Chapter 14: 9CCQ (page 523)
Explain, using precise economic terminology, the economic rationale for laws against insider trading.
To eliminate the asymmetric information inequity, the government must pass a strict insider trading ban.
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The U.S. International Trade Commission's committee in charge of the global safeguard investigation involving imports of steel has announced its recommendations to be forwarded to the president. Of the 33 steel product categories investigated, 12 have experienced a significant increase in the quantity of imported steel, causing serious injury or the threat of serious injury to the U.S. steel industry. The commission has recommended that the president impose a 20 percent tariff on these 12 categories of imported steel. If the president follows the commission's recommendations, what will happen to the supply of foreign steel in these categories? What impact will this have on the equilibrium quantity of steel sold (in these categories) in the United States? Will the equilibrium price for these categories of steel in the United States market increase or decrease? Explain.
You are the manager in a market composed of eight firms, each of which has a 12.5 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 Horizontal Merger Guidelines described in this chapter, do you think the Justice Department (or FTC) would attempt to block a merger between any two of the firms? Explain.
Question: Attorneys for Eastman Kodak argued before the U.S. Supreme Court to defend the company against charges levied by several independent firms that provided service for machines sold by Eastman Kodak. At issue was a decision by Kodak to limit the availability of replacement parts to these firms, making it more difficult for them to compete against Kodak in servicing Kodak machines. The suit alleged that Kodak unlawfully tied the sale of service for its machines to the sale of parts and, therefore, unlawfully monopolized and attempted to monopolize the sale of service and parts for such machines. Under which act do you think Kodak was charged?
Explain why government attempts to solve market failures can lead to additional inefficiencies because of “rent-seeking” activities.
Show why externalities can lead competitive markets to provide socially inefficient quantities of goods and services; explain how government policies, such as the Clean Air Act, can improve resource allocation.
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