Answer to Question #174739 in Microeconomics for Akanksha

Question

“Government should regulate mergers between firms” Give reason in favor and against 

this statement. (4.75)

b. Draw the diagram with demand and supply curves for an importing country. What is the 

consumer surplus and producer surplus before trade is allowed? What will be the 

consumer and producer surplus with free trade? Explain the change in total surplus. (7)

Answer 1

Mergers occur when two or more firms join forces to form a single company. The government enacts antitrust laws to protect consumer operations and monopolies.

A good reason for the merger is if two companies could decrease their costs of production and offer products for much lower prices. Part of that savings could be used for development or an increase in wages. Mergers are pursued by companies to gain access to a wider market and consumer base, as well as to minimize competition and achieve economies of scale .Mergers also result in expanding businesses to new geographic regions and helps to prevent closure of unprofitable firms.

Disadvantages of merging two firms is that it results in less competition and a greater market share. As a result, the new company will obtain a monopoly and raise its product or service prices. In this situation, mergers often avoid economies of scale, and aggressive mergers result in massive job losses.

b.(i)

(ii

Consumer and producer surplus before trade is low while consumer and producer surplus with free trade is high.

(iii)

The change in total surplus is as a result of free trade which increases the willingness to pay for a good due to changes in prices

The sum of the customer and product surpluses is the total economic surplus. Price helps determine market surplus, so when the price is at equilibrium, total surplus is maximized.