Part d please Suppose four Cournot competitors face an inverse market demand curve of P = 1620 – 8Q, each with identical costs Ci = 4000 + 60qi. Use the formulae given in exercise 8.15 (pgs. 214-15) for firm profits, market price, and consumer surplus at a Cournot equilibrium to answer the following questions. a. Demonstrate that a merger between F3 and F4 will not be profitable if their costs remain unchanged. (Careful: the “n” in the profit formula changes from 4 to 3.) b. Could the merger be profitable i. if fixed costs fell? If so, how much reduction is necessary? ii. If the variable costs of the merged firm fell by 75%, so that C3|4 = 8000 + 15q? (Fixed cost remains 8000 because we are assuming only variable costs fall.) c. Calculate the consumer surplus created in this market when there are four identical firms. How does it change after a merger occurs between F3 and F4 if: i. no costs savings occur ii. the merged firm reduces its fixed costs by $6000 iii. the merged firm reduces its variable costs by 75%. Examine your results in part c. Can you explain the pattern of results? Hint: What is the equilibrium market price in each of the scenarios? d. Show how the profits of unmerged firms F1 and F2 affected by a merger between F3 and F4 in which i. the merged does not reduce its costs, ii. the merged firm reduces its fixed costs by $6000 iii. the merged firm reduces its variable costs by 75%
Part d please
Suppose four Cournot competitors face an inverse market demand curve of P = 1620 – 8Q, each with identical costs Ci = 4000 + 60qi. Use the formulae given in exercise 8.15 (pgs. 214-15) for firm profits, market price, and consumer surplus at a Cournot equilibrium to answer the following questions.
a. Demonstrate that a merger between F3 and F4 will not be profitable if their costs remain unchanged. (Careful: the “n” in the profit formula changes from 4 to 3.)
b. Could the merger be profitable
i. if fixed costs fell? If so, how much reduction is necessary?
ii. If the variable costs of the merged firm fell by 75%, so that C3|4 = 8000 + 15q? (Fixed cost remains 8000 because we are assuming only variable costs fall.)
c. Calculate the consumer surplus created in this market when there are four identical firms. How does it change after a merger occurs between F3 and F4 if:
i. no costs savings occur
ii. the merged firm reduces its fixed costs by $6000
iii. the merged firm reduces its variable costs by 75%.
Examine your results in part c. Can you explain the pattern of results? Hint: What is the
d. Show how the profits of unmerged firms F1 and F2 affected by a merger between F3 and F4 in which
i. the merged does not reduce its costs,
ii. the merged firm reduces its fixed costs by $6000
iii. the merged firm reduces its variable costs by 75%
Step by step
Solved in 3 steps
