Midterm 2 questions & answers 2023
1. Ten firms compete in a market to sell product X. The total sales of all firms
selling the product are $2 million. Ranking the firms' sales from highest to
lowest, we find the top four firms' sales to be $260,000, $220,000, $150,000,
and $130,000, respec...
since the HHI increased and higer than the guideline of 1800, it would be difficult to merged and be
blocked.
Suppose the own price elasticity of market demand for retail gasoline is -0.8,
the Rothschild index is 0.5, and a typical gasoline retailer enjoys sales of
$1.5 million annually. What is the price elasticity of demand for a representative gasoline retailer's
product? - ANSWER-R = own price elasticity / price elasticity of demand
0.5 = -0.8 / price elasticity
price elasticity = -1.6
A firm has $1.5 million in sales, a Lerner index of 0.57, and a marginal cost of
$50, and competes against 800 other firms in its relevant market.
a. What price does this firm charge its customers?
b. By what factor does this firm mark up its price over marginal cost?
c. Do you think this firm enjoys much market power? Explain. - ANSWER-a) P = 1/(1-L) * MC
P = 1/(1-0.57) * 50
P = $116.28
b) Mark up = 1/(1-L) = 2.33
meaning that the price chaged by the firm is 2.33 times the marginal cost of producing the product.
c) The firm probably enjoy the market power because P is above MC by 2.33. P should be equal to MC. (P
= MC)
Perfect competition
,Characteristic?
Results? - ANSWER-1. Many buyers and sellers - no power on either side
2. homogenous product
3. perfect information
4. free entry/exit
Optimal Q:
MR = MC
P = MC
Short run earns profit or losses.
Long run however, free entry attracts new competitors.
Long run equilibirum:
P = MC
and at the minimum point on ATC.
shut down: no revenue, no variable cost
variable cost > revenue
, per unit basis:
VC/ Q > Revenue/ Q
12. Forey, Inc., competes against many other firms in a highly competitive industry. Over the last decade,
several firms have entered this industry and, as a
consequence, Forey is earning a return on investment that roughly equals the
interest rate. Furthermore, the four-firm concentration ratio and the HerfindahlHirschman index are
both quite small, but the Rothschild index is significantly greater than zero. Based on this information,
which market structure
best characterizes the industry in which Forey competes? Explain - ANSWER-this industry is most likely
monopolistically comeptitive because it has concentration close to zero, but since each firm product is
slightly differentiated, the rothschild index ill be greater than zero.
Nationwide Bank has approached Hometown Bank with a proposal to merge.
The following table lists the sales of the banks in the area. Use this information
to calculate the four-firm concentration ratio and the Herfindahl-Hirschman
index. Based on the FTC and DOJ Horizontal Merger Guidelines, do you think
the Justice Department is likely to challenge the proposed merger?
Megaank $1100
City bank 950
Nationwide Bank 845
Atlantic saving 785
Bulk Bank 665
Metropolian bank 480
American bank 310
Hometwon bank 260
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