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Antitrust regulations and income inequality

1. How would you expect antitrust authorities to react to:

(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; and

(e) an automobile rental firm that charges higher rates for last-minute rentals than for rentals reserved weeks in advance.

2. Carefully evaluate: "The supply and demand for agricultural products are such that small changes in agricultural supply result in drastic changes in prices. However, large changes in farm prices have modest effects on agricultural output." (Hint: A brief review of the distinction between supply and quantity supplied may be of assistance.) Do exports increase or reduce the instability of demand for farm products? Explain.

3. Briefly discuss the major causes of income inequality. With respect to income inequality, is there any difference between inheriting property and inheriting a high IQ? Explain.

4. Using the concepts in Chapter 7's discussion of consumer behavior, explain how health care insurance results in an overallocation of resources to the health care industry. Use a demand and supply diagram to specify the resulting efficiency loss.

5. Use the accompanying table for Neon and Zeon to answer the questions that follow. Assume that the wage rate shown equals hourly output and income and that the accumulated output and income are the sum of the marginal revenue products (MRPs) of each worker.

"**SEE attached tables***

a. Which country has the greater stock of capital and technological prowess? How can you tell?

b. Suppose the equilibrium wage rate is $19 in Neon and $7 in Zeon. What is the domestic output (=domestic income) in the two countries?

c. Assuming zero migration costs and initial wage rates of $19 in Neon and $7 in Zeon, how many workers will move to Neon? Why will not more than that number of workers move to Neon?

d. After the move of workers, what will the equilibrium wage rate be in each country? What will the domestic output be after the migration? What is the amount of the combined gain in domestic output produced by the migration? Which country will gain output; which will lose output? How will the income of native-born workers be affected in each country?

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Solution Preview

(a) Horizontal mergers are generally denied (Section 7 of the Clayton Act)
(b) They would charge these firms with price fixing (violation of Section 1 of the Sherman Act).
(c) Vertical mergers are generally allowed, since they increase efficiency. However, if a decline in competition would result, the merger would be denied.
(d) This is a conglomerate merger and is permitted.
(e) Price discrimination is also permitted.

2. It is true that when there is a surplus of an agricultural good, the price of it falls dramatically. This is due to the shifting of the supply curve, which cause a great change in price when combined with the ...

Solution Summary

Antitrust laws and mergers, effect of exports on agricultural goods market, and a discussion of income inequality.