Question 1

Suppose that the demand in a particular industry is given by Q^d = 100 - 2P.When the market price in the industry is $10 per unit, total demand in the industry is ____.Furthermore, assume that each of the four largest firms in the industry sell 15 units.Based on this information, the 4-firm concentration ratio is

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Question 2

Some firms find conglomerate mergers advantageous since it permits firms to

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Question 3

Suppose the market for good X has a four-firm concentration ratio of 0.80.Having worked for the four largest firms in the industry, you know the sales for these four firms are given by $100,000, $125,000, $150,000 and $175,000.Based on this information we know that sales for the remaining firms in the industry are

Accepted Answer

The four-firm concentration ratio of 0.80 (or 80%) means that the four largest firms account for 80% of the market sales. The total sales of the four firms are $100,000 + $125,000 + $150,000 + $175,000 = $550,000. Since this represents 80% of the market, the total market sales are $550,000 / 0.80 = $687,500. Therefore, the sales for the remaining firms in the industry are the total market sales minus the sales of the four largest firms: $687,500 - $550,000 = $137,500.

Question 4

Consider a market characterized by a Herfindahl-Hirschman index of 5,000.One of the firms in this market has a Lerner index of 0.89 and is considering a horizontal merger with a competing firm.Based on this information is it likely that the U.S.Department of Justice will

Accepted Answer

The high Herfindahl-Hirschman index indicates that the industry is highly concentrated, which would make the merger subject to scrutiny by the U.S. Department of Justice. Additionally, the fact that the firm proposing the merger has a Lerner index of 0.89 suggests that it has significant market power, which would also make the merger more likely to be rejected. Therefore, option C is the best choice.

Question 5

An industry consists of three firms with equal annual sales.What is the industry's C₄?

Accepted Answer

C₄ (also known as the Herfindahl-Hirschman Index or HHI) is calculated by squaring the market share of each firm in the industry and summing them up. Since all three firms have equal annual sales, their market share is also equal at 1/3. Therefore, (1/3)^2 + (1/3)^2 + (1/3)^2 = 1/9 + 1/9 + 1/9 = 1/3. Multiplying by 10000 to get the HHI value yields 3333.33, which is less than 2500 (the threshold for an unconcentrated industry) and indicates a competitive industry.

Question 6

A firm has a Lerner index of 0.75, and charges a price of $150.The firm's marginal cost is:

Accepted Answer

The Lerner index is defined as (P - MC) / P, where P is the price and MC is the marginal cost. Given a Lerner index of 0.75 and a price of $150, we can rearrange the formula to solve for MC: MC = P - 0.75P = 0.25P = 0.25 * $150 = $37.50.

Question 7

Which of the following is NOT a measure of market structure?

Accepted Answer

Pricing behavior is not a measure of market structure, but rather a result or outcome of market structure. Entry conditions, four-firm concentration ratio, and Herfindahl-Hirschman index are all measures of market structure.

Question 8

Suppose the market for good X has a four-firm concentration ratio of 0.50.Furthermore, assume that total sales in the industry are $1.2 million.Based on this information we know that sales for the largest four firms in the industry equals (in aggregate)

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Question 9

Consider a market characterized by two firms that set the same price in the market, P = $10.Total market demand is Q_T = 100 - 2P, of which the two firms share equally.Based on this information we can conclude

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Question 10

An industry consists of five firms with equal annual sales.What is the industry's HHI?

Accepted Answer

The Herfindahl-Hirschman Index (HHI) is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For five firms with equal annual sales, each would have a market share of 20% (100% / 5). Squaring this 20% gives 400 (as we use the percentage figures directly, it's 20^2 = 400). Summing these squared market shares for all five firms gives an HHI of 2,000 (400 * 5 = 2,000).

Question 11

According to the U.S.Department of Justice Merger Guidelines, a Herfindahl-Hirschman index (HHI) above _________ is associated with a highly concentrated industry.Therefore, if the automobile industry had an HHI of 2,200, then a vertical merger between GM and one of suppliers likely would be

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Question 12

The industry elasticity of demand for good Y is -3, while the elasticity of demand for an individual manufacturer's of good Y is -12.Based on the Rothschild approach to measuring market power, we conclude that

Accepted Answer

The Rothschild approach states that the industry elasticity of demand is equal to the inverse of the sum of the individual firms' elasticities of demand. In this case, the industry elasticity of demand is -3, and the individual manufacturer's elasticity of demand is -12. Using the Rothschild approach, we get (1/-[1/3 + 1/12]) = 1/4. This indicates that there is little monopoly power in this industry. Therefore, the correct answer is choice B.

Question 13

Which of the following is NOT considered a measure of firm conduct?

Accepted Answer

The Dansby-Willig index is not a measure of firm conduct; it is a measure of product differentiation and market structure. The Lerner index, research and development measures, and advertising measures are all considered indicators of how firms behave in the market, reflecting their pricing strategies, innovation efforts, and advertising intensity, respectively.

Question 14

In a perfectly competitive market that is operating at maximum efficiency, the Dansby-Willig index would be

Accepted Answer

The Dansby-Willig index measures the degree of market power or monopoly power in a market. In a perfectly competitive market, there is no market power or monopoly power, and thus the Dansby-Willig index would be zero.

Question 15

An industry consists of four firms with annual sales of $300, $500, $400, and $600, respectively.What is the industry's HHI?

Accepted Answer

HHI is calculated by squaring the market share of each firm and adding up the results. 
Market share of firm 1 = 300/1800 = 0.167, 
Market share of firm 2 = 500/1800 = 0.278, 
Market share of firm 3 = 400/1800 = 0.222, 
Market share of firm 4 = 600/1800 = 0.333.

HHI = (0.167^2 + 0.278^2 + 0.222^2 + 0.333^2) * 10,000 = 2,654. Therefore, the best choice is B.

Question 16

Suppose that the demand in a particular industry is given by Q^d = 500 - 2P.When the market price in the industry is $50 per unit, total demand in the industry is _________.Furthermore, assume that the entire market consists of four firms that share the market equally.The HHI under these conditions is then

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Question 17

Four firms control the market for a particular good resulting in an HHI of 2,900.Total industry sales are $500 and it is known that two firms each have sales of $175.If each of the remaining two firms have the same sales, then we can conclude that the remaining two firms each have a market share of

Accepted Answer

HHI (Herfindahl-Hirschman Index) is calculated by squaring the market share of each firm in the market and adding up the results. In this case, with four firms, the HHI is:

HHI = (0.25)^2 + (0.25)^2 + (0.25)^2 + (0.25)^2 = 0.0625 + 0.0625 + 0.0625 + 0.0625 = 0.25

Multiplying this by 10,000 gives an HHI of 2,500, which is lower than the actual HHI of 2,900 given in the question. This means that the market is moderately concentrated.

We know that total industry sales are $500 and two firms each have sales of $175. This leaves $150 of sales for the remaining two firms.

To find the market share of these two firms, we can use the formula:

Market share = Sales in market / Total industry sales

For the first of the remaining two firms, we have:

Market share = $150 / $500 = 0.3

For the second of the remaining two firms, we know its market share is the same, as stated in the question. Adding up the market shares of all four firms gives:

0.175 + 0.175 + 0.3 + 0.3 = 0.95

This means that the market share of the remaining two firms is:

0.5 - 0.95 = 0.45 / 2 = 0.225

Therefore, each of the remaining two firms has a market share of:

Market share = 0.225 = 0.15 (rounded to two decimal places)

So the answer is C) 0.15.

Question 18

An industry consists of eight firms with annual sales (in millions) of $200, $300, $900, $600, $300, $700, $500, and $600, respectively.What is the industry's C₄?

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Question 19

The industry elasticity of demand for good X is -1.5, while the elasticity of demand for an individual manufacturer of good X product is -9.Based on this information, the Rothschild index of market power is:

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The answer of The industry elasticity of demand for good...

Question 20

A firm has a marginal cost of $200 and charges a price of $500.The Lerner index for this firm is:

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The answer of A firm has a marginal cost of...

Quiz 7: The Nature of Industry