ps3_a-1 - Industrial Organization PS #3 Suggested Answers...

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Industrial Organization PS #3 Suggested Answers (1) A demand function is given by Q=100-P. Calculate the price elasticity of demand at Q=20 Answer: E=(dQ/dP) * (P/Q) = -(1) * (P/Q) at Q=20 à P=80 Thus E= -(1) * (80/20) = -4 (2) A demand function is given by Q=100-ln(P). Calculate the price elasticity of demand at Q=20 Answer: E=(dQ/dP) * (P/Q) = -(1/P) * (P/Q) at Q=20 à lnP=80 and P=4.38 Thus E= -(1/4.38) * (4.38/20) = -0.05 (3) Assume the market for beer is characterized by the following structure. Firm MC Sales 1 12.5 100 2 12.5 90 3 13 40 4 13 10 5 13 8 6 13 7 7 12.5 5 The marginal cost is assumed to be constant for each firm. A competitive firm would have incurred a MC equal to 12. The market price is equal to $20. (a) Calculate CR4 and HHI Answer: CR4=0.923, HHI=0.295 (b) Calculate Answer: = 12.625
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(c) Calculate the Lerner Index for each firm and the weighed Lerner Index Answer: Firm LI 1 0.375 2 0.375 3 0.35 4 0.35 5 0.35 6 0.35 7 0.375 Average weighed Lerner Index= 0.36875 (d) Calculate the welfare loss per sale and the overall welfare loss due to the high degree
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ps3_a-1 - Industrial Organization PS #3 Suggested Answers...

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