Ch Suppose the European Union (EU) is investigating a proposed merger between tw
ID: 1114368 • Letter: C
Question
Ch Suppose the European Union (EU) is investigating a proposed merger between two of the largest distillers of premium Scotch liquor. Based on some economists' definition of the relevant market, the two firms proposing to merge enjoyed a combined market share of about two-thirds, while another firm essentially controlled the remaining share of the market. Additionally, suppose that the (wholesale) market elasticity of demand for Scotch liquor is-1.3 and that it costs $16.20 to produce and distribute each liter of Scotch. Based only on these data, provide quantitative estimates of the likely pre-and postmerger prices in the wholesale market for premium Scotch liquor. Instruction: Do not round intermediate caiculations. Enter your final responses rounded to the nearest penny (two decimal places). Pre-merger price: $ Post-merger price: $ Prex 22 of 25 Next>Explanation / Answer
Solution :- Calculation of pre-merger price in the given question :-
Pre-merger price = 16.20 * (-1.3 * 3) / [ 1 + (-1.3 * 3) ]
= 16.20 * (-) 3.90 / [ 1 + (-) 3.90 ]
= 16.20 * (-) 3.90 / (-) 2.90
= (-) 63.18 / (-) 2.90
= $ 21.79 (approx).
Calculation of post-merger price in the given question :-
Post-merger price = 16.20 * (-1.3 * 2) / [ 1 + (-1.3 * 2) ]
= 16.20 * (-) 2.60 / [ 1 + (-) 2.60 ]
= 16.20 * (-) 2.60 / (-) 1.60
= (-) 42.12 / (-) 1.60
= $ 26.325 (Rounded off to $ 26.33)
Conclusion :-
Pre-merger price $ 21.79 Post-merger price $ 26.33