To examine the trade- off between efficiency and market power from a merger, consider a market with two firms that sell identical products. Firm 1 has a constant marginal cost of 1, and Firm 2 has a constant marginal cost of 2. The inverse market demand function is p = 15 – Q.

a. Solve for the Nash-Cournot equilibrium price, quantities, profits, consumer surplus, and deadweight loss.

b. If the firms merge and produce at the lower marginal cost of 1, how do the equilibrium values change?

c. Discuss the change in efficiency (average cost of producing the output) and total surplus—consumer surplus, producer surplus (or profit), and deadweight loss.