c. What do the values of the two concentration measures imply about the degree of market power in the two industries? Answer: a. The concentration ratio in industry W = 20% + 20% + 20% + 20% = 80%. The concentration ratio for industry X = 50% + 10% + 10% + 10% = 80%. b. The HHI for industry W = 400 × 5 = 2,000 and the HHI for industry X = 2,500 + (100 × 5) = 3,000. c. Both industries are highly concentrated. Although the concentration ratios are the same for each industry, market power is more significant in industry X. The ability to raise prices is greater in industry X. Diff: 3 Page Ref: 506/506 Topic: Characteristics of Monopoly Learning Outcome: Micro 14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytic Skills 43
Figure 15 - 8 134) Refer to Figure 15 - 8 to answer the following questions. a. What quantity will this monopoly produce and what price will it charge? b. Suppose the government decides to regulate this monopoly and imposes a price ceiling of $25. Now what quantity will the monopoly produce and what price will it charge? c. Will every consumer who is willing to pay the ceiling price of $25 be able to buy the product? Briefly explain. Answer: a. To maximize profits, the monopoly will produce the quantity where marginal revenue equals marginal cost. So, the monopoly will produce 15 units and charge a price of $32. b. Its marginal revenue curve is now a flat line at $25, running from the vertical axis to the demand curve, so the monopoly will produce 26 units and charge a price of $25. c. The quantity demanded at a price of $25 is 34, but the quantity supplied is only 26, so there will be a shortage of 8 units, and some consumers will not be able to buy the product. Diff: 2 Page Ref: 508/508 Topic: Government Policy toward Monopoly Learning Outcome: Micro 14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytic Skills 44
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