Investors would demand an interest premium for any

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If the regulated price was less than average total cost, the firm would suffer an economic loss. Investors would demand an interest premium for any funds lent to the firm and the firm’s credit rating would suffer. If the firm was publicly owned, stockholders would sell their shares and buy shares of firms that offered a higher return. In the long run, the firm would go out of business. This may well leave consumers worse off than if they had to pay a price higher than marginal cost. 3. Both! Market power can be consistent with a lack of competition and high prices. But market power can be the result of offering consumers products that they want. Wal-Mart and Microsoft are large companies with market power, but they started out as small companies that grew because they offered consumers goods and services they wanted at acceptable prices. The ambivalence toward firms with market power is reflected in the government’s policies toward mergers. Mergers that cause market power to increase may be approved if the merging firms can show that efficiencies will result. 4. A patent would have preserved the family’s monopoly position but only for a limited time. The textbook explains that “…because the Ecke family kept the technique secret for decades, it was able to maintain a monopoly on the commercial development of the plants.” Since the family was able to earn monopoly profits for decades, the absence of a patent probably had little impact on the firm’s profits. 5. The first part of the FTC’s merger guidelines, market definition, received the most criticism. The textbook notes that “A market consists of all firms making products that consumers view as close substitutes…If our definition of a market is too narrow, a price increase will cause firms to experience a…decline in sales – and profits – as consumers switch to substitutes.” Rather than define the relevant market as the “market for ice cream” or the “market for frozen desserts,” the FTC chose a more narrow market that seems less competitive. But if prices of “super-premium” ice cream rise, critics argued, consumers are free to buy other frozen deserts (including non-“super-premium” ice cream!) that are close substitutes. True/False Answers 1. T See the section “Is Any Firm Ever Really a Monopoly?” beginning on page 474 of the textbook. 2. F A patent grants an inventor exclusive rights to a product for 20 years. 3. T See “Merger Standards” on page 492 of the textbook. 4. F The Sherman Act (1890) contained these provisions. 5. F Joseph Schumpeter argues that large firms are more readily able to have funds available to use for research and development. 6. T See the section “Antitrust Laws and Antitrust Enforcement” beginning on page 488. 7. F Charging the “highest price possible” means charging the price at the very top of the demand curve and (presumably) selling only one unit. That is rarely the profit-maximizing price.
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