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Chapter 7 Solution.pdf

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York University
ECON 3411

Chapter 07The Nature of IndustryChapter 7 Answers to Questions and Problems 1 The fourfirm concentration ratio is2a The HHI isb The fourfirm concentration ratio is 100 percent c If the firms with sales of 300000 and 250000 were allowed to merge the resulting HHI would increase by 960 to 5072 Since the postmerger HHI exceeds that under the Guidelines 2500 and the HHI increases by more than that permitted under the Guidelines 200 the merger is likely to be challenged 3 The elasticity of demand for a representative firm in the industry is 16 since 4a 11628 To see this solve the Lerner index formula for P to obtain b Sinceit follows that the markup factor isThat is the price charged by the firm is 233 times the marginal cost of producing the product c The above calculations suggest price competition is not very rigorous and that the firm enjoys market power5 Managers should not specialize in learning to manage a particular type of market structure Market structure generally evolves over time and managers must adapt to these changes6 To the extent that the HHIs are based on too narrow a definition of the product or geographic market or the impact of foreign competition the merger might be allowed It might also be allowed if one of the firms is in financial trouble or if significant economies of scale exist in the industry712014 by McGrawHill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied scanned duplicated forwarded distributed or posted on a website in whole or part
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