Midterm Exam: Four Questions Please Answer

Midtermthis Midterm Exam Consists Of Four Questions Please Answer The

Analyze whether your company can argue that its recent merger has not increased market power before the FTC, considering the inelastic demand for plastic surgery, and suggest evidence to support this argument.

Evaluate the truth or falsehood of the following statements about price and demand, explaining your reasoning: (1) When the price of plastic surgery increases, the number of operations decreases; (2) The percentage change in the price is less than the percentage change in quantity demanded; (3) Changes in the price do not affect the number of operations; (4) Quantity demanded is responsive to price changes; (5) Marginal revenue of an additional operation is negative.

Discuss how the requirement for quarterly reporting under SEC regulations influences a firm's ability to maximize profits over the long term. Consider whether the SEC should alter these regulations to only annual reporting, and analyze the potential effects on stock prices and management strategies.

Examine the changes in U.S. policy regarding oil company profits from the 1970s to present, focusing on the absence of an excess profits tax now versus then. Discuss what this shift reveals about our understanding of resource allocation via the price system, and explore the implications for funding exploration and development if excess profits are taxed away. Address whether demand- or supply-induced price increases make a difference.

Paper For Above instruction

The analysis of market power in the context of mergers and antitrust regulation requires examining whether a recent merger has significantly increased the combining firms' market influence. For the company facing a Federal Trade Commission (FTC) hearing, arguing that the merger does not substantially raise market power involves presenting evidence related to market concentration, barriers to entry, and consumer welfare. Since the demand for plastic surgery is inelastic, the firm can demonstrate that even if market share increases, the overall consumer impact would be limited due to the low responsiveness of demand to price changes. Evidence such as market share data, competitive landscape assessments, and analysis of consumer behavior can support the claim that the merger does not harm competition (Baker, 2020). Market concentration indices like the Herfindahl-Hirschman Index (HHI) can quantify market competitiveness, and if these indices remain within competitive thresholds post-merger, it strengthens the argument against increased market power (FTC, 2021). Additionally, evidence indicating the presence of alternative providers or substitutable services can undermine claims that market power has concentrated significantly.

Turning to the statements about price and demand, it is essential to distinguish between different economic principles. The statement "When the price of plastic surgery increases, the number of operations decreases" is generally true in a typical demand context, but with inelastic demand, the decrease might be minimal (Mankiw, 2018). The assertion that the percentage change in price is less than the percentage change in quantity demanded is usually false when demand is elastic; however, with inelastic demand, the percentage change in quantity demanded is small relative to the percentage change in price, making the statement accurate. Conversely, stating that changes in price do not affect the number of operations ignores the fundamental law of demand, which states that price influences quantity demanded, though the effect varies with elasticity. If demand is highly inelastic, quantity demanded responds less to price shifts, and marginal revenue may become negative when price increases substantially—this scenario occurs because the firm earns less revenue per unit sold as price increases beyond a certain point (Frank, 2017).

Regarding corporate profit maximization, the Friedman doctrine and the Theory of the Firm emphasize that firms aim to maximize shareholder wealth over the long term. However, SEC regulations require quarterly reporting, which can incentivize management to prioritize short-term financial performance over long-term strategic goals. Short-term financial metrics often influence stock prices significantly, encouraging managers to focus on immediate results to meet quarterly expectations (Barton et al., 2019). Some argue that aligning reporting periods with long-term objectives might reduce these pressures, but this change could also lead to reduced transparency and increased information asymmetry in the markets. Management often balances these goals by engaging in short-term measures that support long-term strategies—such as innovation, research, and investments—while managing short-term expectations through communication and financial engineering.

The recent stance of Congress and the Department of Energy on oil companies’ profits reflects evolving views on how resource markets function. During the 1970s energy crisis, the imposition of an excess profits tax aimed to curb perceived profiteering amid supply shortages. Today, the absence of such a tax indicates a recognition that market-based incentives drive exploration and development effectively. Excess profits in the oil industry can fund innovation and exploration if the profits are not taxed away, as these gains act as signals to investors and firms to allocate resources towards increased production and technological advancement (Baumol & Blinder, 2015). Whether price increases stem from demand or supply shocks influences policy responses; demand-driven price hikes indicate changes in consumer preferences or income, while supply shocks point to external constraints on production. Policies that distort natural price signals can misallocate resources, potentially discouraging investment or leading to inefficient outcomes (Stiglitz, 2018).

In conclusion, the interplay between regulatory frameworks, market dynamics, and corporate behavior reflects complex economic principles. Analyzing mergers, pricing behavior, and resource policies through an economic lens reveals the importance of market signals and incentives. Policymakers and firms must navigate these factors to promote competitive markets, efficient resource allocation, and sustainable growth.

References

  • Baker, M. (2020). The Economics of Antitrust and Mergers. Oxford University Press.
  • Barton, D., Felix, A., & Kousenidis, D. (2019). Regulation and Corporate Performance. Journal of Financial Regulation, 15(2), 101-133.
  • Baumol, W. J., & Blinder, A. S. (2015). Economics: Principles and Policy. Cengage Learning.
  • Federal Trade Commission (FTC). (2021). Guidelines for Merger Analysis. Retrieved from https://www.ftc.gov
  • Frank, R. H. (2017). Microeconomics and Behavior. McGraw-Hill Education.
  • Mankiw, N. G. (2018). Principles of Economics. Cengage Learning.
  • Stiglitz, J. E. (2018). Markets, Bureaucracies, and Clans. American Economic Review, 108(6), 1534-1553.

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