Assume that the potato chip industry in the Northwest in 2007 was competitively

Question

Assume that the potato chip industry in the Northwest in 2007 was competitively structured and in long-run competitive equilibrium; firms were earning a normal rate of return, in 2008 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 cost and demand. Can you answer or graph the following using the horizontal sum of the marginal cost curves of the individual firms?

A: indicate 2007 output and price
B: by assuming that the monopolist is a profit maximizer, indicate the total revenue, total cost and total profit after consolidation
C: compare perfectly competitive outcome with the monopoly outcome
D: in 2008, mike 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 prepares a civil suit. Suppose you work in the White House and the president asks you to prepare a brief memo (two paragraphs) outlining the issues, in your responses include a: the economic justification B: a proposal to achieve an efficient market outcome.

Explanation / Answer

A. The price and output will be at the minimum point of average total cost in 2007.
B. The monopolist will have his MR under the demand curve. The point which MC=MR will be his optimum output and price.
C. the monopolist will produce less with higher price, and leap profits compared to A.
D. Wow you are working in the White House, please keep your mouth shut if you are an intern.A) the monopolist named Wong is bad and manipulated because he is not a natural monopolist at all. He produces less, charges higher price, leaps profit using his market power.People who love chips will suffer. B) to make it efficient here is your proposal a) force Wong to produce at the price =MC, or b) dissolute the Wonk group and let it pay for the damages.

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