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

QUIZ 6 ANSWER KEY
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.

[end of answer key]