ProbSet3Ans - AEM 331 Suggested Answers to Problem Set #3...

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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. Since the price didn’t change after the merger, this means that costs went down with no change in price. Therefore, we know consumers aren’t harmed and producers must be doing better (they sell at the same price, but pay less per unit). So, the merger should certainly be allowed. 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,
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This note was uploaded on 09/23/2009 for the course AEM 3310 taught by Professor Prince,j. during the Winter '08 term at Cornell University (Engineering School).

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ProbSet3Ans - AEM 331 Suggested Answers to Problem Set #3...

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