Question

1. Assume the cost data is for a perfectly competitive firm:
   

Q	AFC	AVC	ATC	MC
1	60	45	105	45
2	30	42.5	72.5	40
3	20	40	60	35
4	15	37.5	52.5	30
5	12	37	49	35
6	10	37.5	47.5	40
7	8.57	38.57	47.14	45
8	7.5	40.63	48.13	55
9	6.67	43.33	50	65
10	6	46.5	52.5	75

1. Complete the following table:

	P = 56	P = 40	P = 32
Will this firm produce in the short run (yes or no)?
What is the profit maximizing output?
What economic profit or loss?

2. What is the long run equilibrium price?
3. What is the shut-down price?

MKT %	Brewery
41	AB InBev
14	Molson Coors
12	SAB Miller
6	Constellation
4	Heineken
1.5	Yuengling
1.5	Samuel Adams
1	20 others

2. ) Use the above market share date to answer the following questions. Show your work.

1. What is the four-firm concentration ratio before the merger?
2. What is the industry HHI before the merger?
3. AB InBev and SAB Miller propose a merger. What is the industry HHI after the merger?
4. Using the HHI results, explain your recommendation for the merger (block or approve)

Answer 1

a)

At Price 56, the equilibrium quantity is Q=8, because beyond Q=8, the Marginal Cost MC > Price of 56

Profit = TR - TC

=PQ - ATC*Q

=56*8 - 48.13*8

=62.96

The firm will produce in the short-run

The profit-maximizing output = Q =8

Economic profit = 62.96

At Price 40, the equilibrium quantity is Q=6, because beyond Q=6, the Marginal Cost MC > Price of 40

Profit = TR - TC

=PQ - ATC*Q

=40*6 - 47.5*6

=-45

The average variable cost at Q =6 is 37.5

Since the Price of 40 > average variable cost of 37.5, the firm will produce in the short-run

The profit-maximizing output = Q =6

Economic loss = -45

At Price 32, the equilibrium quantity is Q=0, because Price of 32 is lower than the average variable cost at each level of output

Profit = TR - TC

=PQ - TFC

=0- 60

=-60

Since the Price of 32  <average variable cost at all levels of output, the firm will not produce in the short-run

The profit-maximizing output = Q =0

Economic loss= TFC = 60

	P = 56	P = 40	P = 32
				Will this firm produce in the short run (yes or no)?	Yes	Yes	No
What is the profit-maximizing output?	8	6	0
What economic profit or loss?	Economic Profit = 62.96	Economic loss = -45	Economic loss = 60

b.

The long-run equilibrium price is the minimum of the average total cost, that is 47.14

c.

The shutdown price is the minimum of average variable cost, that is 37

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The market share of different companies in the Brewery industry is:

Brewery	MKT %
AB InBev	41
Molson Coors	14
SAB Miller	12
Constellation	6
Heineken	4
Yuengling	1.5
Samuel Adams	1.5
20 others	1

A.

The four-firm concentration ratio before the merger = 41 + 14 + 12 + 6 = 73%

B

The industry HHI before the merger is:

Brewery	MKT %	Square of the Market Share
AB InBev	41	1681
Molson Coors	14	196
SAB Miller	12	144
Constellation	6	36
Heineken	4	16
Yuengling	1.5	2.25
Samuel Adams	1.5	2.25
Other - Firm1	1	1
Other - Firm2	1	1
Other - Firm3	1	1
Other - Firm4	1	1
Other - Firm5	1	1
Other - Firm6	1	1
Other - Firm7	1	1
Other - Firm8	1	1
Other - Firm9	1	1
Other - Firm10	1	1
Other - Firm11	1	1
Other - Firm12	1	1
Other - Firm13	1	1
Other - Firm14	1	1
Other - Firm15	1	1
Other - Firm16	1	1
Other - Firm17	1	1
Other - Firm18	1	1
Other - Firm19	1	1
Other - Firm20	1	1
	HHI	2097.5

The industry HHI before the merger is 2097.5

C.

AB InBev and SAB Miller propose a merger

The combined market share of AB InBev and SAB Miller = 53%

The  industry HHI after the merger is:

Brewery	MKT %	Square of the Market Share
AB InBev and SAB Miller	53	2809
Molson Coors	14	196
Constellation	6	36
Heineken	4	16
Yuengling	1.5	2.25
Samuel Adams	1.5	2.25
Other - Firm1	1	1
Other - Firm2	1	1
Other - Firm3	1	1
Other - Firm4	1	1
Other - Firm5	1	1
Other - Firm6	1	1
Other - Firm7	1	1
Other - Firm8	1	1
Other - Firm9	1	1
Other - Firm10	1	1
Other - Firm11	1	1
Other - Firm12	1	1
Other - Firm13	1	1
Other - Firm14	1	1
Other - Firm15	1	1
Other - Firm16	1	1
Other - Firm17	1	1
Other - Firm18	1	1
Other - Firm19	1	1
Other - Firm20	1	1
	HHI	3081.5

The industry HHI after the merger is 3081.5

D.

Before the merger, HHI is 2097.5 and after the merger, HHI is 3081.5

HHI values of more than 2,500 represent a highly concentrated industry.

Hence, the merger should be blocked