answers-f02 - Department of Economics University of...

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Econ 121 Fall 2002 Page 1 Midterm Answer Sheet Department of Economics Fall 2002 University of California Woroch/Lopez/Warmerdam Economics 121 MIDTERM ANSWER SHEET GENERAL INSTRUCTIONS : 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 . I. 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 your bluebook. Each question is worth 7 points for a total of 28 points. 1. While retail sales of ready-to-eat breakfast cereals in the Bay Area exhibits an HHI of 1,840, this figure likely overstates 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 understated ). 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? 2. 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. FALSE: 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. In equilibrium , however, profits will be zero, since firms enter until profits are zero. Profits are just zero when AC = MC, or when s = 1. 3. 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 periods - 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. 4.
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This note was uploaded on 05/05/2008 for the course ECON 121 taught by Professor Woroch during the Fall '07 term at Berkeley.

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answers-f02 - Department of Economics University of...

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