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Exercise 7. Three-firm Cournot merger Three firms produce a homogeneous good at marginal cost c, with 1/5

Exercise 7. Three-firm Cournot merger

Three firms produce a homogeneous good at marginal cost c, with 1/5p=1-Q.

Q1) Find equilibrium quantities, price, profits, welfare

Q2) Now suppose two firms merge, and new company I has a marginal cost ecc (e1).

a) Under which conditions would the merger be profitable?

b) Under which conditions would the merger raise consumer surplus and

welfare?

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