Dead Weight Value

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The Applied Topics in Competition Policy
Prof .Dr Jorn Sickmann

Assignment III

Submitted by:
Siwani Adhikari Matriculation No: 11893 Sem:III Msc . Economics and Finance Hochschule Rhine Wall.Kleve

Exercise 1

Given Demand function D = 100 – p When P0 = 50 Q0 = 100 – 50 = 50 Likewise when P1 = 70 Q1 = 100 – 70 = 30 When P0 = 52 Q0 = 100-52 = 48

a). Deadweight loss is given by A1 in the diagram And value of deadweight loss is given by

½( ΔP) Δ (Q) ½ (70 – 50) (30 – 50)
= - 200

b).

Cost saving in the figure is given by A2 A2 = (AC2 – AC1)Q2 Or, Δ(AC)Q2 = (44 – 50) 30 = -6*30 = - 180

c).

Economic effect of merger will be positive if the following inequality holds [ Δ(AC)Q2 - ½ (ΔP)( ΔQ)] > 0 = - 180 –( -200) > 0 = 20 > 0 Since 20 is greater than 0 the economic effect of merger is positive thus it should be allowed.

d).

When P0 = $ 52 ½ (ΔP)( ΔQ) =

½ (70 – 52) (30 – 48)= -$162

Cost saving(A2) Δ(AC)Q1 =(44-52)*30 = -$240 [ Δ(AC)Q1 - ½ (ΔP)( ΔQ)] > 0 = - 240 –( -162) > 0 = -78, which is not greater than 0 thus , the economic effect of merger is negative hence, it should not be allowed.

Exercise 2 a). Constant marginal cost of Speed Car Production(MCS)= $100 Marginal cost of Better Car Distribution (MCb) = $100 If Pu is price per unit set by Speed Car to Better Car Marginal cost of Better Car (MCb) = 100 + PU Demand is given by P=1000-Q Then, MR is P=1000-2Q Profit maximization function of the retailer is: MR = MC 1000 – 2Q = 100 + Pu Pu = 900 – 2Q MR of the producer (Speed Cars) is given by MR = 900 – 4Q ( due to double marginalization) Profit maximization function of producer is MR = MC 900 – 4Q = 100 4Q = 800 Q = 800/4 Q = 200

For calculation of price, Demand curve of producer Pu = 900 -2Q Pu = 500 Demand curve of retailer P = 1000 – Q P = 1000 – 200 P = 800 MC of producer is 100 and price is 500, its Price is 400(500-100) above the cost, thus profit per unit 400 for producer Total profit = 400*200 =$ 80000 MC of...
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