In atomic collisions,does the neutron fuse with the proton of hydrogen and release a photon which is absorbed by the electron which then gets excited to higher energy state? Or do the neutron and proton stay in contact like a deuterium nucleus without any release of photon. In the latter case how is the lost kinetic energy of the neutron absorbed by the electron?
To answer your main question: the collision between a neutron and nucleus of a hydrogen atom can indeed produce the release of a photon, which results from a transfer of kinetic energy from the neutron to the nucleus which drives the latter to an excited and unstable higher energy state. Then, depending on the original energies and momentum involved and the system's quantum properties, there is a probability that the emitted photon will be absorbed by the surrounding electron.
The neutron and nucleus can fuse to form deuterium, with any excess energy going into the excitation of the nucleus and subsequent emission of a photon. If the initial energy is not enough to cause this excitation after the fusion, or if this excess energy is lost into other particles of the system or degrees of freedom, then there will be no energy for the electron to absorb.
I hope that helps :)