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An industry consisting of two firms is nevertheless behaving in a perfectly competitive fashion. Each firm has a constant marginal cost equal to 20. Demand for the good produced by the industry is represented by Q=400-4P.
a. Graph the market for this industry. What is the equilibrium output and price? The firms now merge, with the result that the marginal cost curve of the new (merged) firm is constant at MC=10. Simultaneously, however, the merger results in the single firm now behaving as a monopolist.
b. What is the new price and quantity? Either add this situation to the graph of part (a) or provide a new graph for the merged firm.
c. A regulator has only two choices. She can either approve the merger, in which case the outcome is as in part (b), or she can void the merger, in which case the outcome is as in part (a). If the regulator is interested in maximizing economic efficiency, should she allow or void the merger? Explain
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