Incentive to Raise Prices after a Merger. Suppose the merger of two firms, Heinz and Beech-Nut, will reduce the price elasticity of demand for each firm’s product from 3.0 to 1.50. For each firm, the...

Incentive to Raise Prices after a Merger. Suppose the merger of two firms, Heinz and Beech-Nut, will reduce the price elasticity of demand for each firm’s product from 3.0 to 1.50. For each firm, the average cost of production is constant at $5 per unit. Suppose Heinz initially has a price of $10 and is considering raising the price to $11.

a.Fill in the blanks in the following table, showing the payoffs from raising the price before the merger (elasticity = 3.0) and after the merger (elasticity = 1.50).

b. Before the merger, raising the price would the firm’s profit. After the merger, raising the price would the firm’s profit.

c. Why is it reasonable to assume that the merger will decrease the elasticity of demand for each firm’s products?