The inverse demand function in a market is given by p=32-Q where Q is the aggregate quantity produced.

The inverse demand function in a market is given by p=32-Q where Q is the aggregate quantity produced. The market has 3 identical firms with marginal and average costs of 8. These firms engage in Cournot competition.

a) How much output does each firm produce?
b) What is the equilibrium price in the market?
c) How much profit does each firm make?
d) Consider a merger between two firms. Assuming that due to efficiency gains from the merger, the merged firm is able to produce at a marginal and average cost of 5. However, the non-merged firm (outsider) still produces at a marginal and average cost of 8. How much does each firm produce after the merger?
e) Demonstrate whether or not this merger is profitable for the parties involved.
f) Demonstrate how the merger affects the profits of the outsider not involved in the merger.
g) How does the merger affect consumer surplus?

Expert Solution

Rahul Sunny answered 2 years ago

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