Chapter 14: government

How much would consumers in the figure below spend to persuade politicians to regulate the monopoly's price to marginal (or average) cost?

$24 The maximum they gain if monopoly is regulated is the area below price $6 and above the marginal cost = (6-2)*4 + (1/2)*(8-4)*(6-2) = $24

Which are the following reasons markets fail?

1. Public Goods 2. Market Power 3. Incomplete information

Antitrust policies are policies designed to keep firms from:

1. colluding 2. price fixing 3. monopolizing Aim is to eliminate deadweight loss and increase output to socially optimal level.

Markets with HHI index > _________ are considered highly concentrated.

2500; HHI<1500= permitted 1500<HHI<2500= moderately concentrated market HHI>2500= highly concentrated market *increasing HHI by 100 raises concerns in MCM and HCM *increasing by 200 in HCM is considered attempt to enhance market power and is illegal.

In highly concentrated markets, an increase in the HHI of more than _________ raises potential concerns.

50 points

Consumer surplus in the unregulated monopoly market in the figure below is:

Consumer surplus is the area above the price and below the demand curve. The profit-maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost: that is, MR = MC. In this case this quantity is 4, and price is $6 Therefore, Consumer surplus= 1/2(10-6)*(4-0) = 8

The domestic demand and supply for sugar are Qd = 60,000 − 400P and QSD = 20,000 + 500P. The foreign supply is QSF = 20,000 + 100P. What is the domestic market price of sugar?

Equilibrium domestic price= total supply= total demand Qd=QSD+QSF so, 60,000-400P=40,000+600P 20,000=1,000P P=20

Charging a fee for every unit of good entering the country is called what?

Excise tariff; 1. limits foreign competition 2. benefits domestic producers at expense of domestic consumers and foreign producers

The marketability of assets in markets dominated by insiders tends to____________. As a result, the welfare of all potential market participants _______________.

Fall; fall; One example of a government regulation designed to alleviate market failures due to asymmetric information is the law against insider trading in the stock market. The purpose of the law is to ensure that asymmetric information (better information by insiders) does not destroy the market by inducing outsiders to stay out of it.

Public goods can lead to market failure due to__________________.

Free riders; Free riders do not pay for the public goods but reap the benefits. As a result, they earn consumer surplus, and producer surplus.

When there are external costs, market equilibrium output is _____________ the socially efficient level and market price is _________________ the socially efficient level.

Greater than; less than; The market is not taking negative externalities into consideration, thus is producing more than socially optimal at a cheaper price than socially optimal. It is for this reason, taxpayers are typically the ones who have to clean up after the negative externalities of firms (because society takes on the burden).

Under what circumstances will government allow one firm to service entire market?

In the presence of large economies of scale (as is the case for some utility companies), it may be desirable for a single firm to service a market. Economies of Scale: a proportionate savings in cost due to an increase in production.

What is the effect of the Truth in Lending Act?

Interest rates increase; gives consumers opportunity to fully understand implications of borrowing money (provides complete information); however, costs increase to lender by complying with act, therefore, interests rates increase.

Consider the monopoly in the figure below with price regulated at $2 per unit. Consumer surplus at the regulated price is:

P=MC at Quantity 3, Area above price to the left of Q=3 is consumer surplus (everything to the right is deadweight loss)

The external marginal cost of producing coal is MCexternal = 6Q while the internal marginal cost is MCinternal = 4Q. The inverse demand for coal is given by P = 120 − 2Q. What is the socially efficient level of output?

Q=10; P= total MC P=120-2Q=6Q+4Q P=120-2Q=10Q 120=12Q Q=10

A firm has a constant marginal social cost of producing that equals $2Q. What is the socially efficient level of production for a firm facing an inverse demand P = 60 − 2Q?

Q=15; 60-2Q=2Q Q=15

The external marginal cost of producing coal is MCexternal = 8Q while the internal marginal cost is MC internal = 6Q. The inverse demand for coal is given by P = 180 − 4Q. How much output would a competitive industry produce?

Q=18; 180-4Q=6Q (set to internal MC because competitive industry would not look at external MC) Q=18

The presence of government in the market leads to: a. benefits at no cost to society. b. rent seeking. c. externalities. d. adverse selection.

Rent Seeking; lobbyist can influence government to favor their firms.

A political lobbyist that spends money to influence public policy is engages in __________________ behavior.

Rent-Seeking;

There are 500 residents in a town. Resident demand curve is: P=10-.5Q MC of planting tulips is $250/planter box. What is the socially efficient level of tulips?

Socially optimal level is where Total Demand=MC P=10-.5Q times 500= total demand P=5000-250Q=MC=250 Q=19 P=5000-250(19)=250/500=.5/person

How does government guard against asymmetric information in advertising?

The Langham act; Under Section 43 of the Lanham Act, false and misleading advertising is prohibited.

The marginal cost of producing a good to society is the: a. horizontal sum of the supply curve and the marginal cost of polluting. b. vertical sum of the demand curve and the marginal cost of polluting. c. horizontal sum of the demand curve and the marginal cost of polluting. d. vertical sum of the supply curve and the marginal cost of polluting.

Vertical sum of the supply curve and the marginal cost of polluting; MSC is defined as the change in society's total cost due to the production of an additional unit of a good or service. MSC = Marginal Private costs (MPC) + Marginal External Costs (MEC) MPC is the same as supply curve. So, the marginal social cost of production is the vertical sum of the supply curve and the marginal cost of polluting.

There are 500 residents in a town. Resident demand curve is: P=10-.5Q MC of planting tulips is $250/planter box. How many planter boxes are likely to be planted?

Zero; there is a free rider problem. Not all residents will pay.

According to the Department of Justice's Horizontal Merger Guidelines, a post-merger HHI _______ is considered _____________________. a. below 1,000; low resulting in a high likelihood that a merger will be permitted b. above 1,800; low resulting in a high likelihood that a merger will be permitted c. below 1,000; high resulting in high likelihood that a merger will be blocked d. below 1,800; high resulting in high likelihood that a merger will be blocked

a. below 1,000; low resulting in a high likelihood that a merger will be permitted if HHI <1500, merger is likely to be permitted

Which of the following are public goods? a. National defense b. Telephones b. Electricity d. All of the statements associated with this question are public goods.

a. national defense; taxes pay for national defense and everyone benefits from it (even non-tax payers) b. individuals pay for telephones c. individuals pay for electricity

Which of the following is true about a lump-sum tariff? a. Domestic firms' marginal cost curves are shifted up by the amount of the lump-sum tariff. b. Foreign firms' average cost curves are shifted up by the amount of the lump-sum tariff. c. Domestic firms' average cost curves are shifted up by the amount of the lump-sum tariff. d. Foreign firms' marginal cost curves are shifted up by the amount of the lump-sum tariff.

b. Foreign firms' average cost curves are shifted up by the amount of the lump-sum tariff; We can eliminate a and c because tariffs are meant to increase the costs of foreign firms, not domestic firms. d.Because lump-sum in a fixed cost, it effects the average cost curve, not marginal cost curve.

How can a firm in a merger avoid antitrust action by the government? a. Prove that the industry's HHI is over 1800. b. Prove that efficiency will improve from the resulting merger. c. Prove that price will not increase from the resulting merger. d. None of the statements are correct.

b. Prove that efficiency will improve from the resulting merger. a. HHI should be low not high c. This is a promise one would not make

In the United States, government is the sole property owner of: a. labor. b. air. c. land. d. knowledge.

b. air.

An unregulated monopolist will likely: a. charge a price below MR. b. charge a price above MC. c. charge a price equal to MR. d. charge a price below MR and above MC.

b. charge a price above MC

Which of the following is NOT a pure public good? a. Clean air b. National defense c. Telephones d. All of the statements associated with this question are pure public goods.

c. Telephones; Telephones are paid by the individual and therefore are not public good. b. national defense is a public good paid by society c. clean air is a public good taken care of by society

If the government regulates a monopoly's price below the socially efficient level, then: a. deadweight loss increases and there is a surplus output. b. deadweight loss decreases and there is a shortage of output. c. deadweight loss increases and there is a shortage of output. d. deadweight loss decreases and there is a surplus of output.

c. deadweight loss increases and there is a shortage of output. We know that deadweight loss will increase below or above the Socially efficient level so we can eliminate B and D. There will be a shortage of output because the low price will increase demand, but firm will not be able to match demand. It will create quantity where P=MC which will be less than demand.

The Clean Air Act and its amendments increase the production costs of the firms in a covered industry through increased: a. fixed costs while marginal cost is unchanged. b. marginal cost while fixed costs remain the same. c. fixed costs and increased marginal costs. d. average cost while marginal cost is unchanged.

c. fixed costs and increased marginal costs. This is because, according to Clean Air act, the new firm will have a permit to pollute and increased cost will help to control the air pollution, that is generated by the firm. And as the cost increases, production will reduced.

According to the Clean Air Act, a new firm in the covered industry is required to: a. obtain a permit to pollute. b. at least match the most effective system existing in the industry. c. obtain a permit to pollute and at least match the most effective system existing in the industry. d. None of the statements are correct.

c. obtain a permit to pollute and at least match the most effective system existing in the industry.

When a government assumes an information-gathering role and sets minimum standards in industries, such as medicine, it is employing a ___________________ program.

certification program

The total loss of producer and consumer surplus from underproduction by firms with market power

deadweight loss

In general, government involvement in the market place is intended to alleviate market __________________.

failure; four reasons why free markets may fail to provide the socially efficient quantities of goods: (1) market power, (2) externalities, (3) public goods, and (4) incomplete information. Governments try to regulate markets to create socially efficient quantities of goods.