Micro Ec

1. In the 1980s, PepsiCo Inc., which then had 28 percent of the soft-drink market, proposed to acquire the Seven-Up Company. Shortly thereafter, the Coca-Cola The company, with 39 percent of the market, indicated it wanted to acquire the Dr Pepper Company. Seven-Up and Dr Pepper each controlled about 7 percent of the market. In your judgment, was the government’s decision to block these mergers appropriate? Why?

2. What are the effects of farm subsidies such as those of the United States and the European Union on (a) domestic agricultural prices, (b) world agricultural prices, and (c) the international allocation of agricultural resources? (d) Use public choice theory to explain the persistence of farm subsidies in the face of major criticisms of those subsidies. If the special-interest effect is so strong, what factors made it possible in 1996 for the government to end price supports and acreage allotments for several crops?

3. Use quintiles to briefly summarize the degree of income in-equality in the United States. How and to what extent does government reduce income inequality?

a. Assume that Al, Beth, Carol, David, and Ed receive incomes of $500, $250, $125, $75, and $50, respectively. Construct and interpret a Lorenz curve for this five-person economy. What percentage of total income is received by the richest quintile and by the poorest quintile?

b. How does the Gini ratio relate to the Lorenz curve? Why can’t the Gini ratio exceed 1? What is implied about the direction of income inequality if the Gini ratio declines from 0.42 to 0.35? How would one show that change of inequality in the Lorenz diagram?

c. Why is the lifetime distribution of income more equal than the distribution in any specific year?

4. In July 2007 The Wall Street Journal (WSJ) reported that a growing shortage of skilled labor in Eastern European countries such as Slovakia was driving up wages in key industries and reducing business income. The reason for the shortages was a large migration of skilled Eastern European workers to Western European countries. Use the simple immigration model to demonstrate the key elements of the WSJ story as just described.