Reference no: EM132286889

1. You are a member of the Justice Department. A group of competitive firms in the shoe industry announce that they plan a horizontal merger (a merger of all competitors) that will lead to a monopoly in this industry. Assume that all firms are maximizing profits.

The demand for shoes in this industry is characterized by the following inverse demand function:

P = 1000 - Q.

a. Analyze the impact of the merger in a situation where the marginal costs and average costs of producing shoes are $600 per unit for the firms prior to the merger and they remain at $600 per unit after the merger. Show the before and after situations on the same graph and use sentences to describe how the merger will change the following:

i. the price of shoes (2)

ii. the quantity of shoes (2)

iii. consumer surplus (2)

iv. producer economic profits (2)

Sentences for

Price: Before the merger, the price of the shoes is $600. After the merger, the price of the shoes rises to $800.

Quantity: Before the merger, the firms were producing 400 units of shoes. After the merger, the firms lessen their production and are producing only 200 units of the shoes.

Consumer Surplus

Producer Surplus (economic profits)

Graph and Calculations Here.