Economics of Social Issues Study Set 2

Business

Quiz 8 :

The Economics of Big Business: Who Does What to Whom

Quiz 8 :

The Economics of Big Business: Who Does What to Whom

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In Chapter 3, you learned the concept of diminishing returns. In this chapter, the concept of diseconomies of scale was presented. Compare/contrast these two concepts.
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Diminishing returns:
Diminishing returns refer to the fall in output in the production process as a result of employing one more unit of resource.
Diseconomies of scale:
Diseconomies of scales refer to the cost disadvantage situation that may arise due to increase in size of the organization, thus causing a rise in the average cost of production. It is the opposite of economies scale.
The main difference of diminishing returns and diseconomies of scale is that diminishing returns are measured in terms of marginal, whereas diseconomies of scale are calculated in terms of average. Another difference is that diminishing returns are applied in the short run where one or more factors are fixed, whereas diseconomies of scale are applied in the long run where all factors are variable.

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Suppose two industries exist, A and B, both of which have concentration ratios of 80 percent. In A, the four largest firms control the following shares of the market, respectively: 60 percent, 10 percent, 7 percent, and 3 percent. In B, the four largest each have a 20 percent share of the market. In which would you expect more potential for monopoly power? What does this say about using concentration ratios as a measure of the potential for monopoly power?
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Monopoly:
Monopoly refers to a market situation where a single firm has domination in the industry, supplies the whole market, and faces no competition.
Concentration ration:
Concentration ratio is a tool that quantifies the market share of four or eight biggest firms in the market. It is most commonly used to determine whether the market is heading toward oligopoly or showing characteristics of a monopoly.
In Industry A, one firm has 60 percent of market share of whole industries that show near monopoly power, whereas in Industry B, the four largest firms haS₂0 percent market share. This explains that industries have the potential for monopoly power.
Using concentration ratio has some limitation, which may give misleading information about monopoly power. While calculating the concentration ratio, it ignores sales of imported goods. It also ignores sales in geographical areas. By keeping this in mind, the limitation of concentration ratio is often used to measure the potential degree of monopoly power in an imperfectly competitive market.

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The typical firm's long-run average cost curve is U-shaped. Why?
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Long-run average cost curve:
The long-run average cost curve (LAC) is a curve that indicates in long run firm can produce with given any level production at the lowest cost.
Figure 1 illustrates a typical firm's long-run average cost curve.
img In Figure 1, the vertical axis measures the price level and the horizontal axis measures the quantity per unit of time. As shown in Figure 1, a typical firm's long-run average cost curve is U-shaped. This is because, in the initial stage, AC decreases as the output increases. It is called the stage of economies of scale. Then, it reaches the minimum point of Q 0. After that point, as the output increases, AC starts to increase, which is called the stage of diseconomies of scale.

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Using the deadweight welfare loss diagram, compare and contrast the outcomes of competition and monopoly.
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Suppose that the market for (extremely) high-end sports cars is such that no more than 100,000 can be sold per year and that at this level of production, the industry's long-run average cost curve is declining. Why will this market most likely naturally gravitate to having only one producer?
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Define and explain the capture theory of regulation.
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What is natural monopoly, and what dilemma does it pose for public policy? Give examples of natural monopoly.
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What are barriers to entry, and how do they inhibit the proper functioning of a market?
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Explain what a concentration ratio measures and how it can be used to indicate whether a firm is operating in a competitive industry or an industry that is close to the monopolistic model. What shortcomings do concentration ratios have?
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Explain why bigness and monopoly power are not necessarily the same.
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Explain how agency problems contribute to the abuse of market power by managers of large corporations. Can regulation prevent agency problems? Discuss.
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From an economic perspective, evaluate the U.S. federal government's decision to bail out the automobile industry in Given the state of the industry today, was this a good decision?
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Who would you expect to have lower costs of production, a monopolist or a competitive firm? Explain.
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What are stock options? Stock option plans are often used as an incentive to hire top-level managers, but do they always create the right incentives for managerial behavior? Explain.
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The profit-maximizing condition for a competitive firm requires production to be carried to the point where marginal revenue is equal to marginal cost. Explain why. Is this condition the same for firms with monopoly power?
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List and discuss the three economic justifications for government regulation. If one of these exists, does that mean that regulation should be imposed?
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A merger of formerly competing firms forming a monopoly invariably leads to a fall in industry output. Why?
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