econ 107 ps4a

econ 107 ps4a - Economics 107 Solutions to Practice...

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Economics 107 – Solutions to Practice Problems for Chapter 9 1 1. Monopoly power of a large dominant firm might be due to its superior efficiency or quality of product thus leading to higher consumer surplus. It is, however, illegal to try to obtain (or to have obtained) monopoly power using anticompetitive means that eventually hurt consumer surplus such as predation, some vertical restraints, and mergers among others. 2a. Find the equilibrium prices, quantities, profits, and the Herfindahl index. For firm A: ) 2 90 ( 30 ) 2 90 ( max B A B A A A P P P P P P A FOC: 0 60 2 2 90 A B A A A P P P P Similarly for firm B: ) 2 90 ( 30 ) 2 90 ( max A B A B B B P P P P P P B FOC: 0 60 2 2 90 B A B B B P P P P Solve the system of FOCs for the two firms to get the equilibrium prices: 50 B A P P The equilibrium quantities are determined from the firms’ demand curves: 40 B A Q Q The equilibrium profits are determined from the firms’ profit functions: 800 B A Since the market share of each firm is 50 percent, the HHI will be: 5000 HHI 2b. Find the equilibrium prices, quantities, profits, market shares, and the Herfindahl index. Discuss the antitrust implications of this. Nothing is changed in the maximization problem of firm A: ) 2 90 ( 30 ) 2 90 ( max B A B A A A P P P P P P A FOC: 0 60 2 2 90 A B A A A P P P P However, firm B now has zero costs of production: ) 2 90 ( max A B B B P P P P B FOC: 0 2 2 90 B A B B B P P P P

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Economics 107 – Solutions to Practice Problems for Chapter 9 2 Solve the system of FOCs to get the new equilibrium prices: 34 , 46 B A P P The equilibrium quantities are determined from the firms’ demand curves: 68 , 32 B A Q Q The equilibrium profits are determined from the firms’ profit functions: 2312 , 512 B A The market share of firm B is 68 percent and the market share of firm A is 32 percent,
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This note was uploaded on 04/14/2010 for the course ECON econ 107 taught by Professor Peters during the Winter '09 term at UCSD.

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econ 107 ps4a - Economics 107 Solutions to Practice...

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