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2 Problems: Regulation & Antitrust and Free Markets

Activity 1
Regulation and Antitrust

The top 6 firms in an industry have the following market shares:

A 25
B 25
C 20
D 10
E 10
F 5

Firm C wants to buy out Firm F.
Will the Department of Justice likely approve this acquisition?
Calculate the Herfindahl-Hirschman Index (HHI), showing all work.

Activity 2
1. A community's marginal utility and total cost schedules for wooden chairs are as follows (all units are in thousands):

Chairs MU TC
1 $10 $2
2 9 5
3 8 9
4 7 14
5 6 20
6 5 27
7 4 35
8 3 44
9 2 54

a) What is the efficient level of output?
b) What are the supply and demand schedules for chairs, and the equilibrium output and price?
c) Explain why the free market does or does not achieve the efficient level of output.

2. Suppose that in Problem 1 the government imposed
a) a price ceiling of $4.
b) a price floor of $7.
What quantity of chairs would be sold at these prices? Explain why these quantities either would or would not be efficient.

Reminder: For consumers following the Optimal Purchase Rule: MU=P.
Use the Q of chairs and the P (MU) as the Demand Schedule.
For firms under conditions of perfect competition, P=MR
To maximize their profits, they must produce where: MR=MC.
(You have to calculate MC from Total Cost given above.)
Use the Q of chairs and the MC figures as the Supply Schedule.

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Solution Preview

Activity 1
See the attached file. The HHI is the sum of the squares of the market shares for each firm in the industry. The Department of Justice considers that a merger that increases HHI by more than 100 points is likely to significantly increase a firm's ...

Solution Summary

The two problems covered by this solution deal with Regulation & Antitrust, and Free Markets. Problem 1 shows how the Department of Justice uses the Herfindahl-Hirschman Index (HHI) to decide whether to challenge a proposed merger. Problem 2 shows how to determine the quantity of a good sold in a free market under a price ceiling or a price floor.