There are two ?rms in the market. One has lower costs than the other. Assume they compete within the market in a bertrand game.
Demand: Q = 200 - 4P
MC1 = AC1 = 8, MC2 = AC2 = 5
(1a)Find the equilibrium prices of both ?rms, the quantity demanded and the pro?t each ?rmearns.
Note: The ?rms' costs are di?erent, therefore their best response functions must lookdi?erent (MR1 = MC1 will not be the same MR2 = MC2).
(1b) Imagine you are a social planner. Firm 2 wishes to buy ?rm 1. This will create amonopoly in the market with Firm 2's marginal and average costs. As a socialplanner, your goal is to maximize social welfare. In order to do so you can approve or deny the merger. Firm 2 argues that this merger will mean that all the products inthe market will be produced with their more e?cient technology, thus improving welfare.Calculate monopoly quantity, price, and total welfare that will occur if you approve themerger. Should you approve the merger?