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Chapter 14 - A Manager's Guide to Government in the Marketplace

Chapter 14: Answers to Questions and Problems 1. a. b. c.

HHI = 8×(12.5)2 = 1,250. HHI = 6×(12.5)2 + (25)2 = 1,562.5. The Justice Department may potentially challenge, but since the post-merger HHI is less than 2,500, it will likely consider other factors before doing so (e.g., cost savings).

2. a. i. MR = MC at approximately Q = 7.5. Moving to the demand curve for the quantity, we see the monopoly price is about $125. ii. At a price of $125, consumer surplus is (200 – 125)×7.5×(1/2) = $281.25. b. i. $80. ii. It will produce 12 units. iii. 0 units, since the firm would earn a loss by operating at the regulated price, which is lower than ATC. 3. a.

Set P = MCExternal + MCInternal to get 200 - 4Q = 18Q. Solving yields Q = 9.09 units. b. Set P = MCInternal to get 200 - 4Q = 12Q. Solving yields Q = 12.5 units. c. Set MR = MCInternal to get 200 - 8Q = 12Q. Solving yields Q = 10 units. d. Pollution taxes or permits can help induce firms to produce the socially efficient level of output.

4. a.

This is where the higher curve (the sum of the two worker’s inverse demand curves) intersects the marginal cost curve. This occurs at Q = 8 units. b. Each will pay half the marginal cost, so $12 per unit. c. i. No. The socially efficient level would be 12 units. This is where P = 60 – 3Q = MC = 24. ii. Workers 1 and 2 get surplus of $32 = ($20 - $12)(8)(1/2), while worker 3 gets surplus of $128 = $32 + $12(8). 5. a. b. c.

Set MR = MC to get 40 – 4Q = 8. Solve to obtain Q = 8 and P = $24. Set P = MC to get 40 – 2Q = 8. Solve to obtain Q = 16 and P = $8. Monopoly profits, which are ($24 - $8)8 = $128.

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Chapter 14 - A Manager's Guide to Government in the Marketplace

6. Note that QS = QSF + QSD = 450 + P. Setting this equal to domestic demand yields 450 + P = 600 – 2P. Solving yields P = 50 and Q = 500 units. b. Setting total supply under the quota to total demand yields 300 + P = 600 – 2P. Solving yields P = $100 and Q = 400 units. c. Consumers are worse off since price is higher. d. Domestic producers are better off since they get more sales at a higher price. a.

7. a. b.

Nothing – it is a lump-sum tariff, and so does not affect per-unit costs. It may cause it to stop exporting, and thus export less, but only if the lump sum tariff makes it unprofitable for them to sell in the domestic market.

8. a. b. c.

MR = MC at Q = 4. Moving up to the demand curve, the price is $16. Q = 4 units. The monopolist will produce up to where the regulated price intersects MC, at Q = 2 units. d. Qd =10 units while only 2 units are available. This leads to a shortage of 8 units. e. $16, computed as .5($18 - $10)(6 – 2) = $16. f. P = $14 (where MC intersects D). There is neither a shortage nor a surplus at this price. 9.

Laws against insider trading are designed to alleviate market failure due to asymmetric information. If potential investors believe the market is dominated by insiders with privileged information, they will choose to stay out of the market.

10.

Fairness is not the economic basis for government laws and regulation to remedy market failures. Instead, market efficiency is the economic basis.

11.

Section 2 of the Sherman act makes it illegal to monopolize or attempt to monopolize.

12.

It was found guilty of price discrimination, which is illegal under the Robinson Patman Act.

13.

Yes. Under the Hart-Scott-Rodino Merger Act, such notification is required for transactions exceeding $68.2 million.

14.

There is a free rider problem caused by the public-goods nature of obtaining information. If the manager of one division expends effort gathering information and shares it, then other division managers receive the benefits without having to bear any of the costs. Unfortunately, when all division managers think this way, the result is that very little effort is spent within the firm on information gathering efforts.

14-2 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 14 - A Manager's Guide to Government in the Marketplace

15.

Her best shot would probably be to point out that absent externalities, the fact that her firm has market power means that price is too high and output too low. Absent market power, the fact that her firm creates an externality means that production is too high and price is too low. But since her firm operates in an environment of both market power and externalities, the two forces might exactly balance. In other words, her firm might actually be producing the socially efficient output and charging the socially efficient price.

16.

No. These changes in the law allow the company that is affected by insider trading to reap the benefits from stopping the action or reporting it. Therefore, the market itself helps enforce the law.

17.

The socially efficient price is $4. Inverse demand is P = 750 – 0.5Q, so at a price of $4, consumer surplus is (750 – 4)(1500 – 2×4)(1/2) = $556,516. The monopoly price (where MR = MC) is $377, and this yields consumer surplus of just $139,129. Consumers are willing to spend up to the difference in consumer surplus at the socially efficient price and the monopoly price: $556,516 – $139,129 = $417,387. Thus, each consumer is willing to spend about $417,387/3,000,000 = $0.14. In light of the low benefit per consumer (less than the cost of a postage stamp) and the fact that the monopoly would be willing to spend up to the monopoly profits to fight regulation, consumers are unlikely to succeed.

18.

Due to the elimination of the import quota on rubber, the price of rubber in China fell and more rubber was exchanged. Consumers of rubber in China gained while producers of rubber in China were harmed. Overall, however, social welfare in China increased due to this change.

19.

This will reduce the supply of foreign steel, thereby reducing the equilibrium quantity of steel sold in the U.S. and raising the price.

20.

The equilibrium quantity of lumber in the U.S. will decrease and the equilibrium price will increase. U.S. consumer surplus will decrease (consumers are made worse off), domestic producer surplus increases (domestic producers are made better off), and the U.S. government benefits due to tariff revenue increases.

21.

Setting supply equal to demand, we see that, prior to the Truth in Lending Simplification Act (TILSA), $8.5 billion in consumer loans were made and loans sold at a price (interest rate) of 3.5 percent. Post TILSA, consumer loan origination is $10.5 billion and sold at a price (interest rate) of 7.5 percent. The increase in consumer loan origination is not a general result. Whether consumer loan origination increases or decreases depends on the relative magnitudes of the shift in supply and demand. The price (interest rate), however, will certainly increase.

14-3 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 14 - A Manager's Guide to Government in the Marketplace

22.

The statement is false. Among other things, businesses that import inputs (or final products) from abroad would be harmed relative to their competitors who procure inputs domestically. Workers employed at the firms that procure inputs internationally would be adversely affected. Similarly, domestic consumers would pay higher prices for many goods resulting in lower consumer surplus. Overall welfare would be lower in the domestic economy.

23.

The policy would not improve social welfare. At the profit-maximizing output level, Moses is earning zero economic profit since P = ATC. By regulating the firm’s price to marginal cost, the firm would shut down in the long run. Under this scenario, consumers would have no electricity source. Consequently, the deadweight loss resulting from monopoly pricing is less (and social welfare is higher) than it would otherwise be at the regulated price.

14-4 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part....