Question

You are an economist with the Justice Department with responsibility for economic analysis of merger activity. Suppose that the government’s welfare function is given by W = α CS + (1- α)PS, where W is social welfare, CS is consumers’ surplus, PS is producer’s surplus and α 0 [0,1]. Let the market demand function be given by Q = 32 – 2P. Let the pre-merger cost function be given by C(Q) = 6Q and the post-merger cost function be given by C(Q) = 4Q. Also assume that the competitive outcome prevails pre-merger and the monopoly outcome prevails post-merger. 1.1. Compute pre-merger and post-merger CS and PS. 1.2. Compute pre-merger and post-merger DWL. 1.3. Illustrate your results graphically. 1.4. For what values of α is the merger welfare-diminishing?

Answer 1