Question 1.

The JKL Corporation, the PQR Corporation, and the XYZ Corporation have an oligopoly in making widgets, a high-tech product used by businesses. The oligopoly exists because of the very high sunk costs required to build a widget factory and a service network. The current price of a widget is $100. The marginal cost of a widget is $85 at JKL, $75 at PQR, and $60 for XYZ.

The managers of JKL and PQR have decided to merge so that they can compete better with XYZ. The government must decide whether to allow the merger.

a. Argue briefly FOR allowing the merger.

b. Argue briefly AGAINST allowing the merger.

c. What additional facts about the market for widgets might be important in this case?

Question 2.

There is a consumer food product category called didgets. The market for didgets is characterized by product branding, large advertising budgets, and relatively low profits except for the top brands. A popular brand of didgets can sell for up to 40% more than an equivalent generic brand, but might not taste as good to loyal customers of the branded product. Didgets are distributed by grocery stores that carry a variety of brands but earn very small margins and have high fixed costs.

Many of the top brands use a flavor-enhancing ingredient that lowers costs, appeals to children, and is scientifically associated with childhood obesity.

There is a policy debate about approaches to this problem. Among the proposals: Outlaw the ingredient. Require manufacturers to put warning labels on the product and in advertising. Require grocery stores to pay a tax on each box sold locally, with the proceeds going to pay for health programs in local schools. Do nothing and let the market decide.

a. Describe the likely effects on the total welfare (surplus) of society of the status quo, i.e., do nothing and let the market decide.

b. Select ONE policy alternative to doing nothing, which may be from this list but does not have to be. Describe the likely effects of that policy on the total welfare (surplus) of society.

c. What additional facts about the market for didgets might be important in this case?