2 monopoly causes an increase in producer surplus 3

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2. Monopoly causes an increase in producer surplus. 3. Monopoly causes a reduction in economic efficiency, measured by the deadweight loss. 28 d The only firms that do not have market power are firms in perfectly competitive markets, who must charge a price equal to marginal cost. 29 a It is possible to put a dollar value on the loss of economic efficiency by estimating the size of the deadweight loss triangle – as in Figure 14-5. 30 b Schumpeter argued that economic progress depended on technological change in the form of new products. Schumpeter was unconcerned that firms with market power would charge higher prices than perfectly competitive firms. 31 a Collusion refers to an agreement among firms to charge the same price or to otherwise not compete. 32 b Antitrust laws are laws aimed at eliminating collusion and promoting competition among firms. 33 a The Sherman Act prohibited “restraint of trade,” including price fixing and collusion. It also outlawed monopolization. 34 c The Robinson-Patman Act prohibited charging buyers different prices if the result would reduce competition. 35 a Horizontal mergers are mergers between firms in the same industry. Vertical mergers are mergers between firms at different stages of production of a good. 36 a The government is most concerned with horizontal mergers, or mergers between firms in the same industry, because horizontal mergers are more likely to increase market power than vertical mergers. 37 c When the merger realizes efficiency gains, marginal cost shifts to MC 2 and the profit maximizing level of output becomes Q 3 with a price of P 3 . 38 d One of the fruits of this economic expertise was the joint development by the Department of Justice and FTC of merger guidelines in 1982. The guidelines made it possible for economists and attorneys employed by firms considering a merger to understand whether the government was likely to allow the merger or to oppose it. The guidelines have three main parts: 1. Market definition 2. Measure of concentration 3. Merger standards 39 c In this case, the Herfindahl-Hirschman Index (HHI) is calculated as follows: 25 2 + 25 2 + 25 2 + 25 2 = 2,500. 40 c To achieve economic efficiency, regulators should require that the monopoly charge a price equal to its marginal cost. 41 b This price level corresponds to the level required to cover average total cost, which includes a normal rate of return. Short Answer Responses 1. The four-firm concentration ratios for both Industry A and Industry B are 80 percent. The HHI for Industry A = 75 2 + 2 2 + 2 2 + 1 2 = 5,625. The HHI for industry B = 20 2 + 20 2 + 20 2 + 20 2 = 1,600. The HHI index indicates a higher level of concentration in Industry A than in Industry B because it accounts for the distribution of market shares among the largest firms in the industries. Concentration ratios do not account for the distribution of markets shares among firms. (In fact, the largest firm in industry A probably has considerable market power.)
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CHAPTER 14 | Monopoly and Antitrust Policy 416 2. If the regulated price was less than average total cost, the firm would suffer an economic loss.
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