micro 1
Micro
January 14, 2015
1. The purpose of antitrust policy is to promote __competition among firms_____, which leads to lower __price for customers______. Explain why this is so?
The purpose of antitrust policy is to promote competition, which leads to lower prices. If a company had the power of price control that comes with being a monopoly, they would profit by picking the quantity/price that equals the highest revenue for their company. This would be likely a lower quantity and higher price than would prevail if there was competition.
Combining operations could lead to greater efficiency. Cost savings could come by combining HR or accounting depts. The main problem with cost savings is that a monopoly does not have the pressure to operate efficiently.
2. Assume a healthy baseball pitcher is worth $5 million per year to his team, compared to only $1 million for an unhealthy one. According to a baseball executive, "If my assumptions are correct, our team is willing to pay a maximum of $3 million for a pitcher in the free-agent market." What are the executive's assumptions? Are these assumptions realistic? The executive is assuming that there is asymmetric information out there about certain pitchers, meaning that the team that is “selling” the players has more information on his health than the uninformed buyer, the executive. So a reasonable assumption is that the executive will split the difference in the mixed market and pay the average, which is $3 million. The executive does have realistic assumptions, simply for the fact that he has asymmetric information, and is not fully notified of the players’ injury status.
3. Imperfect information can go both ways. What are some examples (your own, not from the text) of market situations in which the seller has more information than the buyer and some examples in which the buyer has more information than the seller? One example where the seller knows more than the buyer would be when you are purchasing a
January 14, 2015
1. The purpose of antitrust policy is to promote __competition among firms_____, which leads to lower __price for customers______. Explain why this is so?
The purpose of antitrust policy is to promote competition, which leads to lower prices. If a company had the power of price control that comes with being a monopoly, they would profit by picking the quantity/price that equals the highest revenue for their company. This would be likely a lower quantity and higher price than would prevail if there was competition.
Combining operations could lead to greater efficiency. Cost savings could come by combining HR or accounting depts. The main problem with cost savings is that a monopoly does not have the pressure to operate efficiently.
2. Assume a healthy baseball pitcher is worth $5 million per year to his team, compared to only $1 million for an unhealthy one. According to a baseball executive, "If my assumptions are correct, our team is willing to pay a maximum of $3 million for a pitcher in the free-agent market." What are the executive's assumptions? Are these assumptions realistic? The executive is assuming that there is asymmetric information out there about certain pitchers, meaning that the team that is “selling” the players has more information on his health than the uninformed buyer, the executive. So a reasonable assumption is that the executive will split the difference in the mixed market and pay the average, which is $3 million. The executive does have realistic assumptions, simply for the fact that he has asymmetric information, and is not fully notified of the players’ injury status.
3. Imperfect information can go both ways. What are some examples (your own, not from the text) of market situations in which the seller has more information than the buyer and some examples in which the buyer has more information than the seller? One example where the seller knows more than the buyer would be when you are purchasing a