Suppose you own a home remodeling company. You are currently earning short-run profits. The home remodeling industry is an increasing-cost industry. In the long run, what do you expect will happen to:
- a) Your firms costs of production? Explain
- b) The price you can charge for your remodeling services? Why?
- c) Profits in home remodeling? Why?
Antitrust authorities at the Federal Trade Commission are reviewing your company’s recent merger with a rival firm. The FTC is concerned that the merger of two rival firms in the same market will increase market power. A hearing is scheduled for your company to present arguments that your firm has not increased its market power through this merger. Can you do this? How? What evidence might you bring to the hearing?
When McDonalds Corp. reduced the price of its Big Mac by 75 percent if customers also purchased French fries and a soft drink; The Wall Street Journal reported that the company was hoping the novel promotion would revive its US sales growth. It didn’t. Within 2 weeks, sales had fallen. Using your knowledge of game theory, what do you think disrupted McDonalds plans?