Question

1. In general, the marginal cost (MC) curve is U-shaped as you learned in the lectures and the textbook. However, exception exists. Please provide at least one industry as an example to illustrate that MC is not U-shaped. Explain briefly the shape of MC in the industry.

2. Engineers at a national research laboratory built a prototype automobile that could be driven 180 miles on a single gallon of gasoline. They estimated that in mass production the car would cost $40,000 per unit to build. The engineers argued that Congress should force U.S. automakers to build this energy-efficient car. In your opinion, is energy efficiency the same thing as economic efficiency? Please explain your opinion and state whether you support it or not.

Please answer all of the two questions by one paragraph for each.

Answer 1

1.

A monopoly describes a situation where all (or most) sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient (involving the lowest long-run average cost) for production to be concentrated in a single form. In some cases, this gives the largest supplier in an industry, often the first supplier in a market, an overwhelming cost advantage over other actual and potential competitors. This tends to be the case in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market, and hence high barriers to entry; examples include public utilities such as water services and electricity. It is very expensive to build transmission networks (water/gas pipelines, electricity and telephone lines); therefore, it is unlikely that a potential competitor would be willing to make the capital investment needed to even enter the monopolist's market.

2.

The Infant industry argument is an economic rationale for trade protectionism. The core of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale. The argument was first fully articulated by Alexander Hamilton in his 1790 Report on Manufactures, was systematically developed by Daniel Raymond,[1] and was later picked up by Friedrich List in his 1841 work The National System of Political Economy, following his exposure to the idea during his residence in the United States in the 1820s.
Many countries have successfully industrialized behind tariff barriers. For example, from 1816 through 1945, tariffs in the USA were among the highest in the world. According to Ha-Joon Chang, "Almost all NDCs [Newly Developed Countries] had adopted some form of infant industry promotion strategy when they were in catching-up positions. In many countries, tariff protection was a key component of this strategy, but was neither the only nor even necessarily the most important component in the strategy.