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Carlos Serrano

UNIVERSITY OF TORONTO Faculty of Arts and Science November 2012 PROBLEM SET 3 1 ECO380 - Managerial Economics I Carlos J. Serrano DUEDATEISNOVEM BER27ATTH EBEGNN NGO FTHEL CTU RE **************************************************************************** Colbrtinnprbemesi rngy encouraged, but copying the answers from someone else is not allowed and will be considered plagiarism. Acknowledge the names of the people that collaborated with you in the top right corner of your problem set. If other student helped you, write their full name. If a private tutor helped you, write his/her full name and private tutor in parenthesis. If a peer mentor helped you, write their full name and peer mentor in parenthesis. If a former student helped you, write their name and former student in parenthesis. If somebody else helped you, write their full name and your relationship to him/her. **************************************************************************** Question 1: [Mergers] (50 points) Consider an in2ustry with two firms: firm 1 and firm 2. Assume tha2 firm 1 provides good 1 with total costs 1 (1 )=  +1 ; firm 2 produces good 2 with total 2o2ts  ( 2= c + firm produces a different product. The demand of product 1 i1 2 ( − 21− 2, and the demand for product 2 is  (  )=40 − 2 − smet firm 1 and 2 set prices simultaneously. Assume that  =10 . 2 1 2 2 1 (a) Show whether the two goods are complements or substitutes? (2 points) Consider the possibility of a merger between firm 1 and firm 2. Let us suppose that the merger has been approved by the Antitrust authorities. The CEO of the mergedfirm is confronted with the following choices. Plan 1: Closing one of the two plants. The benefits of closing one plant are that one fixed cost will be saved. However, the cost structure of the firm changes. The total costs of producing good 1 and good 2 in one1p2ant are1 2 )= +( + )  Note that the firm can still produce both products in one plant. Plan 2: Keeping both plants active. If the two plants are kept active, both fixed costs must be covered and the total costs of producing good 1and2are (12)=2  + 1 + 2  (b) Explain the advantages and disadvantages of plan 1 and 2. You have five lines of text to explain your answer. What are the steps you have analyze to determine the choice that maximizes the profits of the merged firm? You have up to ten lines of text to explain the steps. (8 points) (c) What is the plan that maximizes the profits of the merged firm? What are th1 pric2s  and  that maximize the profits of the merged firm? What are the optimal quantities trte  ?W 1 2 profits of the merged firm? Explain in detail how you plan to solve the decision problem of the firm (40 points) 1The contents of this problem set are copyrighted by the University of Toronto. The sale, license, and bundling of the contents of the test will be prosecuted by the legal services of the University of Toronto. Please report unauthorized use to [email protected] 1 Question 2: [Hold-up problem and the management of residual control rights
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