Purchase Solution

Government Intervention for Socially Efficient Outcomes

Not what you're looking for?

Ask Custom Question

These questions come from Baye's fifth edition of Managerial Economics and Business Strategy. Chapter 14: A Manager's Guide to Government in the Marketplace.

1) You are the manager in a market comprised of five firms, each of which has a 20 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of its competitors.

a. Calculate the premerger Herfindahl-Hirschman index (HHI) for this market.
b. Suppose that any two of these firms merge. What is the postmerger HHI?
c. Based only on the information contained in this question and on the U.S. Department of Justice Horizontal Merger Guidelines, do you think the Justice Department would attempt to block a merger between any two of the firms? Explain.

2) You are an industry analyst that specializes in an industry where the market inverse demand is P = 100 - 5Q. The external marginal cost of producing the product is MCExternal = 10Q, and the internal cost is MCInternal = 20Q.

a. What is the socially efficient level of output?
b. Given these costs and market demand, how much output would a competitive industry produce?
c. Given these costs and market demand, how much output would a monopolist produce?
d. Discuss actions the government could take to induce firms in this industry to produce the socially efficient level of output.

3) Consider a competitive market served by many domestic and foreign firms. The domestic demand for these firms' product is Qd = 500 -1.5P. The supply function of the domestic firms is QSD = 50 + 0.5P, while that of the foreign firms is QSF = 250.

a. Determine the equilibrium price and quantity under free trade.
b. Determine the equilibrium price and quantity when foreign firms are constrained by a 100-unit quota.
c. Are domestic consumers better or worse off as a result of the quota?
d. Are domestic producers better or worse off as a result of the quota?

Purchase this Solution
Solution Summary

Government interventions related to industry concentration, pollution, and free trade are discussed to answer the questions in 288 words.

Solution Preview

1) The Herfindahl-Hirschman Index ("HHI") is calculated by summing the squares of the individual market shares of all the participants and multiplying by 10,000.

a. HHI = 10,000 [(.20)^2 +(.20)^2 +(.20)^2+(.20)^2+(.20)^2] =2000
b. HHI= 10,000 [(.20)^2 +(.20)^2 +(.20)^2+(.40)^2] =2800
c.
The U.S. Dept. of Justice "Merger Guidelines:" The Justice Dept. views industries with HHIs in excess of 1,800 to be "highly concentrated" and may ...

Purchase this Solution
Free BrainMass Quizzes
Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

View More Free Quizzes
Related BrainMass Solutions

  • Necessity of social regulation

    The most efficient level of production, socially speaking, occurs when social marginal benefit = social marginal cost. Firms that are maximizing profits will produce where private MC= MR.

  • governmental regulation of monopolies and potential monopolies

    These arent socially efficient outcomes and so the government intervenes to counter the extreme powernof the monopolist. The governmental regulation of monopolies and potential monopolies is briefly debated.

  • Classical economics and Keynesian economics

    Keynesian theory argues that markets are not as efficient as the classical economists tend to believe, but needs an occasional nudge or push to bring it to the socially optimal equilibrium.

  • Market Imperfections - Monopolies

    Monopoly behavior and government intervention

  • Externalities

    Property rights can be defined and enforced a. only by the government b. only through constant renegotiation c. by government, by informal social actions, and by ethical norms d. by the government and by ethical norms 8.

  • government intervention on efficiency grounds

    The socially efficient level of education is above the market equilibrium, however, because people often can't afford the education they want. The government can intervene by providing loans and grants.

  • equilibrium price and quantity in a market with no government intervention

    What emissions fee would induce the socially optimal quantity of the good? See attached. I have attached both a Word and PDF version of the file. This solution analyzes equilibrium price and quantity in a market with no government intervention.

  • Encouraging a Monopoly to Social Efficiency

    If government wanted to encourage a monopoly to produce the socially efficient quantity, should it use a per-unit tax or per-unit subsidy? Explain how this tax or subsidy would achieve the socially efficient level of output.

  • External Cost

    Discuss three ways government can induce firms to produce the socially efficient level of output. Socially efficient level of output will be when Total MC = Total MR.

View More Related Solutions