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ProbSet3Ans_Solutions

# ProbSet3Ans_Solutions - AEM 331 Suggested Answers to...

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AEM 331 Suggested Answers to Problem Set #3 1. a. The deadweight loss pre-merger is zero (P = MC). Post-merger, deadweight loss is (using the graph): (70-44)*(56-30)/2 = 26*26/2 = 338. b. Pre-merger, PS = 0 and CS = 50*50/2 = 1250. Post-merger, PS = 26*30 = 780 and CS = 30*30/2 = 450. So, welfare pre-merger is 1250 and post- merger is 780+450 = 1230. c. The merger shouldn’t be allowed using this analysis. A potential consideration would be any improved ability for technological progress resulting from the merger. 2. a. The deadweight loss pre-merger is 2*2/2 = 2. The deadweight loss post- merger is the same: 338. b. Pre-merger, PS = 2*48 = 96 and CS = 48*48/2 = 1152. Post-merger, PS = 780 and CS = 450 as above. c. Now we compare 1248 (96+1152) and 1230 and still get the result that we should not allow the merger. 3. Marginal cost and inverse demand aren’t necessary to solve this problem. Before the merger, we have 20 firms each with 5% market share. Therefore, the HHI is 20*25 = 500. If the merger takes place, we have one firm with 30% market share, and fourteen with 5% market share. This gives us an HHI of 900 + 14*25 = 1250.

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ProbSet3Ans_Solutions - AEM 331 Suggested Answers to...

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