Consider an industry with 9 Örms whose market shares are given in the
Market Share Number of Örms
a. Calculate the HHI for this industry.
b. Suppose one of the Örms with a 10 percent market share announces a plan
to buy the other Örm with a 3 percent market share. Is the U.S. Department of
Justice likely to challenge the merge? Why or why not?
c. Suppose the Örm with the 20 percent market share announces a plan to
buy one of the Örms with a 10 percent market share. Is the U.S. Department of
Justice likely to challenge the merger? Why or why not?
d. Suppose one of the Örms with a 17 percent market share announces a
plan to buy the Örm with the 3 percent market share. Is the U.S. Department
of Justice likely to challenge the merger? Why or why not?
The demand schedule and the total costs for a natural monopoly are given
in the following table:
Price Quantity Total Cost
16 4 58
15 5 65
14 6 72
13 7 79
12 8 86
11 9 93
10 10 100
9 11 107
8 12 114
7 13 121
6 14 128
5 15 135
a. Why is this Örm a natural monopoly? What will the monopoly price be?
b. Suppose the government sees that this is a natural monopoly and decides
to regulate it. If the regulators use average total cost pricing, what will the
price and quantity be? What should proÖts be when the regulators are using
average total cost pricing?
c. If the regulators use marginal cost pricing, what will the price and quantity
be? What are proÖts in this situation? Why is this policy di¢ cult for regulators
to pursue in practice?
d. Why might the government want to use incentive regulation?
Suppose a Örm with some market power faces a downward-sloping demand
curve for customized mugs. Using the information on demand given in the
table below, complete the table. If the hourly wage is $50, how many hours of
labor will this Örm decide to use (the Öm can only choose from the given labor
quantities: 10, 20, 30, 40, 50, or 60 hours)? Draw the resulting demand curve
for labor (you can assume that the labor demand curve is continuous, and do
not worry about drawing a step function).
Labor Output Quantity MPL Output Price Revenue MR MRPL
10 500 13
20 900 11
30 1200 9
40 1400 8
50 1500 7
60 1550 6
MPL: Marginal Product of Labor
MRPL: Marginal Revenue Product of Laborë
MRPL = MRMPL
Analyze the labor supply schedules for Charlie and Don below.
Wage Hours Worked by Charlie Hours Worked by Don
$10 20 0
$13 22 9
$18 28 16
$27 32 18
$35 40 21
$45 50 20
$50 65 18
a. Draw the labor supply schedules for Charlie and Don.
b. How does Donís marginal beneÖt from more leisure compare with Charlieís?
c. At what point does the income e§ect begin to outweigh the substitution
e§ect for Don? Explain.
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a) The HHI index of the industry is calculated using the formula
HHI = s12 + s22 + s32 + ... + sn2 (where s1,s2,s3,…sn is the market share of the ith firm).
In this industry,
HHI = 32+102+102+102+102+102+102+172+202 =9+100+100+100+100+100+100+289+400 = 1298...