econ 107 ps3a

econ 107 ps3a - Economics 107 Solutions to Practice...

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Economics 107 – Solutions to Practice Problems for Chapter 7 1 of 3 1. Since before the merger the firms are pricing at their marginal costs, their profits and hence producer surplus are all zero. Consumer surplus is given by the area of the triangle below the demand curve but above the price of 60: 800 2 40 40 2 40 ) 60 100 ( 2 ) 100 ( Q P CS So total welfare is W = CS + PS = 800 + 0= 800. After the merger, the monopolist will face the problem: Q Q Q Q C Q Q P M Q 20 ) 100 ( ) ( ) ( max The first order condition for profit maximization yields 40 Q and 60 P . The firm will earn profits 1600 40 20 40 ) 40 100 ( ) ( ) ( Q C Q Q P M . Given 40 Q and 60 P , consumer surplus is still 800 (just like before the merger). But now total welfare is increased: W = CS + PS = 800 + 1600= 2400. So, if the DOJ cared about welfare they should allow the merger to take advantage of the efficiencies. If the DOJ cared only about consumer surplus, they should still allow the merger because customers will not be hurt in any way. If instead of merging, the firms formed a cartel, then as long as the same efficiencies are realized, the results will be exactly the same and the cartel should be allowed. Keep in
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This note was uploaded on 04/14/2010 for the course ECON econ 107 taught by Professor Peters during the Winter '09 term at UCSD.

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econ 107 ps3a - Economics 107 Solutions to Practice...

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