ECON 180 - Regulation and Antitrust Policy Drake University, Spring 2013 William M. Boal Course page: www.cbpa.drake.edu/econ/boal/180 Blackboard: bb.drake.edu Email: william.boal@drake.edu

Market Structure

### Version A

I. Multiple choice [3 pts each: 21 pts total]

(1)f. (2)a. (3)b. (4)b. (5)b. (6)a. (7)b.

II. Problems

(1) [Measuring industry concentration: 18 pts]

1. Firm #3.
2. 80.
3. 70.
4. Industry A.
5. 1750.
6. 1800.
7. Industry B.
8. 0.0875 .
9. 0.09 .

(2) [Entry barriers and contestable markets: 26 pts]

1. \$3.
2. 5 million.
3. 0.4 or 2/5.
4. \$2.
5. \$5.
6. loss.
7. \$9 million.
8. 10 million.
9. \$3.
10. profit.
11. \$10 million.
12. \$3.
13. 0 because price = marginal cost.

(3) [Dominant-firm price leadership: 30 pts]

1. \$3.
2. \$10.
3. 5 million.
4. 4 million.
5. Residual demand curve has intercept on price axis at \$10 and joins market demand curve at \$3; slope thus = -1/(2 million).
6. Residual marginal revenue curve has intercept on price axis at \$10 with slope = -1/(1 million).
7. 6 million.
8. \$7.
9. 4 million.
10. 3/7 = 0.4286 .

III. Critical thinking [5 pts]

Efficiency requires that all firms have the same marginal cost, and that marginal cost equals consumers' marginal willingness to pay. That is, MCDF = MCCF = P. This occurs when the total quantity of output is 12 million, the dominant firm produces 10 million, and the competitive fringe produces 2 million.

### Version B

I. Multiple choice [3 pts each: 21 pts total]

(1)e. (2)b. (3)a. (4)a. (5)c. (6)b. (7)c.

II. Problems

(1) [Measuring industry concentration: 18 pts]

1. Firm #1.
2. 70.
3. 80.
4. Industry B.
5. 2200.
6. 1950.
7. Industry A.
8. 0.44 .
9. 0.39 .

(2) [Entry barriers and contestable markets: 26 pts]

1. \$1.
2. 8 million.
3. 0.75 or 3/4.
4. \$0.
5. \$2.
6. loss.
7. \$8 million.
8. 11 million.
9. \$1.
10. profit.
11. \$22 million.
12. \$1.
13. 0 because price = marginal cost.

(3) [Dominant-firm price leadership: 30 pts]

1. \$5.
2. \$10.
3. 1 million.
4. 8 million.
5. Residual demand curve has intercept on price axis at \$10 and joins market demand curve at \$5; slope thus = -1/(2 million).
6. Residual marginal revenue curve has intercept on price axis at \$10 with slope = -1/(1 million).
7. 4 million.
8. \$8.
9. 3 million.
10. 1/4 = 0.25 .

III. Critical thinking [5 pts]

Efficiency requires that all firms have the same marginal cost, and that marginal cost equals consumers' marginal willingness to pay. That is, MCDF = MCCF = P. This occurs when the total quantity of output is 8 million, the dominant firm produces 6 million, and the competitive fringe produces 2 million.