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Company is Being Accused of Monopoly Behavior

You work for a company that is being accused of monopoly behavior, given its large size. Comparisons are made to the industry standard, where each establishment has on average about 15.1 employees. Your company is quite a bit bigger than that, but you want to provide evidence against these monopoly charges.

a. You've collected data at different times in your company's history, when you had different amounts of capital.
In 1990, SRATC = 1.875Q2 - 18.75Q + 116.88
In 2000, SRATC = 1.875Q2 - 56.25Q + 500
In 2010, SRATC = 1.875Q2 - 37.5Q + 237.5
Plot these three different SRATC curves (have Q go from 0 to 20), and discuss how (and why) your company has changed since 1990 in terms of its size.

b. Make another column labeled "LRATC" that includes three points: 1990's SRATC when Q = 2, 2000's SRATC when Q = 18, and 2010's SRATC when Q = 10. Plot a 2nd-degree polynomial trendline to represent your company's LRATC.

c. In a more competitive industry with smaller firms, typical LRATC curves follow LRATC = 100/18Q2 - 100/3 Q + 100. Using all available information in this question, present an argument that could be used to justify your company's size.

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Solution Preview

a. Please see the attached file for the graph. Between 1990 and 2000, our firm expanded considerably. Its fixed and variable costs rose and its production costs shifted from curve SRATC 1990 to SRATC 2000. Our most efficient output, i.e. the quantity with the lowest average cost, shifted from Q = 5 ...

Solution Summary

This solution shows how a company that is being accused of monopoly behavior can use cost data to justify its size. Graphs of short-run and long-run costs are used to illustrate the company's argument.