Economics 1460 Industrial Organization Fall 2007 PROBLEM SET 2 (due October 12) with c 1 < c 2 be the equilibrium price on the market? (Hint: I do not expect a formal answer, but explain your intuition carefully.) 2. A formula which is often used to assess market power is the "Lerner for-mula" : L = H " where " is the price elasticity of demand, H H = P n i =1 s 2 i where s i and L the Lerner index given by L = P n i =1 s i p MC i p : Consider a linear P = 1 Q . Verify cost, c 1 = c 2 = c: Then show that the formula still holds when the two c 1 < c 2 : 3. Empirical evidence from the US airline industry suggests that fare wars
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