midterm2_ans

# midterm2_ans - Eco 171 - Industrial Organization Second...

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Eco 171 - Industrial Organization Second Midterm Exam Name : Section: Instructions There are 6 short questions and 2 problems. Short questions are worth a total of 40 points and the problems a total of 60 points. Answer in the space provided (no need to use it all.) If necessary use the back of the page. For stuck in a question, move on to the next one. DONT FORGET TO WRITE DOWN YOUR NAME. Part I. Short questions 1. Consider an industry with 3 Cournot competitors where the markups (price-mc)/p of the ±rms are: 0.25,0.25 and 0.5. (a) Explain why the market demand elasticity in the industry must be one. ( = 1) : Hint. Use the formula p c i p = s i : Answer. Using our formula: m i = p c i p = s i it follows that: m 1 + m 2 + m 3 = s 1 + s 2 + s 3 = 1 : But since m 1 + m 2 + m 3 = 0 : 25 + 0 : 25 + 0 : 5 it follows that = 1 : (b) What is the Her±ndahl index in this industry? Answer. Again using the above formula and = 1 ; it follows that s 1 = s 2 = 0 : 25 and s 3 = 0 : 5 : Hence H = 10 ; 000 ± 1 4 ± 2 + 1 4 ± 2 + 1 2 ± 2 ! = 10 ; 000 ± 3 8 ± = 3 ; 750 1

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2. There are three competitors in a Cournot market with market shares s 1 = s 2 = 0 : 25 and s 3 = 0 : 5 : merge. Which of the following is true? Explain. ( Hint: After the merger the Cournot equilibrium might change. ) 3 will increase. homogeneous good. Aggregate demand is p = 100 Q: zero marginal cost. Firm one has 40 units of capacity and rationing Hint: Consider the worst case scenario where p 1 = 0 2 would be p 2 = 60 q 2 ) Answer. Because rationing is e¢ cient, consumers with the highest will- The rest of the consumers (those with willingness to pay less than 60)
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## This note was uploaded on 10/28/2008 for the course ECON 171 taught by Professor Hopenhayn during the Spring '07 term at UCLA.

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midterm2_ans - Eco 171 - Industrial Organization Second...

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