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# hw3_eco380_fall12.pdf

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Department
Economics
Course
ECO380H1
Professor
Carlos Serrano
Semester
Fall

Description
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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