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ProbSet6Ans

# ProbSet6Ans - AEM 331 Suggested Answers to Problem Set#6 1...

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AEM 331 Suggested Answers to Problem Set #6 1. a. The innovation market. b. The government would argue that competition spurs innovation. The merger would hurt innovation by allowing for less competition in the innovation market. The second point would be that there could be dampened competition ex post since this could eliminate potential rival innovations. c. The first argument is difficult to quantify simply because it’s not even clear that the premise of competition benefiting innovation is true. The second is difficult to quantify since it involves predicting what innovations would come about with and without the merger – a daunting task. 2. a. Set MR = MC. Therefore, 210 – 4*Q = 10, giving Q = 50. Price then is 210 – 2*50 = 110. Profits are (110 – 10)*50 = 5000. b. For a given royalty of r, Firm B’s marginal cost is 10+r. Now, setting MR = MC, we have 210 – 4*Q = 10 + r. This means the Q chosen by Firm B will be Q = (200 – r)/4. Firm A makes profits equal to r*Q, so Firm A’s

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ProbSet6Ans - AEM 331 Suggested Answers to Problem Set#6 1...

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