# Problem 1 Consider an industry with 9 Örms whose market share...

## Transcribed Text

Problem 1 Consider an industry with 9 Örms whose market shares are given in the following frequency. Market Share Number of Örms 3% 1 10% 6 17% 1 20% 1 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? 1 Problem 2 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? Calculate proÖts. 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? Problem 3 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 2 MPL: Marginal Product of Labor MRPL: Marginal Revenue Product of Laborë MRPL = MRMPL Problem 4 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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Problem 1:
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...

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