QUIZ 6 ANSWER KEY
Market Structure
Version A
I. Multiple choice [3 pts each: 21 pts total]
(1)f. (2)b. (3)a. (4)a. (5)b. (6)d. (7)a.
II. Problems
(2) [Measuring industry concentration: 18 pts]
- Firm 1.
- 85.
- 80.
- Industry A.
- 2100.
- 3000.
- Industry B.
- 0.07.
- 0.10.
(4) [Entry barriers and contestable markets: 26 pts]
- $2.
- 6 million.
- 0.60.
- $2.
- $4.
- loss.
- $6 million.
- 9 million.
- $2.
- profit.
- $18 million.
- $2.
- 0.
(5) [Dominant-firm price leadership: 30 pts]
- $4.
- $12.
- 1 million.
- 9 million.
- Residual demand curve has intercept on price axis at $12 and joins market demand curve at $4; slope thus = -2/(3 million).
- Residual marginal revenue curve has intercept on price axis at $12 with slope = -4/(3 million).
- 6 million.
- $8.
- 2 million.
- 0.5.
III. Challenge question
- Plant-level economies of scale occur when average cost decreases as the quantity of output at a particular plant increases. (A plant is a work location such as a factory, a warehouse, an office, or a restaurant.)
- Firm-level economies of scale occur when average cost decreases as the quantity of output in an entire firm increases. (A firm is a company; it may have multiple plants.)
- Pizza restaurants enjoy plant-level economies of scale if average cost decreases as an individual restaurant grows in output. This might occur if large restaurants can use more efficient ovens, or if they can rearrange work so that each worker specializes in a particular task and works faster, etc.
- Pizza restaurants enjoy firm-level economies of scale if average cost decreases as the whole chain grows (even if individual restaurants remain the same size). This might occur if restaurant chains can centralize functions like advertising or recipe-testing.
Version B
I. Multiple choice [3 pts each: 21 pts total]
(1)e. (2)a. (3)b. (4)b. (5)a. (6)b. (7)b.
II. Problems
(2) [Measuring industry concentration: 18 pts]
- Firm 6.
- 80.
- 90.
- Industry B.
- 2350.
- 2150.
- Industry A.
- 0.047.
- 0.043.
(4) [Entry barriers and contestable markets: 26 pts]
- $3.
- 6 million.
- 4/7 = 0.5714.
- $4.
- $6.
- loss.
- $6 million.
- 7 million.
- $3.
- profit.
- $21 million.
- $3.
- 0.
(5) [Dominant-firm price leadership: 30 pts]
- $4.
- $10.
- 5 million.
- 2 million.
- Residual demand curve has intercept on price axis at $10 and joins market demand curve at $4; slope thus = -1/(2 million).
- Residual marginal revenue curve has intercept on price axis at $10 with slope = -1/(1 million).
- 6 million.
- $7.
- 3 million.
- 3/7 = 0.4286.
III. Challenge question
Same as Version A.
[end of answer key]