In the gas industry, each firm chooses the output level to produce and price is determined by aggregate output. Market demand is given by p = 10-Q, with Q being the aggregate output. In the gas industry, there are two firms: GasA and GasB. Firms face the same total cost function: TC = 4q, where i = {A, B}. a) Assuming that the firms simultaneously choose their output levels, compute firm-level output and profits in the market equilibrium, as well as the consumer surplus in equilibrium. b) Assume now that the two firms decide to merge. In this case, the merging process requires an administrative cost equal to 2, independently of the quantities the two firms produce after the merger. Moreover, the merger will reduce the marginal cost of the merged entity to 1, due to synergies. Firms split the profit of the merger equally. Compute firm-level output, profit and consumer surplus in the merger scenario. Do firms A and B have incentive to merge? If yes, should the Competition Commission allow this merger to occur based on the consumer surplus standard? Explain your answer.

In the gas industry, each firm chooses the output level to produce and price is determined by aggregate output. Market demand is given by p = 10-Q, with Q being the aggregate output. In the gas industry, there are two firms: GasA and GasB. Firms face the same total cost function: TC = 4q, where i = {A, B}. a) Assuming that the firms simultaneously choose their output levels, compute firm-level output and profits in the market equilibrium, as well as the consumer surplus in equilibrium. b) Assume now that the two firms decide to merge. In this case, the merging process requires an administrative cost equal to 2, independently of the quantities the two firms produce after the merger. Moreover, the merger will reduce the marginal cost of the merged entity to 1, due to synergies. Firms split the profit of the merger equally. Compute firm-level output, profit and consumer surplus in the merger scenario. Do firms A and B have incentive to merge? If yes, should the Competition Commission allow this merger to occur based on the consumer surplus standard? Explain your answer.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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