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AEM 331
Problem Set #3
Due 2/27/09
Q
2
Q
1
Q
P
P
2
P
1
C
1
C
2
Demand
Postmerger
Premerger
Z
Y
X
W
V
U
T
1.
Assume the following facts concerning the horizontal merger model developed by
Williamson as discussed in class and shown above.
Let inverse demand be
P = 100Q
; average cost premerger,
1
$50
C
=
; average cost postmerger,
2
$44
C
=
; and premerger price,
1
$50
P
=
.
Assume that the postmerger price,
2
$70
P
=
, results from the market power created from the merger.
a.
Calculate the value of the deadweight loss post merger.
b.
Calculate welfare before and after the merger.
c.
Should the merger be allowed?
What qualifications should be considered?
2.
Assume all the facts in problem 1 except now assume the postmerger price to be
$50.
Without doing any calculations, should the merger be allowed?
How do you
know?
3.
Suppose inverse demand in the Ithaca pumpkin market is P = 400 – 3*Q.
Also,
suppose that there are 20 firms with marginal costs of 30 (i.e., a large number of
identical firms), each with identical market share.
If one of the twenty firms
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 Winter '08
 PRINCE,J.

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