chap007 - Chapter 7 Answers to Questions and Problems 1 The...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 7: Answers to Questions and Problems 1. The four-firm concentration ratio is, 4 $175,000 $150,000 $125,000 $100,000 0.55 $1,000,000 C . 2. a. The HHI is 2 2 2 $200,000 $400,000 $500,000 10,000 =3,719 $1,100,000 $1,100,000 $1,100,000 HHI . b. The four-firm concentration ratio is 100 percent. c. If the firms with sales of $200,000 and $400,000 were allowed to merge, the resulting HHI would increase by 1,322 to 5,041. Since the pre-merger HHI exceeds that under the Guidelines (1,800) and the HHI increases by more than that permitted under the Guidelines (100), the merger is likely to be challenged. 3. The elasticity of demand for a representative firm in the industry is –1.5, since . 5 . 1 6 . 0 9 . 0 9 . 0 6 . 0 F F E E . 4. a. $100. To see this, solve the Lerner index formula for P to obtain 1 1 $35 $100 1 1 0.65 P MC L . b. Since 1 1 P MC L , it follows that the markup factor is 1 2.86 1 0.65 . That is, the price charged by the firm is 2.86 times the marginal cost of producing the product. c. The above calculations suggest price competition is not very rigorous and that the firm enjoys market power. 5. Managers should not specialize in learning to manage a particular type of market structure. Market structure generally evolves over time, and managers must adapt to these changes. 6. To the extent that the HHIs are based on too narrow a definition of the product (or geographic) market or the impact of foreign competition, the merger might be allowed. It might also be allowed if one of the firms is in financial trouble, or if significant economies of scale exist in the industry. Managerial Economics and Business Strategy, 7e Page 1
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
7. As shown in the text, the HHI is 2 2 2 2 2 2 1 1 2 ... ... 000 , 10 000 , 10 T n T j T i T T n i T i S S S S S S S S S S S S . (1) When firms i and j merge, the HHI becomes 2 2 2 2 2 1 ... ... 000 , 10 T n T j i T T S S S S S S S S S . (2) The difference between (2) and (1) is that 2 2 T j T i S S S S becomes 2
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern