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    Economics of a Merger

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    Consider a market that is initially served by two firms, each of which charges a price of $10 and sells 100 units of the good. The long-run average cost of production is constant at $9 per unit. Suppose a merger will increase the price to $14 and reduce the total quantity sold from 200 to 150.

    A. COMPUTE -- What is the consumer surplus [loss] associated with the merger.

    B. COMPUTE -- What was the profit before the merger? after? increase?

    C. How does the consumer loss compare to the increase in profit?

    D. COMPUTE --- What is the net loss from the merger to SOCIETY?

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    Solution Preview

    The loss in consumer surplus can be calculated as follows:
    4x150 + 0.5x4x50
    = 600 + 100
    = ...

    Solution Summary

    The solution explains the different economics behind a merger using the questions below.