If “excess profits” are taxed away, where will oil companies get the money to fund new exploration and development of oil properties?

Two to three pages should be sufficient for each question.

  1. 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?
  2. Assume that the demand for plastic surgery is price inelastic. Are the following statements true or false? Explain your answer for full credit.
    • When the price of plastic surgery increases, the number of operations decreases.
    • The percentage change in the price of plastic surgery is less than the percentage change in quantity demanded.
    • Changes in the price of plastic surgery do not affect the number of operations.
    • Quantity demanded is quite responsive to changes in price.
    • The marginal revenue of another operation is negative.
  3. The Theory of the Firm document, the Friedman article, and the information in chapter 4 argue that the main goal of a firm in a market economy is to maximize profit (shareholder wealth) over the long term. However, SEC regulations require U.S. corporations to publish operating results on a quarterly basis. How does this short term time frame impact long term profit maximization? Should the SEC change their regulations of public corporations to require only annual reporting of operations? How might this impact stock price in the short term? How do you believe that management deals with these two sometimes competing goals?
  4. During the energy crisis of the 1970s, and again in the last 5 years, Congress bemoaned the “price gouging” and “windfall” profits of the major oil companies. In the 1970s Congress imposed an “excess profits tax” on these companies. It did not do so this time? What does this change show about how our understanding of the way the price system works to allocate resources has evolved? If “excess profits” are taxed away, where will oil companies get the money to fund new exploration and development of oil properties? Does it matter if these price increases are demand or supply induced?
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