Reference no: EM131170708

Assume that the potato chip industry in the Northwest in 2011 was competitively structured and in long-run competitive equilibrium; firms were earning a normal rate of return. In 2012, two smart lawyers quietly bought up all the firms and began operations as a monopoly called “Wonks”. To operate efficiently, Wonks hired a management consulting firm, which estimated long-run costs and demand. These results are presented in the following figure.

(ZMC = the horizontal sum of the marginal cost curves of the individual branches/firm)

A. Indicate 2011 output and price on the diagram.

B. By assuming that the monopolist is a profit-maximizer, indicate on the graph total revenue, total cost, and total profit after the consolidation.

C. Compare the perfectly competitive outcome with the monopoly outcome.

D. In 2012, an old buddy from law school files a complaint with the Antitrust Division of the Justice Department claiming that Wonks has monopolized the potato chip industry. Justice concurs and prepare a civil suit. Suppose you work in the White House and the president asks you to prepare a brief memo (two or three paragraphs) outlining the issue. In your response, be sure to include:

1. The economic justification for action.

2. A proposal to achieve an efficient market outcome.

Assume that the potato chip industry in the Northwest in 2011 was competitively structured and in long-run competitive equilibrium; firms were earning a normal rate of return. In 2012, two smart lawyers quietly bought up all the firms and began operations as a monopoly called “Wonks”. To operate efficiently, Wonks hired a management consulting firm, which estimated long-run costs and demand. These results are presented in the following figure.

(ZMC = the horizontal sum of the marginal cost curves of the individual branches/firm)

A. Indicate 2011 output and price on the diagram.

B. By assuming that the monopolist is a profit-maximizer, indicate on the graph total revenue, total cost, and total profit after the consolidation.

C. Compare the perfectly competitive outcome with the monopoly outcome.

D. In 2012, an old buddy from law school files a complaint with the Antitrust Division of the Justice Department claiming that Wonks has monopolized the potato chip industry. Justice concurs and prepare a civil suit. Suppose you work in the White House and the president asks you to prepare a brief memo (two or three paragraphs) outlining the issue. In your response, be sure to include:

1. The economic justification for action.

2. A proposal to achieve an efficient market outcome.