Question.2974 - 1. Assume an industry is composed of the following eight firms. Company Market Share Firm A 30 percent Firm B 25 percent Firm C 15 percent Firm D 10 percent Firm E 7 percent Firm F 6 percent Firm G 4 percent Firm H 3 percent a. If Firms B and C propose a merge, would the Antitrust Division likely challenge the merger? Why or why not? b. If firms G and H propose a merger, would the Antitrust Division likely challenge the merger? Why or why not? 2. The widget Industry in Anytown is a monopoly, controlled by Widget Corp. Its demand curve for the local market is given by P = 800 – 20 W Where W represents the number of widgets sold per period. The total cost function (including opportunity or implicit costs) for Widget Corp. is TC = 300 + 500 W + 10 W 2 a. Assuming the industry is unregulated, what are the equilibrium price and output and economic profits earned by Widget Corp.? b. If the industry is regulated and the regulatory authority forces Widget Corp. to earn only a normal return on investment (which is included in its cost function), what is the resulting equilibrium price and quantity? c. What happens to consumer surplus? What happens t o the economic profits earned by Widget Corp.? 3. Discuss the various ways governments can handle externalities, such as noise from a local airport or a barking dog or building of commercial office space or an industrial building in a residential area? How does the assignment of property rights affect the outcome? Under what circumstances would a socially optimal solution arise without any government intervention? Under what circumstances would government intervention likely move the outcome closer to a socially optimal solution?
Answer Below:
1. Assume an industry is composed of the following eight firms. Company Market Share Firm A 30 percent Firm B 25 percent Firm C 15 percent Firm D 10 percent Firm E 7 percent Firm F 6 percent Firm G 4 percent Firm H 3 percent a. If Firms B and C propose a merge, would the Antitrust Division likely challenge the merger? Why or why not The Herfindahl index before merger is (30^2+25^2+15^2+10^2+7^2+6^2+4^2+3^2) or 1960 Now suppose the Firms B & C merge, then the new Herfindahl index would be (30^2+40^2+10^2+7^2+6^2+4^2+3^2) or 2710 The agencies generally consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated. Since the HHI is increasing by more than 200 points and the market is highly concentrated thus the Anti Trust Division is likely to challenge the merger. b. If firms G and H propose a merger, would the Antitrust Division likely challenge the merger? Why or why not? The Herfindahl index before merger is (30^2+25^2+15^2+10^2+7^2+6^2+4^2+3^2) or 1960 After the merger the new index would be (30^2+25^2+15^2+10^2+7^2+6^2+7^2) or 1984 Since the change in HHI is less than 100 it is unlikely to have an adverse competitive effects and the Anti Trust Division is less likely to challenge the decision. 2. The widget Industry in Anytown is a monopoly, controlled by Widget Corp. Its demand curve for the local market is given by P = 800 – 20 W Where W represents the number of widgets sold per period. The total cost function (including opportunity or implicit costs) for Widget Corp. is TC = 300 + 500 W + 10 W 2 a. Assuming the industry is unregulated, what are the equilibrium price and output and economic profits earned by Widget Corp.? b. If the industry is regulated and the regulatory authority forces Widget Corp. to earn only a normal return on investment (which is included in its cost function), what is the resulting equilibrium price and quantity? c. What happens to consumer surplus? What happens t o the economic profits earned by Widget Corp.? Ans) a) If we assume W is the quantity sold then revenue = 800W-20W 2 Thus MR= 800-40W and MC= 500+20W Thus the profit maximization quantity would be at MR=MC 500+20W=800-40W 60W=300 or W=5 P=800-(20*5) or 700 Thus the equilibrium quantity would be 5 units at a price of 700. At this price the profit would be (700*5)-(300+500*5+10*5 2 ) or 3500-3050 or 450 b) The regulation should make the economic profit 0. Thus TR-TC=0 Or 800W-20W 2 – (300 + 500 W + 10 W 2 ) = 0 or 300W -30 W 2 -300 = 0 W 2 -10W-10=0 Or W=10 and P=600 (This is the equilibrium price and quantity under regulation) c) The consumer surplus increases and the economic profits are 0 under regulation 3. Discuss the various ways governments can handle externalities, such as noise from a local airport or a barking dog or building of commercial office space or an industrial building in a residential area? How does the assignment of property rights affect the outcome? Under what circumstances would a socially optimal solution arise without any government intervention? Under what circumstances would government intervention likely move the outcome closer to a socially optimal solution? The ways with which the government can remove externalities are: Taxation- The government may impose a tax on the entity creating the externality. The tax will equal the private cost to the social cost which will delete the external effects of the transaction. Imposing laws and regulations- The government may impose a law to prohibit any entity which may be involved in creating the externality. Tradable allowances- In this the government imposes a limit up to which a certain transaction can cause negative externalities. The assignment of property rights help in assigning a value to the externality in order to value of the externality. For example, if the steel mill owns the rights, then the individuals that live around the mill will be willing to pay the steel mill not to produce--up to the cost that they are incurring from health care, reduced aesthetic appeal of the air, etc. This amount that they are willing to pay becomes an opportunity cost for the steel mill if they produce. Thus they will cut production to the optimal level. On the other hand, if the people own the air, then the steel mill would have to pay them that same amount for the right to produce. Thus the negative externality is directly added to the steel mill's marginal cost. This can help in solving the problem without government intervention. If either of the party those creating the negative externality or the one affected is not ready to come down to a mutual agreement then the government has to intervene.More Articles From Economics
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