Download Assignment -The Sherman and Clayton Acts Solution

1. The Sherman and Clayton Acts
The Clayton Act of 1914 classifies several business practices as illegal, including price discrimination
and tying contracts, if they "substantially lessen competition or tend to create a monopoly."
The Clayton Act of 1914 is an example of which of the following?
Antitrust laws
Price regulations
2. The Clayton and Celler-Kefauver Acts
Which of the following activities are prohibited by the Clayton Act when they lead to less competition?
A buyer is forced to buy multiple products from a producer in order to get a desired product.
Each of these answers is correct.
A director from one business sits on the board of a competing firm.
A firm acquires a major percentage of the stocks of a competing firm.
3. The Herfindahl index
Suppose that three firms make up the entire wig manufacturing industry. One has a 40% market
share, and the other two have a 30% market share each.
The Herfindahl index of this industry is _3400________ (a.10,000 b.6,000 c.3,400 d.4,000
e.3,000).
A new firm, Mane Attraction, enters the wig manufacturing industry and immediately captures a 15%
share of the market. This would cause the Herfindahl index for the industry to __fall_________ (a.fall
b.rise c.remain the same).
The largest possible value of the Herfindahl index is 10,000 because:
An industry with an index higher than 10,000 is automatically regulated by the Justice
Department
An index of 10,000 corresponds to a monopoly firm with 100% market share
An index of 10,000 corresponds to 100 firms with a 1% market share each
4. 90-60-30, Herfindahl, and the FTC
Suppose that in the market for soft drinks, market share is divided among six companies in the
following manner:
Firm
Market Share
Coca-Cola
90%
Pepsi-Cola
3%
Cadbury
2%
Cott
2%
National Beverage
2%
Royal Crown
1%
Based on the Herfindahl index of the market for soft drinks, the FTC would __challenge________
(a.challenge b.encourage c.not challenge) a merger between Cadbury and National Beverage.
HHI= 90^2+3^2+2^2+2^2+2^2+1^2
=8122
A merger between Cadbury and National beverage
HHI= 92^2+3^2+2^2+2^2+1^2
= 8482
Postmerger Index level
IF HHI> 2500 , highly concentrated market and FTC will challenge the merger if it
increases between 100 to200
5. Three types of mergers
Categorize each of the following examples as a horizontal, vertical, or conglomerate merger.
Horizontal
A retail coffee chain merges with a sports
equipment manufacturer.
Vertical
Conglomerate
Horizontal
Vertical
Conglomerate
A newspaper publisher merges with a paper and
pulp mill.
In 1999, two large oil companies merged to form
a single company.
6. Network monopolies
A lock-in effect __increases _________ (a.increases b.decreases) the costs of switching from one
network good to another network good.
How do network externalities help a monopoly retain its market power?
If there are strong network externalities associated with a good, other goods are poor substitutes
for it.
By exploiting network externalities, a firm can become a natural monopoly.
Goods with network externalities are more likely to receive a government patent.
7. When fewer firms are better II
Secure Corp is a home security provider. In the long run, Secure Corp can provide home security for
20,000 homes each month at a total cost of $700,000, home security for 30,000 homes at a total cost
of $900,000, or home security for 40,000 homes at a total cost of $1,000,000.
Use the purple points (diamond symbol) on this graph to plot points of the long-run average cost
curve at outputs of 20,000, 30,000, and 40,000 homes.
20,000 homes each month at a total cost of $700,000
AC = 700000/20000 = 35
30,000 homes at a total cost of $900,000,
AC = 900000/30000
= 30
Home security for 40,000 homes at a total cost of $1,000,000
AC = 1000000/40000
= 25
Suppose that there are 40,000 households that purchase home security in this area. All of Secure
Corp's potential rivals face the same long-run average cost curve.
True or False: Because Secure Corp faces falling long-run average cost over the relevant output
range, it would be inefficient for another firm to enter this home security market.
True
False
8. Regulating a natural monopoly
Consider the local telephone company, a natural monopoly. The following graph shows the monthly
demand curve for phone services, the company's marginal revenue (MR), marginal cost (MC), and
average total cost (ATC) curves.
Suppose that the government has decided not to regulate this industry, and the firm is free to
maximize profits, without constraints.
Complete the first row of the following table.
Short Run
Pricing Mechanism
Quantity
Price
(Subscriptions)
(Dollars per
subscription)
Long-Run
Profit
Decision
Short Run
Quantity
(Subscriptions)
Pricing Mechanism
Price
(Dollars per
subscription)
Profit
Multiple Choice
Maximization
a.6,000 b.11,000 c.12,000
a.30 b.35 c.40 d.60
Long-Run
Profit
Decision
a. Neg
a. Exit the
b. Pos
industry
c. Zero
b. Stay in
business
c. Stay or
exit
Marginal-Cost
Multiple Choice
Pricing
a.6,000 b.11,000 c.12,000
a.30 b.35 c.40 d.60
a. Neg
a. Exit the
b. Pos
industry
c. Zero
b. Stay in
business
c. Stay or
exit
Average-Cost
Multiple Choice
Pricing
a.6,000 b.11,000 c.12,000
a.30 b.35 c.40 d.60
a. Neg
a. Exit the
b. Pos
industry
c. Zero
b. Stay in
business
c. Stay or
exit
Suppose that the government forces the monopolist to set the price equal to marginal cost.
Complete the second row of the previous table.
Suppose that the government forces the monopolist to set the price equal to average total cost.
Complete the third row of the previous table.
True or False: Over time, the telephone company has a very strong incentive to lower costs when
subject to average-cost pricing regulations.
True
False
9. More theories of regulation
Which of the following points supports the capture theory of regulation?
Regulators tend to promote regulations that will expand the power, size, and budgets of their
agencies.
Regulators tend to be highly moral and civic-minded people who seek to do what is best for the
public interest.
Regulators often accept jobs in the industries that they once regulated after they leave the
regulatory agency.
10. The costs and benefits of regulation
Additional regulation in a sector of the economy is socially advantageous whenever
_(c)_____________.
(a. The total benefit to society of regulation exceeds the total cost of regulation
(b. Regulation does not lead to job loss in the sector
(c. The marginal benefit to society of additional regulation exceeds the marginal cost to
society
11. Deregulation
Which of the following theories does not support deregulation?
Public interest theory of regulation
Capture theory of regulation
Public choice theory of regulation
1. Externalities
If the consumption of a good generates positive externalities, then which of the following is correct?
Market forces may lead to an underallocation of resources to producing the good.
The government can subsidize consumption of the good to increase efficiency.
Both of these answers are correct.
2. Externalities - Definition and examples
An externality arises when a firm or person engages in an activity that affects the well-being of a third
party, yet neither pays nor receives any compensation for that effect. If the impact on the third party
is beneficial, it is called a _positive__________ (a.negative b.positive) externality.
The following graph shows the demand and supply curves for a good with this type of externality. The
dashed drop lines on the graph reflect the market equilibrium price and quantity for this good.
Shift one or both of the curves to reflect the presence of the externality. If the social cost of producing
the good is not equal to the private cost, then you should shift the supply curve to reflect the social
costs of producing the good; similarly, if the social value of producing the good is not equal to the
private value, then you should shift the demand curve to reflect the social value of consuming the
good.
With this type of externality, in the absence of government intervention, the market equilibrium
quantity produced will be ___________ (a.greater b.less) than the socially optimal quantity.
Which of the following generate the type of externality previously described? Check all that apply.
The local airport has doubled the number of runways, causing additional noise pollution for the
surrounding residents.
Jake has planted several trees in his backyard that increase the beauty of the neighborhood,
especially during the fall foliage season.
Your roommate, Nick, has bought a bird that keeps you up at night with its chirping.
A microbiology lab has published its breakthrough in swine flu research.
3. The effect of negative externalities on the optimal quantity of consumption
Consider the market for bolts. Suppose that a hardware factory dumps toxic waste into a nearby river,
creating a negative externality for those living downstream from the factory. Producing an additional
ton of bolts imposes a constant external cost of $165 per ton. The following graph shows the demand
(private value) curve and the supply (private cost) curve for bolts.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $165
per ton.
The market equilibrium quantity is __________ (a.1.5 b.2 c.2.5 d.3 e.3.5 f.4 g.4.5 h.5 i.5.5) tons of
bolts, but the socially optimal quantity of bolt production is __________ (a.1.5 b.2 c.2.5 d.3 e.3.5 f.4
g.4.5 h.5 i.5.5) tons. To create an incentive for the firm to produce the socially optimal quantity of
bolts, the government could impose a _____tax______ (a.tax b.subsidy) of
$165
per ton of
bolts.
4. Efficiency in the presence of externalities
Parks confer many external benefits on society: open space, trees that reduce pollution, and so on.
Therefore, the market equilibrium quantity of parks is not equal to the socially optimal quantity. The
following graph shows the demand for parks (their private value), the supply of parks (the private cost
of producing them), and the social value of parks, including both the private value and external
benefits.
Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple
point (diamond symbol) to indicate the socially optimal quantity. Finally, use the grey polygon (star
symbol) to indicate the area representing market failure.
Which of the following policies could help the government achieve the efficient outcome? Check all
that apply.
Introduce emission taxes
Offer a subsidy equal to the price at the efficient outcome
Offer a subsidy to consumers equal to the vertical distance between the marginal private benefit
curve and the marginal social benefit curve
Offer a subsidy to producers equal to the vertical distance between the marginal private benefit
curve and marginal social benefit curve
Implement tradable pollution permits
5. The effects of property rights on achieving efficiency
Consider a lake found in the town of Center Barnstead, and then answer the questions that follow.
The town has a hiking lodge whose visitors use the lake for recreation. The town also has a tannery
that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation
destination. That is, the tannery's waste decreases the hiking lodge's economic profit.
Suppose that the tannery could use a different production method that involves recycling water. This
would reduce the pollution in the lake to levels safe for recreation, and the hiking lodge would no
longer be affected. If the tannery uses the recycling method, then the tannery's economic profit is
$1,300 per week, and the hiking lodge's economic profit is $2,300 per week. If the tannery does not
use the recycling method, then the tannery's economic profit is $2,100 per week, and the hiking
lodge's economic profit is $1,100 per week. These figures are summarized in the following table.
Complete the following table by computing the total profit (the tannery's economic profit and the
hiking lodge's economic profit combined) with and without recycling.
Profit
Action
Tannery
Hiking Lodge
Total
(Dollars)
(Dollars)
(Dollars)
No Recycling
2,100
1,100
3200
Recycling
1,300
2,300
3600
Total economic profit is highest when the recycling production method is __used________ (a.not
used b.used).
When the tannery uses the recycling method, the hiking lodge earns $2,300-$1,100 = $1,200 more
per week than it does with no recycling. Therefore, the hiking lodge should be willing to pay up to
$1,200 per week for the tannery to recycle water. However, the recycling method decreases the
tannery's economic profit by $2,100-$1,300=$800 per week. Therefore, the tannery should be
willing to use the recycling method if it is compensated with at least $800 per week.
Suppose the hiking lodge has the property rights to the lake. That is, the hiking lodge has the right to
a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the tannery will
____________ (a.not use b.use) the recycling method and will pay the hiking lodge __between
$400 and $800_____
(a.$0 b. between $0 and $400 c. Between $400 and $800 d. between $800 and $1,200) per week.
Now, suppose the tannery has the property rights to the lake, including the right to pollute it. In this
case, assuming the two firms can bargain at no cost, the tannery will ___use______ (a.not use
b.use) the recycling method, and the hiking lodge will pay the tannery __$800and
$1200___________ (a.$0 b. between $0 and $400 c. Between $400 and $800 d. between $800 and
$1,200) per week.
The hiking lodge will make the most economic profit when _____________ (a.the tannery has
property rights to pollute the lake b.It has property rights to a clean lake).
True or False: The lake will remain polluted, regardless of who has the property rights.
True
False
6. Achieving lower pollution
Suppose the Environmental Protection Agency (EPA) wants to mandate that all methane emissions
must be reduced to zero in order to alleviate global warming in the United States.
Which of the following describes why most economists would disagree with this policy?
Society would not benefit from lower air pollution.
The opportunity cost of zero pollution is much higher than its benefit.
Reducing methane emissions is desirable, but whatever levels of pollution firms decide to emit
privately are already efficient.
The environment isn’t worth protecting.
7. Correcting for negative externalities - Regulation versus tradable permits
Suppose the government wants to reduce the total pollution emitted by three local firms. Currently,
each firm is creating 4 units of pollution in the area, for a total of 12 pollution units. If the government
wants to reduce total pollution in the area to 6 units, it can choose between the following two
methods:
Available Methods to Reduce Pollution
1. The government sets pollution standards using regulation.
2. The government allocates tradable pollution permits.
Each firm faces different costs, so reducing pollution is more difficult for some firms than others. The
following table shows the cost each firm faces to eliminate each unit of pollution. For each firm,
assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution) is
prohibitively expensive.
Cost of Eliminating the . . .
First Unit of Pollution
Second Unit of Pollution
Third Unit of Pollution
(Dollars)
(Dollars)
(Dollars)
Firm
Firm X
90
125
180
Firm Y
55
70
110
Firm Z
650
800
1,500
Now, imagine that two government employees propose alternative plans for reducing pollution by 6
units.
Method 1: Regulation
The first government employee suggests to limit pollution through regulation. To meet the pollution
goal, the government requires each firm to reduce its pollution by 2 units.
Complete the following table with the total cost to each firm of reducing its pollution by 2 units.
Total Cost of Eliminating Two Units of Pollution
Firm
(Dollars)
Firm X
215
Firm Y
125
Firm Z
1450
Method 2: Tradable Permits
Meanwhile, the other employee proposes using a different strategy to achieve the government’s goal
of reducing pollution in the area from 12 units to 6 units. He suggests that the government issue two
pollution permits to each firm. For each permit a firm has in its possession, it can emit 1 unit of
pollution. Firms are free to trade pollution permits with one another (that is, buy and sell them) as
long as both firms can agree on a price. For example, if firm X agrees to sell a permit to firm Y at an
agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution
by only 1 unit, while firm X would end up with only one permit and would have to reduce its pollution
by 3 units. Assume the negotiation and exchange of permits are costless.
Because firm Z has high pollution-reduction costs, it thinks it might be better off buying a permit from
firm Y and a permit from firm X, so that it doesn't have to reduce its own pollution emissions. At which
of the following prices are both firm Y and firm X willing to sell one of their permits to firm Z ? Check
all that apply.
$109
$149
$170
$579
$787
There exists some Pp such that
MAC1 > Pp > MAC2
Which means there exits some Pp such that firm z will want to buy permits and firm X
and Y will want to sell permits.
Suppose the owners of the three firms get together and agree on a trading price of $498 per permit.
Complete the following table with the action each firm will take at this permit price, the amount of
pollution each firm will eliminate, and the amount it costs each firm to reduce pollution to the
necessary level. If a firm purchases two permits, assume that it buys one permit from each of the
other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.)
Firm
Initial Pollution
Final Amount of
Cost of Pollution
Permit Allocation
Pollution Eliminated
Reduction
(Units of pollution)
(Dollars)
(Units of
Action
pollution)
(Multiple Choice)
Initial Pollution
Final Amount of
Cost of Pollution
Permit Allocation
Pollution Eliminated
Reduction
(Units of pollution)
(Dollars)
Firm
Firm
(Units of
Action
pollution)
(Multiple Choice)
2
a.Buy one permit
X
1
90
1
55
0
0
b. Buy two permits
c.Don’t buy/sell
d. Sell one permit
e. Sell two permits
Firm
2
a.Buy one permit
Y
b. Buy two permits
c.Don’t buy/sell
d. Sell one permit
e. Sell two permits
Firm
2
a.Buy one permit
Z
b. Buy two permits
c.Don’t buy/sell
d. Sell one permit
e. Sell two permits
Regulation Versus Tradable Permits
Determine the total cost of eliminating six units of pollution using both methods, and enter the
amounts in the following table. (Hint: You might need to get information from previous tasks to
complete this table.)
Total Cost of Eliminating Six Units of Pollution
Proposed Method
(Dollars)
Regulation
3474
Tradable Permits
2988
In this case, you can conclude that eliminating pollution is __________ (a.less b.more) costly to
society when the government distributes tradable permits than when it regulates each firm to
eliminate a certain amount of pollution.
8. Rivalry and excludability
A good is nonrivalrous if:
One person's benefit from the good does not reduce the benefit available to other people.
It is not possible to prevent an individual from using the good.
The quantity of the good is affected by the price a consumer pays for the good.
Those who are unwilling or unable to pay for the good do not obtain its benefits.
9. Market failure associated with public goods
A group of university students buys coconuts from a farmers' market. The students consume the meat
of the coconuts for food and use the shells to make sculptures. These sculptures are placed in a public
park that any student can visit. The park sustains itself through students' donations.
Some individuals have no incentive to donate to the park and will, instead, depend on those who do
donate. This is an example of which of the followingf?
Overuse of coconuts
Socially efficient allocation of coconuts
The free-rider problem
A negative externality
10. The market for lemons
Consider a market in which there are many potential buyers and sellers of used cars. Each potential
seller has one car, which is either of high quality (a plum) or low quality (alemon). A seller with a
low-quality car is willing to sell it for $3,500, whereas a seller with a high-quality car is willing to sell it
for $9,000. A buyer is willing to pay $4,500 for a low-quality car and $11,000 for a high-quality car.
Of course, only the seller knows whether a car is of high or low quality, as illustrated in the
accompanying image.
Suppose that 85% of sellers have low-quality cars. Assume buyers know that 85% of sellers have lowquality cars but are unable to determine the quality of individual cars.
If all sellers offer their cars for sale and buyers have no way of determining whether a car is a highquality plum or a low-quality lemon, the expected value of a car to a buyer is
$4325
(Hint: The expected value of a car is the sum of the probability of getting a low-quality car multiplied
by the value of a low-quality car and the probability of getting a high-quality car multiplied by the
value of a high-quality car.)
Suppose buyers are willing to pay only up to the expected value of a car that you found in the
previous question.
Since sellers of low-quality cars are willing to sell for $3,500, while sellers of high-quality cars are
willing to sell for $9,000, ___________ (a.only low-quality sellers b.only high-quality sellers c.no
sellers d.all types of sellers) will be willing to participate in this market at that price.
The dilemma in this problem is an example of which of the following economic concepts?
Moral hazard
Signaling
Adverse selection
Screening
11. How asymmetric information prevents gains from trade
Larry sees a classified ad from Megan offering a used DVD player for $30. On the opposite page, he
sees a big color ad from a national electronics chain offering a new DVD player for $175. Larry values
a DVD player at $220 as long as it works, regardless of whether it is new or used.
For each of the scenarios listed, determine the principle illustrated by each person’s reasoning.
Scenario
Suppose Megan, the seller of the DVD player, knows the player works well—
she is selling it only because she got a better model as a gift. She thinks
about asking $45 and offering a guarantee: She will replace the DVD player
with a new $175 DVD player if it turns out not to work. Then she thinks,
"That's not a good idea! Someone can just buy it, handle it carelessly, and, if
it breaks, can pretend it didn't work and get a new DVD player for $45—
meanwhile, I'll be out $130!"
Suppose Larry buys the new DVD player from the national electronics chain,
thinking "Someone would ask $30 for a used DVD player only if it didn't work
well."
Why is Megan unable to sell Larry the DVD player? Check all that apply.
Moral
Adverse
Hazard
Selection
Moral hazard can prevent sellers from offering guarantees of quality, because they can't be sure
that buyers won't try to take advantage of the guarantees by filing false claims.
Adverse selection can cause buyers to avoid purchasing high-quality goods because of uncertainty
about their quality.