Monopoly Supplier and Manufacturer

The following questions refer to the accompanying diagram, which shows a monopoly leather supplier selling leather to a monopoly shoe manufacturer. The leather supplier initially produces QM and charges the shoe manufacturer PM. Then the leather supplier acquires the shoe manufacturer in a vertical merger.

-Refer to Monopoly Supplier and Manufacturer.The vertical merger causes social gain to

Question

Monopoly Supplier and Manufacturer

The following questions refer to the accompanying diagram, which shows a monopoly leather supplier selling leather to a monopoly shoe manufacturer. The leather supplier initially produces QM and charges the shoe manufacturer PM. Then the leather supplier acquires the shoe manufacturer in a vertical merger.

-Refer to Monopoly Supplier and Manufacturer.The vertical merger causes social gain to

Quizplus · Accepted Answer

The vertical merger between the Monopoly Supplier and Manufacturer cause social gain to increase by area E + H, as there will be cost savings due to integration between the two companies. Area E represents the reduction in cost of producing goods due to the merger, while area H represents the increase in profits for the merged company. Areas A and B represent the original social gain before the merger, while areas C, D, and G represent deadweight losses due to the monopoly power. Therefore, the social gain increases by area E + H.