AGENDA Tues 1/19. QOD #5: Fruit Flies Partner Practice CH 20 P #3,4 HW Review CH 18 Q#1, 4-7, 10-13

Transcription

1 AGENDA Tues 1/19 QOD #5: Fruit Flies Partner Practice CH 20 P #3,4 HW Review CH 18 Q#1, 4-7, Macro Topic Selection: Intro to Team Teach HW: Read pp Q#3,5,7 Parent Syllabus Review DUE: Mon 1/24 LO1 17-1

2 QOD #5: Fruit Flies 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 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, and would the court consider Sunny Valley to be a monopolist? LO1 17-2

3 QOD #5: Fruit Flies Solution a. Sunny Valley has 90% (= 900,000 / 1,000,000) of the blueberry market, so the court would rule that Sunny Valley is definitely a monopoly. b. Sunny Valley has 30% (= 1,800,000 / 6,000,000) of the berry market, so the court would rule that Sunny Valley is definitely not a monopoly. c. Sunny Valley has just over 60% (= 9,700,000 / 16,000,000) of the market for all fruits, so the court would rule that Sunny Valley is probably a monopoly. LO1 17-3

4 CH 20 P#3 Solution (a) The average worker was 3 times more productive than the minimum-wage worker (= $22 / $7.25). The lawyer was 13.8 times more productive than the minimum-wage worker (= $100 / $7.25). (b) The lawyer earns $4000 per week (= $100 x 40), while the minimum-wage worker earns $290 per week (= $7.25 x 40). (c) Each minimum-wage worker will receive an additional $50 per week (= $1000 / 20). The transfer amounts to $1.25 per hour (= $50 / 40). (d) Each minimum-wage worker will receive an additional $200 per week (= $4000 / 20). The transfer amounts to $5 per hour (= $200 / 40). LO7 20-4

5 CH 20 P #4 Solution (a) The cost of one audit is $1700 (= [$7000 / 10] + $1000). (b) The profit is $100 (= $ $1700). The profit rate as a percentage of revenue is 5.6% (= $100 / $1800). (c) Ted will complete 110 audits (= 10 x 11). Firm B will earn $11,000 in accounting profit (= 110 x $100). (d) Firm A will regret its decision by $6,000 (= $11,000 - $5,000). LO7 20-5

6 Antitrust Laws The purpose Prevent monopoly Promote competition Achieve allocative efficiency Historical background Regulatory agencies Antitrust laws LO1 18-6

7 Antitrust Laws Sherman Act 1890-meant to prevent monopoly Clayton Act 1914 Outlaw price discrimination-having to buy multiple products Prohibit tying contracts-having to buy multiple products Prohibit stock acquisition=-from competing companies No interlocking directorates-on the board of directors for competing firms Federal Trade Commission Act 1914 Wheeler-Lea Act 1938-gave FTC the ability to police deceptive acts (i.e. misleading advertising) LO1 18-7

8 Antitrust Policy Issues of interpretation Monopoly behavior or structure 1911 Standard Oil Case-guilty of monopolizing the petroleum industry so the co. was divided up U.S. Steel Case- rule of reason was established-the co. had not resorted to illegal acts and was not found guilty. Deemed a good trust Alcoa Case-reversed earlier decision of the good trust. Court said that mere possession of monopoly power was a violation of the Sherman Act. The relevant market 1956 DuPont Cellophane Case-controlled 100% of the cellophane market. However, it was decided that cellophane was not a market but in the flexible packaging materials and only controlled 20%. Issues of enforcement-active v. laissez-faire LO2 18-8

9 Effectiveness of Antitrust Laws Monopoly-sometimes they develop naturally and the gov. has been somewhat lenient. AT&T-1982-broken up into 22 smaller companies after the court found that the co. ruled the co. had engaged in anticompetitive practices. Microsoft Case-guilty of anticomp. Practices related to its operating systems-netscape Mergers Horizontal merger-between companies that sell similar products Vertical merger-merger between diff. stages of the prod. process. Conglomerate merger-between companies in diff. industries. LO2 18-9

10 Autos Automobiles Conglomerate Merger A Mergers Blue Jeans B C D E F Blue Jeans Glass T U V W X Y Z Denim Fabric Horizontal Merger Vertical Merger LO

11 Mergers Merger guidelines The Herfindahl Index Price fixing-no, no, no Price discrimination- ok Tying contracts-i.e. having to buy multiple products-no,no,no LO

12 Industrial Regulation Natural monopolies Economies of scale-only one firm can produce min. ATC Public utilities Electricity, water, gas, phone Solutions for better outcomes Public ownership Public regulation Public interest theory of regulation-necessary to keep a monopoly from charging? LO

13 Industrial Regulation Commission (Year Established) Federal Energy Regulatory Commission (1930)* Jurisdiction Electricity, gas, gas pipelines, oil pipelines, water-powered sites Federal Communications Commission (1934) State public utility commissions (various years) Telephones, television, cable television, radio, telegraph, CB radios, ham operators Electricity, gas telephones *Originally called the Federal Power Commission, renamed in 1977 LO

14 Problems with Industrial Regulation Regulators establish rates to give natural monopoly fair return No incentive to reduce cost X-inefficiency Perpetuate monopoly Conditions of natural monopoly can end Legal Cartel Theory- the firms actually desire the regulation. HUH? The reg. commission blocks entry or may divide up the market for the few companies involved. LO

15 Deregulation Began in the 1970s Has produced large net benefits for consumers and society Industries deregulated include: Airlines Railroads Telecommunications Electricity-can you backfiredwholesale rates in CA. LO

16 Social Regulation Concerned with the conditions under which goods and services are produced Impact of production on society Physical qualities of goods Applied across the board to all industries LO

17 Social Regulation Commission (Year Established) Food and Drug Administration (1906) Equal Employment Opportunity Commission (1964) Occupational Safety and Health Administration (1972) Environment Protection Agency (1972) Consumer Product Safety Commission (1972) Jurisdiction Safety and effectiveness of food, drugs, and cosmetics Hiring, promotion, and discharge of workers Industrial health and safety Air, water, and noise pollution Safety of consumer products LO

18 Social Regulation Optimal level of social regulation In support of social regulation Criticisms of social regulationmc>mb? Two reminders There is no free lunch Less government is not always better than more LO

19 MACRO Topic Selection GDP/Econ Growth CH 24-25: Kordis Unemployment/Inflation CH 26 Interest Rate/Investment CH 27 Public Sector/AG GDP CH 28 AG Supply/Demand CH 29 Fiscal Policy CH 30 Money CH Monetary Policy CH 33 AS/AD; I/U & Taxation CH 35 International Trade/Trade Deficits CH 37/38 LO