ecn121bf09_pm2a

ecn121bf09_pm2a - Fall 2009 Economics 121B: Industrial...

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1 Fall 2009 Economics 121B: Industrial Organization PRACTICE MIDTERM 2 Answer Keys November XX, 2009 ( 9:00-9:50 a.m.) Part I Short Answer Questions (Total 40 points) (Please write your answers in 2-4 sentences.) 1 . (10 points) Among two approaches for identifying unreasonable restraints of trade in the U.S. antitrust law, the per se rule is applied to price fixing cases, but the rule of reason is applied to horizontal merger cases. Explain why they are treated differently like this. Answer : The per se rule is applied to price fixing cases because price fixing results in deadweight loss and its harm is clear. Horizontal mergers may have anticompetitive effects. However, since mergers result in the integration of the firm’s resources, there is also the possibility of cost savings. Thus, the costs and benefits of horizontal mergers should be considered to determine the total effect of horizontal mergers and that is why the rule of reason is applied to horizontal merger cases. 2 . (10 points) What is the four-firm concentration ratio ( CR4 )? What do you think is a fundamental problem with CR4 ? Briefly explain. [When you explain, having an example with hypothetical industries would be very helpful.] Answer : (see Problem Set #2) 3 . (10 points) Evaluate the following statement. (Choose between “True” or “False”, with explanations. Answers without explanations will receive zero credit.) “In October 2009, three pizza restaurant chains, Athos Pizza, Porthos Pizza, and Aramis Pizza, proposed to merge and form Three Musketeers’ Pizza. If the premerger HHI was 1450 and the three merging firms had market shares of 5.0 percent, 4.5 percent, and 3.3 percent of the pizza restaurant chain market, then this merger would be unsafe under the 1992 Merger Guidelines.” Answer : True. The merger belongs to the unsafe region. If three premerger firms’ market shares are A, B, and C, respectively, then the increase of HHI by merger is 2*(AB+BC+CA). Thus, 2*(AB+BC+CA) = 2*(5.0*4.5+4.5*3.3+3.3*5.0) = 107.7 Postmerger HHI =
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This note was uploaded on 05/15/2010 for the course ECN 60112 taught by Professor Janinewilson during the Fall '10 term at UC Davis.

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ecn121bf09_pm2a - Fall 2009 Economics 121B: Industrial...

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