Final answer:
In the Cournot competition model, the effect of a merger between Firms 2 and 5 on the merged firm's output compared to the pre-merger output levels depends on the merged entity's new cost structure and the strategic output adjustments by all firms. The merged firm will select its output to maximize profit given the shifted market dynamics and changed market power.
Step-by-step explanation:
When analyzing mergers in the context of Cournot competition, the impact on the merged firms' output versus the combined pre-merger case depends on the new cost structure and the strategic interaction between remaining firms in the market. If we consider the Cournot model with the demand equation P = A - BQ and the general formula for equilibrium quantities, qᵢ = (A/N+1 - cᵢ)/B - (Σ cⱼ)/B(N+1), we can determine the pre-merger and post-merger outputs of the firms. Before the merger, Firms 2 and 5 would determine their output levels independently, each taking into account the other firms' outputs as given. After the merger, the combined entity would behave as a single firm with potentially a different cost structure, likely leading to a change in the overall output produced by the new merged firm compared to their total individual pre-merger outputs.
In Cournot competition, firms make output decisions based on other firms' expected outputs, trying to maximize their profit given the quantity produced by others. Post-merger, the market dynamics change, and the new, larger firm re-adjusts its strategy and output to maximize its profits. This adjustment could lead to either an increase or decrease in the total output produced by the merged firm, depending on the level of increase in its market power and the resultant changes in its marginal costs.