Question #1 A, B, C and D Consider the following information concerning a possib
ID: 3172933 • Letter: Q
Question
Question #1 A, B, C and D Consider the following information concerning a possible horizontal merger between Firm A and Firm B. Currently (i.e., pre merger), the market is competitive and the equilibrium price (P*) is 50 and the equilibrium quantity (Q*) is 50 units. Production costs are constant and MC_ PRE = ATC_PRE = 50. The elasticity of demand is equal to -1.0. If Firm A and Firm B merge ATC it is expected that production costs will decrease such that the post-merger costs will be MC_POST ATC = 40. It is also expected that the merger will result in situation where the merged firms will be able to behave (i.e., set POST and POST as a wealth maximizing monopoly firm. Given this evidence then, if the merger occurs A. what will be the change in Consumer Surplus (precise amount)? B. what will be the change in Producer Surplus (precise s amount)? C. what will be the change in Total Surplus (precise s amount)? D. should this horizontal merger be allowed (and why)?Explanation / Answer
we know that the demand elasticity equal to -1 means that the % change in price leads to equal % change in demand inversely. Hence, 20% change in price (50-40 =20%) will shoot the demand to 60 (50+20% = 60).
We can calculate the required figures in the following manner: -
As we know that the consumer surplus and Producer surplus ascertain the area of a Right Triangle, hence we shall use the formula of Area of Right Triangle = ½ * Base * Height
Consumer Surplus = 1/2* (50-0) (60-50) = 250
Producer Surplus = 1.2 *(50-0) (50-40) = 250
Total Surplus = Consumer Surplus + Producer Surplus
= 250+250
=500
The merger may not be allowed as the merged firm may impede the effective competition and lead to monoplistic situation.