Question

If the firms in a Cournot duopoly merge forming a monopoly, the effect on price, profit, and other variables depends on the trade-off between efficiency and market power. The firms produce identical products. Firm 1 has a constant marginal cost of $3, and Firm 2 has a constant marginal cost of $6. The market demand is Q=75−p. The Cournot-Nash equilibrium occurs where q

1
​
equals and q
2
​
equals (Enter numeric responses using real numbers rounded to two decimal places.) Furthermore, the equilibrium occurs at a price of $ Firm 1 receives profit of $ and Firm 2 receives profit of $ Consumer surplus equals $ If the firms merge and produce at the lower marginal cost, then the new equilibrium occurs where market output (Q) is The new equilibrium price is $ The merged firm's profit is $ Consumer surplus is now $

Answer 1

When two firms in a Cournot duopoly merge to form a monopoly, the effect on price, profit, and other variables depends on the trade-off between efficiency and market power. The new equilibrium occurs at a different output level and price, resulting in changes in profit and consumer surplus.

Step-by-step explanation:

In a Cournot duopoly, if the firms merge and form a monopoly, the effect on price, profit, and other variables depends on the trade-off between efficiency and market power. When the firms produce at their respective Cournot-Nash equilibrium quantity, Firm 1 produces 25 units and Firm 2 produces 25 units. The equilibrium price is $50. Firm 1 receives a profit of $375 and Firm 2 receives a profit of $750. Consumer surplus is $2,500. If the firms merge and produce at the lower marginal cost (which is $3), the new equilibrium occurs at a market output (Q) of 50 units. The new equilibrium price is $25. The merged firm's profit is $750 and consumer surplus is now $1,250.

Answer 2

The effect of firms in a Cournot duopoly merging into a monopoly impacts prices, profits, and consumer surplus, with prices likely increasing and consumer surplus decreasing. The new firm may produce more efficiently but will face the possibility of zero economic profits in the long term due to market adjustments.

Step-by-step explanation:

When firms in a Cournot duopoly with different marginal costs merge into a monopoly, the resulting impact on variables such as price, profit, and consumer surplus depends on the balance between realized efficiency gains and increased market power. In a Cournot duopoly, each firm decides how much quantity to produce independently but taking into account the other firm's production, leading to specific quantities produced, market prices, and profits for each firm.

After the merger into a monopoly, the new single firm can leverage the more efficient production, potentially of the firm with the lower marginal cost, to set a market price at the intersection of marginal cost (MC) and marginal revenue (MR). As a monopoly, the firm can increase its profits significantly as there is no competition, but this also usually means a higher price for consumers and thus a loss of consumer surplus, as compared with the more competitive pre-merger situation.

However, it's important to remember that in the long run, economic profits for monopolistically competitive firms would normalize to zero due to market entry and competitive pressures. Such pressures can also affect monopolies if there are no strong barriers to entry or if regulatory actions are taken to preserve competition.