Chapter 7 - Summary Economics of Gender and Work PDF

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CHAPTER 7

1)Ten firms compete in a market to sell product X. The total sales of all firms selling the product are $1,500,000. Ranking the firms’ sales from highest to lowest, we find the top four firms’ sales to be $310,000, $255,000, $220,000, and $190,000, respectively. Calculate the four-firm concentration ratio in the market for product X. The four-firm concentration ratio is: C4 = ($310,000 + $255,000 + $220,000 + $190,000) / $1,500,000 = 0.65. 2) An industry consists of three firms

with sales of $235,000, $680,000, and

$315,000. a. The HHI is calculated as follows: HHI = 10,000[($235,000 / $1,230,000)2 + ($680,000 / $1,230,000)2 + ($315,000 / $1,230,000)2] = 4,077. b. The four-firm concentration ratio is 100 percent. c. If the firms with sales of $235,000 and $315,000 were allowed to merge, the resulting HHI would increase by 979, to 5,056. Since the postmerger HHI exceeds that under the Guidelines (2,500) and the HHI increases by more than that permitted under the Guidelines (200), the merger is likely to be challenged.

3) Suppose the own price elasticity of market demand for retail gasoline is

-0.9, the Rothschild index is 0.4, and a typical gasoline retailer enjoys sales of $1,700,000 annually. What is the price elasticity of demand for a representative gasoline retailer’s product? The elasticity of demand for a representative firm in the industry is -2.25. This is because 0.4 = -0.9 / Ef, which implies Ef = -0.9 / 0.4 = -2.25.

4) A firm has $1,900,000 in sales, a Lerner index of 0.55, and a marginal cost

of $50, and competes against 800 other firms in its relevant market. Explanation a. $111.11. To see this, solve the Lerner index formula for P to obtain P = (1 / (1 - L)) × MC = (1 / (1 0.55)) × $50 = $111.11. b. Since P = (1 / (1 - L)) × MC, it follows that the markup factor is (1 / (1 - 0.55)) = 2.22. That is, the price charged by the firm is 2.22 times the marginal cost of producing the product. Note that this markup suggests price competition is not very rigorous and that the firm enjoys market power, despite the large number of competitors.

5) Based on the information given, indicate whether the following industry is

best characterized by the model of perfect competition, monopoly, monopolistic competition, or oligopoly. a. Industry A has a four-firm concentration ratio of 0.005 percent and a Herfindahl-Hirschman index of 75. A representative firm has a Lerner index of 0.45 and a Rothschild index of 0.34.  Monopolistically competitive industry  Perfectly competitive industry

 Oligopoly industry  Monopoly industry

b. Industry B has a four-firm concentration ratio of 0.0001 percent and Herfindahl-Hirschman index of 55. A representative firm has a Lerner index of 0.0034 and Rothschild index of 0.00023.

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Monopolistically competitive industry Monopoly industry Oligopoly industry Perfectly competitive industry

c. Industry C has a four-firm concentration ratio of 100 percent and HerfindahlHirschman index of 10,000. A representative firm has a Lerner index of 0.4 and Rothschild index of 1.0.

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Oligopoly industry Monopolistically competitive industry Perfectly competitive industry Monopoly industry

d. Industry D has a four-firm concentration ratio of 100 percent and Herfindahl-Hirschman index of 5,573. A representative firm has a Lerner index equal to 0.43 and Rothschild index of 0.76.

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Oligopoly industry Monopoly industry Perfectly competitive industry Monopolistically competitive industry

Explanation

a. Industry A is a monopolistically competitive industry. b. Industry B is a perfectly competitive industry. c. Industry C is a monopoly industry. d. Industry D is an oligopoly industry.

10) Which of the following would most likely be scrutinized under the FTC and

DOJ Horizontal Merger Guidelines? Merger A: Two major players in Internet services and retailing– Amazon.com and ebay–merge. Merger B: Cigarette maker Philip Morris merges with the Miller Brewing Company. Merger C: Lockheed Martin, a large firm that manufactures aircraft, merges with United States Steel.

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Merger A Merger B Merger C None of these mergers would be scrutinized.

Explanation Merger A is the only horizontal merger, and therefore the only merger that would be scrutinized under the Guidelines for horizontal mergers. Merger B is a conglomerate merger, while Merger C is a vertical merger.

11) Suppose Fiat recently entered into an Agreement and Plan of Merger with

Case for $4.3 billion. Prior to the merger, the market for four-wheel-drive tractors consisted of five firms. The market was highly concentrated, with a Herfindahl-Hirschman index of 2,875. Case’s share of that market was 16 percent, while Fiat comprised just 10 percent of the market. If approved, by how much would the postmerger Herfindahl-Hirschman index increase? Based only on this information, is the Justice Department likely to challenge the merger according to the Horizontal Merger Guidelines?  No.  Yes.  Possibly - but other factors will be considered.

Explanation If approved, the merger would raise the HHI by 10,000[(0.16 + 0.1) 2 – (0.16)2 – (0.1)2] = 320 points. This means the postmerger HHI would be 3195 ( = 2875 + 320). Since the postmerger HHI is greater than 2,500 and the change in HHI is greater than 200, the merger is likely to be challenged....