You are an economist in a company where you have recently got a new Chief Executive Officer (CEO) who is assigned to merge your company with other companies in the market. CEO comes to your office and say: I am new in this industry and need your help to understand the market. So far, I am informed that there are only four firms in the market that produces same commodity. If all the four companies merge, then the following functions will be applicable for the company:
TC(Q) = 500 000 + 0,85Q + 0,015Q2
Q = 14 166 – 16,6P
The CEO wants you to do the following:
a) Assume that all the firms merge together and become one firm in the market. Since you have all information, answer the following question:
i. Give a mathematical expression for Total Revenue, Marginal Revenue, marginal cost and average cost function for the market.
ii. Draw these curves in a diagram and show in the diagram the quantity to be produced and the price to be charged that will maximize the profit for the firm.
iii. Find the price and quantity that maximizes the total profit for the firm using your mathematical expression in (i). What would be the total profit?
b) CEO says that the government would regulate the price if the firms are allowed to merge. Hence, you need to answer the following question:
i. At what price the consumer surplus would be maximized? What would be the amount of consumer and producer surplus at that price?
ii. What would be the consumer surplus and producer surplus, if the government do not regulate price.