Econ 121 Fall 2002
Midterm Answer Sheet
Department of Economics
University of California
MIDTERM ANSWER SHEET
: Write your name
and your TA’s name
on the front cover of each of TWO BLUE BOOKS.
The exam has 3 parts. Put Part I and Question II.1 in one blue book, and Question II.2 and Part III in a second. The
exam is worth 100 points. Point assignments are given in the instructions for each part. Check your calculations on
scratch paper but be certain to put all of your answers in the bluebooks
TRUE or FALSE or UNCERTAIN and EXPLAIN
Choose 4 of the following 6 statements, decide whether each
is true or false or uncertain, and then explain the reasoning behind your answer in a few sentences; provide any
assumptions you may think necessary to draw your conclusion.
We will only grade the first 4 that appear in
Each question is worth 7 points for a total of 28 points.
While retail sales of ready-to-eat breakfast cereals in the Bay Area exhibits an HHI of 1,840, this figure likely
the extent of concentration in this market.
UNCERTAIN - If the HHI overstates
the extent of concentration then we are saying that the HHI would
actually be lower if the market isn’t as concentrated as the HHI suggests.
Because the figure includes the
whole bay area but consumers will not be willing to travel very far to get, market concentration will be greater
if we look at a more local level (i.e. given this argument the HHI is probably
It maybe however, that the market is too narrowly defined, since some consumers may be willing to substitute
other breakfast items (oatmeal, granola bars, steak & eggs) for RTE cereal.
To find out for sure, we would
like to use the SSNIP test: if we raised the price of all
RTE cereals, what is the decrease in sales?
When firms in an industry act as price takers, their index of scale economies, s, will be less than 1 when the industry
reaches in equilibrium.
s = AC/MC.
When firms act as price takers (i.e. a competitive industry), when s < 1 then AC <
MC and firms are making a profit.
however, profits will be zero, since firms enter until profits
Profits are just zero when AC = MC, or when s = 1.
It is never profitable to sell a product below
its cost of production and below the price charged by competitive firms.
FALSE – We have studied three possibilities where this could be the case.
- First, a product may be a “loss-leaders” – where the firm may be willing to lose money on one product
because it makes it up on another.
- Second, learning-by-doing may make a firm decided to overproduce in one period at such a quantity that the
price falls below production costs.
Although it loses money in the first period, it lowers costs in subsequent
- Third, as in the model of the dominant firm with a competitive fringe, if it’s the dominant firms costs are low
enough, its price may be too low for the competitive fringe to produce.