Industrial Organization
PS #3
Suggested Answers
(1) A demand function is given by Q=100P.
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=100ln(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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View Full Document(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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 Spring '11
 Storchmann
 Price Elasticity, Supply And Demand, Lerner, demand function, Lerner Index, average WEIGHED Lerner

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