Chapter 20 & 21

The efficiency loss of imposing an excise tax is due to:

Producing and consuming fewer units

In the 1980s, PepsiCo Inc., which then had 28 percent of the soft-drink market, proposed to acquire the Seven-Up Company. Shortly thereafter, the Coca-Cola Company, with 39 percent of the market, indicated it wanted to acquire the Dr. Pepper Company. Seven-Up and Dr. Pepper each controlled about 7 percent of the market. The government's decision to block these mergers was

justified, because the proposed merged companies would have resulted in a Herfindahl index well over the guidelines used by the federal government for horizontal mergers.

An administration that believes competitive forces will resolve any monopoly problems believes in the

process of creative destruction, and will likely take a laissez-faire perspective to resolving monopoly problems.

When confronted with a natural monopoly that restricts output and charges monopoly prices, the two methods that governments have for promoting better outcomes are:

public ownership and public regulation

A proposed merger of firms that would simultaneously lessen competition and reduce unit costs through economies of scale should be allowed if

the price reductions associated with the decrease in unit costs outweigh the increase in price associated with the reduced level of competition in the industry

Which of the following is the correct name for the idea that certain firms prefer government regulation because regulation shields them from the pressures of competition and, in effect, guarantees them a regulated profit?

The legal cartel theory of regulation

For tax purposes, "gross income" is all the money a person receives in a given year from any source. But income taxes are levied on "taxable income" rather than gross income. The difference between the two is the result of many exemptions and deductions. To see how they work, suppose you made $50,000 last year in wages, $10,000 from investments, and were given $5,000 as a gift by your grandmother. Also assume that you are a single parent with one small child living with you. a. What is your gross income? b. Gifts of up to $12,000 per year from any person are not counted as taxable income. Also, the "personal exemption" allows you to reduce your taxable income by $3,650 for each member of your household. Given these exemptions, what is your taxable income? c. Next, assume you paid $700 in interest on your student loans last year, put $2,000 into a health savings account (HSA), and deposited $6,000 into an individual retirement account (IRA). These expenditures are all tax exempt, meaning that any money spent on them reduces taxable income dollar-for-dollar. Knowing that fact, what is now your taxable income? d. Next, you can either take the so-called standard deduction or apply for itemized deductions (which involve a lot of tedious paperwork). You opt for the standard deduction that allows you as head of your household to exempt another $8,500 from your taxable income. Taking that into account, what is your taxable income? e. table ? f. As the parent of a dependent child, you qualify for the government's $1,000 per-child "tax credit." Like all tax credits, this $1,000 credit "pays" for $1,000 of whatever amount of tax you owe. Given this credit, how much money will you actually have to pay in taxes?

a. $65,000 b. 52,700 c. 44,000 d. $35,500 e. How much federal income tax will you owe? $4,432.35 What is the marginal tax rate that applies to your last dollar of taxable income? 15 f. $3,432.35 Using that actual amount, what is your average tax rate relative to your taxable income in part d? 9.67 percent What about your average tax rate relative to your gross income? 5.28 a. To calculate gross income, add up income from the different sources. You made $50,000 in wages plus $10,000 from investments plus a gift of $5,000 from your grandmother. Thus, your gross income was $65,000. b. Your taxable income equals your gross income minus any gifts up to $12,000 minus the personal exemption for the two members in the household (single parent with a child). Thus, your taxable income equals $52,700 (= $65,000 (gross income) − $5,000 (gift) − 2 × ($3,650) (exemption for two household members)). c. The additional deductions from taxable income result in a new taxable income of $44,000 (= $52,700 − $700 (interest on student loan) − $2,000 (HSA) − $6,000 (IRA)). d. Your taxable income after taking the standard deduction is $35,500 (= $44,000 (from part c) − $8,500 (standard deduction)). e. The tax schedule is:

Suppose a tax is such that an individual with an income of $10,000 pays $2,000 of tax, a person with an income of $20,000 pays $3,000 of tax, a person with an income of $30,000 pays $4,000 of tax, and so forth. a. a. What is each person's average tax rate? b. Is this tax regressive, proportional, or progressive?

a. Income Tax Paid Average Tax Rate $10,000 $2,000 20% 20,000 3,000 15% 30,000 4,000 13.3% b. regressive

Given the inelasticity of cigarette demand, an excise tax on cigarettes will fall on the

consumer, and the efficiency loss will be relatively small

The optimal amount of product safety in automobiles may be less than the amount that would totally eliminate the risk of accidents and deaths because

the marginal cost of providing the extra units of safety would exceed the expected marginal benefit received from the design change.

The city of Joslyn has three sources of revenue: borrowing, proprietary income from running the local electric power utility, and taxes. If it received $10 million from running the electric power utility and borrowed $40 million, how much did it collect in taxes? Assume Joslyn's total revenue is $150 million.

$100 million

Suppose George made $20,000 last year and that he lives in the country of Harmony. The way Harmony levies income taxes, each citizen must pay 10 percent in taxes on their first $10,000 in earnings and then 50 percent in taxes on anything else they might earn. So given that George earned $20,000 last year, his marginal tax rate on the last dollar he earns will be __________ and his average tax rate for his entire income will be __________.

50 percent; less than 50 percent

Is it possible for a country with a regressive tax system to have a tax-spending system that transfers resources from the rich to the poor?

Yes, if the poor get more in spending than they pay in taxes.

Carrot Computers and its competitors purchase touch screens for their tablet computers from several suppliers. The six makers of touch screens have market shares of, respectively, 19 percent, 18 percent, 14 percent, 16 percent, 20 percent, and 13 percent. a. What is the Herfindahl index for the touch screen manufacturing industry? b. By how much would a proposed merger between the two smallest touch screen makers increase the Herfindahl index? Would the government be likely to challenge that proposed merger? c. If Carrot Computers horizontally merges with its competitor Blueberry Handhelds, by how much would the Herfindahl index change for the touch screen industry?

a. 1,706 b. 364 yes c. 0 a. The Herfindahl index for an industry is found by squaring the market share of each firm in the industry and adding these together. The Herfindahl index for the firms above equals 1,706 (= 192 + 182 + 142 + 162 + 202 + 132). b. The two smallest firms make up 13 percent and 14 percent. Thus, if they merge, they will make up 27 percent of the market. The Herfindahl index after the merger is 2,070 (= 192 + 182 + 162 + 202 + (13 + 14)2). The increase in the Herfindahl index is 364 (= 2,070 (after merger) - 1,706 (prior to merger)). The government would likely challenge this merger because a Herfindahl index above 1,800 suggests that the market is too concentrated. b. The two smallest firms make up 13 percent and 14 percent. Thus, if they merge, they will make up 27 percent of the market. The Herfindahl index after the merger is 2,070 (= 192 + 182 + 162 + 202 + (13 + 14)2). The increase in the Herfindahl index is 364 (= 2,070 (after merger) - 1,706 (prior to merger)). The government would likely challenge this merger because a Herfindahl index above 1,800 suggests that the market is too concentrated.

Suppose in Fiscalville there is no tax on the first $10,000 of income, but a 20 percent tax on earnings between $10,000 and $20,000 and a 30 percent tax on income between $20,000 and $30,000. Any income above $30,000 is taxed at 40 percent. a. If your income is $50,000, how much will you pay in taxes? b. Determine your marginal tax rate. c. Determine your average tax rate. d. Is this a progressive tax?

a. 13,000 b. 40 percent c.26 percent d. yes a. Since the individual has an income of $50,000, we must calculate the taxes paid over each of the relevant tax brackets. From $0 to $10,000, the tax rate is 0 percent. So the individual pays $0 on his or her income from $0 to $10,000. From $10,000 to $20,000, the tax rate is 20 percent. So the individual pays $2,000 on his or her income from $10,000 to $20,000 (= 0.2 × $10,000). From $20,000 to $30,000, the tax rate is 30 percent. So the individual pays $3,000 on his or her income from $20,000 to $30,000 (= 0.3 × $10,000). From $30,000 and higher, the tax rate is 40 percent. So the individual pays $8,000 on his or her income from $30,000 to $50,000 (= 0.4 × $20,000). Adding up the taxes paid over this income range, the total tax paid by this individual is $13,000 (= $0 (first $10,000) + $2,000 (second $10,000) + $3,000 (third $10,000) + $8,000 (last $20,000)). b. The marginal tax rate is 40 percent. This is the tax rate on the last dollar earned. c. The average tax rate is 26 percent (= $13,000/$50,000). d. This tax rate is progressive because the average tax rate will increase with income. This follows from the fact that the marginal tax rate is higher for higher income brackets. As income increases above $30,000, the average tax rate will get closer and closer to the marginal rate of 40 percent.

Suppose that there are only three types of fruit sold in the United States. Annual sales are 1 million tons of blueberries, 5 million tons of strawberries, and 10 million tons of bananas. Suppose that of those total amounts, the Sunny Valley Fruit Company sells 900,000 tons of blueberries, 900,000 tons of strawberries, and 7.9 million tons of bananas. a. What is Sunny Valley's market share if the relevant market is blueberries? If a court applies the "90-60-30 rule" when considering just the blueberry market, would it rule that Sunny Valley is a monopoly? b. What is Sunny Valley's market share if the relevant market is all types of berries? Would the court rule Sunny Valley to be a monopolist in that market? c. What if the relevant market is all types of fruit? What is Sunny Valley's market share? Would the court consider Sunny Valley to be a monopolist?

a. 90 % yes b. 30 % no c. 61 % yes Courts often decide whether or not market power exists by considering the share of the market held by the dominant firm. They have roughly adhered to a "90-60-30 rule" in defining monopoly: If a firm has a 90 percent market share, it is definitely a monopolist; if it has a 60 percent market share, it probably is a monopolist; if it has a 30 percent market share, it clearly is not a monopolist. The market share will depend on how the market is defined. a. Sunny Valley's market share is 90 percent if the relevant market is blueberries. Annual sales of blueberries are 1 million tons and Sunny Valley sells 900,000 tons of blueberries: 900,000/1,000,000 × 100 = 90 percent. Based on the 90-60-30 rule, Sunny Valley would be ruled a monopolist. b. Sunny Valley's market share is 30 percent if the relevant market is all berries. Annual sales of blueberries are 1 million tons and annual sales of strawberries are 5 million tons. Sunny Valley sells 900,000 tons of blueberries and 900,000 tons of strawberries: (900,000 tons of blueberries + 900,000 tons of strawberries)/(1 million tons of blueberries + 5 million tons of strawberries) = 1.8 million tons of berries/6 million tons of berries × 100 = 30 percent. Based on the 90-60-30 rule, Sunny Valley would not be ruled a monopolist. c. Sunny Valley's market share is 61 percent if the relevant market is all types of fruit. Annual sales of blueberries are 1 million tons, annual sales of strawberries are 5 million tons, and annual sales of bananas are 10 million tons. Sunny Valley sells 900,000 tons of blueberries, 900,000 tons of strawberries, and 7.9 million tons of bananas: (900,000 tons of blueberries + 900,000 tons of strawberries + 7.9 million tons of bananas)/(1 million tons of blueberries + 5 million tons of strawberries + 10 million tons of bananas) = 9.7 million tons of fruit/16 million tons of fruit × 100 = 60.63 percent, or 61 percent. Based on the 90-60-30 rule, Sunny Valley would likely be ruled a monopolist.

a. Which of the following statements is true? b. An example of a government transfer payment is

a. Exhaustive expenditures use resources, whereas nonexhaustive expenditures change the ownership of financial resources. b. a subsidy to large corporations.

a. Does a progressive tax system by itself guarantee that resources will be redistributed from the rich to the poor? b. The tax system in the United States is c. Does the tax-spending system in the United States redistribute resources from higher-income earners to lower-income earners?

a. No, not if the tax revenue is returned to the rich. b. progressive c. Yes, the tax-spending system in the United States is progressive

Suppose the equation for the demand curve for some product X is P = 8 − 0.6Q The equation for the supply curve is P = 2 + 0.4Q a. What are the equilibrium price and quantity? b. Now suppose an excise tax is imposed on X such that the new supply equation is P = 4 + 0.4Q How much tax revenue will this excise tax yield the government? c. In the diagram below, draw the new supply curve (with the excise tax) and identify the area that corresponds to the revenue generated by the tax.

a. P = $4.4 Q= 6 b. $8

Identify each of the following taxes as being either progressive or regressive.

a. Personal income tax: Progressive . b. Sales taxes: Regressive . c. Payroll taxes: Regressive . d. Property taxes: Regressive

a. Which of the following statements is true? b. The antitrust laws are enforced by c. Which of the following statements is true?

a. The Sherman Act prohibits conspiracies to restrain trade. b. the Department of Justice, the Federal Trade Commission, and state attorney generals c. Private firms can bring antitrust suits against other firms under antitrust laws.

Use the diagram above to identify the portions of the circular flow that impact the allocation of resources and the distribution of income based on the following actions:

a. The construction of a new high school will impact 1, 3, 4, 5, 6, 11, 12 . b. A 2-percentage-point reduction of the corporate income tax will impact 1, 5, 6, 11 . c. An expansion of preschool programs for disadvantaged children will impact 7, 9, 8, 12 . d. The levying of an excise tax on polluters will impact 1, 2, 3, 4, 11, 12 .

How would you expect antitrust authorities to react to the following? a. A proposed merger of Ford and General Motors. b. Evidence of secret meetings by contractors to rig bids for highway construction projects. c. A proposed merger of a large shoe manufacturer and a chain of retail shoe stores. d. A proposed merger of a small life-insurance company and a regional candy manufacturer. e. An automobile rental firm that charges higher rates for last-minute rentals than for rentals reserved weeks in advance.

a. They would block this horizontal merger because it violates Section 7 of the Clayton Act. b. They would charge these firms with price-fixing, which violates Section 1 of the Sherman Act. c. They would allow this vertical merger unless both firms had very large market shares and the resultant merger would substantially lessen competition d. They would allow this conglomerate merger. e. They would not interfere with this price discrimination.

The socially optimal price Pr, found where D and MC intersect, will result in an efficient allocation of resources but may entail losses to the monopoly. The fair-return price Pf will allow the monopolist to break even but will not fully correct the underallocation of resources. Consider the figure. Assume that a marginal-cost pricing policy does not entail public subsidies. a. The socially optimal (marginal-cost) pricing is subject to b. Assume that a government subsidy might be used to cover any loss resulting from marginal-cost pricing. In this case,

a. fewer regulatory problems but gives firms an incentive to artificially inflate marginal-cost estimates b. allocative efficiency can be achieved, but there is no incentive to seek cost reductions.

a. The rulings in the Standard Oil and U.S. Steel cases indicate that b. The main antitrust issue in the DuPont cellophane case was the c. The Microsoft and Standard Oil cases

a. monopoly violations must involve intent through abusive and anticompetitive actions. b. size of the relevant market. c. differ in the remedy: dissolution for Standard Oil and required behavior changes for Microsoft.

a. Industrial regulation is concerned with b. Benefits of social regulation include c. Costs of social regulation include

a. prices, output, and profits in specific industries, whereas social regulation deals with the broader impact of business on consumers, workers, and third parties. b. increased worker and product safety. c. administrative and compliance costs

a. A progressive tax is one in which b. A regressive tax is one in which c. A proportional tax is one in which d. The federal personal income tax is e. A 4 percent state general sales tax is f. A federal excise tax on automobile tires is g. A municipal property tax on real estate is h. The federal corporate income tax is i. The type of tax represented by the portion of the payroll tax levied on employers is

a. the average rate increases as income increases. b. the average rate decreases as income increases. c. the average rate is constant as income increases. d. progressive, and the incident is on the taxpayer e. regressive, and the incident is on the consumer f. regressive, and the incident is on the consumer. g. regressive, and the incident is on the consumer if the property is used in business. h. proportional, if the incidence is on shareholders. i. difficult to determine without knowing the relative labor supply and demand elasticities.

a. There will be a greater incidence of an excise tax on consumers b. There will be a greater incidence of an excise tax on consumers c. The efficiency loss of a tax is the net benefit society gives up because d. Other things equal,

a. the less elastic the demand. Correct b. the more elastic the supply. Correct c. too little of the product is produced. Correct d. the greater the elasticities of demand and supply, the greater the efficiency loss of a particular tax. Correct

a. A firm charged with violating Section 7 of the Clayton Act might try arguing that the products sold by the merged firms are in separate markets because b. A firm charged with violating Section 2 of the Sherman Act might try convincing the court that none of its behavior in achieving and maintaining its monopoly was illegal because a violation of Section 2 of the Sherman Act requires

a. this would reduce the likelihood that competition would be affected b. behavior that indicates intent to monopolize.

The nation of Upstandia uses kroner for money and its tax code is such that a person making 100,000 kroner per year pays 40,000 kroner per year in income taxes; a person making 200,000 kroner per year pays 70,000 kroner per year in income taxes; and a person making 300,000 kroner per year pays 90,000 kroner per year in income taxes. Upstandia's income tax system is:

regressive.

Consider this statement: "The social desirability of any particular firm should be judged not on the basis of its market share but on the basis of its conduct and performance." This statement ignores the likelihood that

well-behaved monopolies may still be inefficient.