1. Two clinics want to merge. The price elasticity of demand is −0.20, and each clinic has fixed costs of $60,000. One clinic has a volume of 7,200, marginal costs of $60, and a market share of 2 percent. The other clinic has a volume of 10,800, marginal costs of $60, and a market share of 4 percent. The merged firm would have a volume of 18,000, fixed costs of $80,000, marginal costs of $60, and a market share of 6 percent. a. What are the total costs, revenues, and profits for each clinic and for the merged firm? b. How does the merger affect markups and profits?
2. What would each of the clinics in Exercise 1 be worth to an outside buyer (using the guideline of 10 times annual profits)? What would each of the clinics be worth to each other?