3 Problems on the Market Structure - Quiz 5 | ECON 180 | Quizzes Economics

Regulation & Antitrust Policy (Econ 180) Signature:

Drake University, Spring 2009

William M. Boal Printed name:

QUIZ #5 VERSION A

"Market Structure"

INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing

calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be

correct to at least 3 significant digits. Point values for each question are noted in brackets.

I. Multiple choice: Circle the one best answer to each question. [2 pts each: 20 pts total]

(1) If an industry is a monopoly, its Hirschman-

Herfindahl Index (HHI) is

a. negative one.

b. zero.

c. 20.

d. 100.

e. 1,000.

f. 10,000.

(2) If an industry consists of 4 firms of equal size, its

Hirschman-Herfindahl Index (HHI) is

a. 4.

b. 250.

c. 400.

d. 2000.

e. 2500

f. 5000.

(3) Consider an industry that behaves like a Cournot

oligopoly. Holding constant the industry elasticity of

demand, the Lerner index (or price-cost margin) is

a. positively related to the industry's HHI.

b. negatively related to the industry's HHI.

c. positive but constant because it depends only on

the industry's elasticity of demand.

d. zero, as in all Cournot oligopolies.

(4) Although profits are greater in more highly

concentrated industries, social welfare may also be

greater in such industries, according to the

a. permanent income hypothesis.

b. collusion hypothesis.

c. differential efficiency hypothesis.

d. Bertrand model of price competition.

(5) The average cost curve in the graph below shows

a. economies of scale.

b. diseconomies of scale.

c. neither economies nor diseconomies of scale.

d. Cannot be determined from information given.

(6) Suppose an industry is a Cournot oligopoly but

entry is possible after firms pay a fixed, sunk entry

cost. The higher that entry cost, the

a. greater the number of firms, in long-run

equilibrium.

b. smaller the number of firms, in long-run

equilibrium.

c. The entry cost is unrelated to the entry cost.

d. Cannot be determined from information given.

(7) The theory of contestable markets concludes that,

even if a market is a natural monopoly, the

equilibrium price in the market will

a. be greater than average cost.

b. be equal to average cost.

c. fall after another firm enters the market.

d. rise after another firm enters the market.

(8) Suppose a dominant firm shares a market with a

competitive fringe of smaller firms. If the dominant

firm lowers the price,

a. total market quantity demanded increases and the

fringe’s quantity supplied increases.

b. total market quantity demanded increases and the

fringe’s quantity supplied decreases.

Output

Average cost

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Regulation & Antitrust Policy (Econ 180) Signature: Drake University, Spring 2009 William M. Boal Printed name:

QUIZ #5 VERSION A

"Market Structure"

INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. I. Multiple choice: Circle the one best answer to each question. [2 pts each: 20 pts total] (1) If an industry is a monopoly, its Hirschman- Herfindahl Index (HHI) is a. negative one. b. zero. c. 20. d. 100. e. 1,000. f. 10,000. (2) If an industry consists of 4 firms of equal size, its Hirschman-Herfindahl Index (HHI) is a. 4. b. 250. c. 400. d. 2000. e. 2500 f. 5000. (3) Consider an industry that behaves like a Cournot oligopoly. Holding constant the industry elasticity of demand, the Lerner index (or price-cost margin) is a. positively related to the industry's HHI. b. negatively related to the industry's HHI. c. positive but constant because it depends only on the industry's elasticity of demand. d. zero, as in all Cournot oligopolies. (4) Although profits are greater in more highly concentrated industries, social welfare may also be greater in such industries, according to the a. permanent income hypothesis. b. collusion hypothesis. c. differential efficiency hypothesis. d. Bertrand model of price competition. (5) The average cost curve in the graph below shows a. economies of scale. b. diseconomies of scale. c. neither economies nor diseconomies of scale. d. Cannot be determined from information given. (6) Suppose an industry is a Cournot oligopoly but entry is possible after firms pay a fixed, sunk entry cost. The higher that entry cost, the a. greater the number of firms, in long-run equilibrium. b. smaller the number of firms, in long-run equilibrium. c. The entry cost is unrelated to the entry cost. d. Cannot be determined from information given. (7) The theory of contestable markets concludes that, even if a market is a natural monopoly, the equilibrium price in the market will a. be greater than average cost. b. be equal to average cost. c. fall after another firm enters the market. d. rise after another firm enters the market. (8) Suppose a dominant firm shares a market with a competitive fringe of smaller firms. If the dominant firm lowers the price, a. total market quantity demanded increases and the fringe’s quantity supplied increases. b. total market quantity demanded increases and the fringe’s quantity supplied decreases.

Output

Average cost

Drake University, Spring 2009 Page 2 of 5 c. total market quantity demanded decreases and the fringe’s quantity supplied increases. d. total market quantity demanded decreases and the fringe’s quantity supplied decreases. (9) Suppose a dominant firm shares a market with a competitive fringe of smaller firms. Everything else equal, the more elastic is the competitive fringe's supply curve, the a. more market power the dominant firm has. b. less market power the dominant firm has. c. The elasticity of fringe supply has no effect on the market power of the dominant firm. d. Cannot be determined from information given. (10) According to the model of dynamic limit pricing, a dominant firm will set its current price lower, a. the higher its discount rate (r). b. the lower its discount rate (r). c. Its price is not affected by its discount rate. d. Cannot be determined from information given. II. Problems: Insert your answer to each question below in the box provided. Feel free to use the margins for scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section. (1) [Measuring industry concentration: 18 pts] Suppose two industries each consist of six firms with the following market shares. Industry A Industry B Firm #1 50% Firm #1 25% Firm #2 10% Firm #2 25% Firm #3 10% Firm #3 20% Firm #4 10% Firm #4 20% Firm #5 10% Firm #5 5% Firm #6 10% Firm #6 5% a. Suppose Industry A is a Cournot oligopoly. Which firm must have lower marginal cost—Firm #1 or Firm #6? b. Compute Industry A’s four-firm concentration ratio (4CR). c. Compute Industry B’s four-firm concentration ratio (4CR). d. Which industry is more concentrated according to the 4CR? e. Compute Industry A’s Hirschman-Herfindahl index of concentration (HHI). f. Compute Industry B’s Hirschman-Herfindahl index of concentration (HHI). g. Which industry is more concentrated according to the HHI? h. Assume Industry A is a Cournot oligopoly and that the industry's elasticity of demand is -2. Compute its average Lerner index. [Hint: Recall the formula: avg L = HHI / (10,000 ||) .] i. Assume Industry B is also a Cournot oligopoly and that the industry's elasticity of demand is also -2. Compute its average Lerner index.

Drake University, Spring 2009 Page 4 of 5 (3) [Dominant-firm price leadership: 30 pts] Enormous Corporation is the dominant firm in its industry. The following diagram shows total market demand, the supply curve of the follower firms or "competitive fringe," and the marginal cost for Enormous Corporation. Assume the "competitive fringe" firms take price as given.

Quantity (millions)

Price

Market demand

Supply of competitive

fringe

Marginal cost of

dominant firm

a. What is the highest price at which the competitive fringe would supply zero output? $

b. At what price would the quantity supplied by the competitive fringe be sufficient to supply the entire quantity demanded by the market?

Suppose the market price were $5 for some reason.

c. How much output would the competitive fringe supply? million

d. How much output would be left for the dominant firm? million

Now suppose the dominant firm sets the market price to maximize profit. e. Draw and label the residual demand curve available to the dominant firm, using a straightedge. f. Draw and label the residual marginal revenue curve available to the dominant firm, using a straightedge.

g. What quantity will the dominant firm seek to produce to maximize its profit? million

h. What price will the dominant firm set in the market? $

i. What quantity will the competitive fringe firms supply as a result? million

j. Compute the dominant firm's Lerner index (or "price-cost margin"). [Hint: By definition, the Lerner index = (P-MC)/P.]

Drake University, Spring 2009 Page 5 of 5 III. Critical thinking: Write a one-paragraph essay answering the following question. [6 pts] Suppose a market is currently served by only one firm, Firm A, whose average and marginal cost is $5, but whose price is currently $8. Firm B, with similar costs, is considering entering the market. To preserve its monopoly, Firm A tells firm B that if Firm B enters the market, Firm A will lower the price to $4 to make sure that Firm B loses money. Is this threat credible? Why or why not? Define "credible threat" before answering this question. [end of quiz]

3 Problems on the Market Structure - Quiz 5 | ECON 180, Quizzes of Economics

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Download 3 Problems on the Market Structure - Quiz 5 | ECON 180 and more Quizzes Economics in PDF only on Docsity!

QUIZ #5 VERSION A

"Market Structure"

Output

Average cost

Quantity (millions)

Price

Market demand

Supply of competitive

fringe

Marginal cost of

dominant firm

a. What is the highest price at which the competitive fringe would supply zero output? $

c. How much output would the competitive fringe supply? million

d. How much output would be left for the dominant firm? million

g. What quantity will the dominant firm seek to produce to maximize its profit? million

h. What price will the dominant firm set in the market? $

i. What quantity will the competitive fringe firms supply as a result? million