ECON 180 - Regulation and Antitrust Policy Drake University, Spring 2015 William M. Boal Course page: www.cbpa.drake.edu/econ/boal/180 Blackboard: bb.drake.edu Email: william.boal@drake.edu

ANSWER KEY: THEORIES OF MARKET STRUCTURE

### Quiz 6 Version A

(1)e. (2)c. (3)b. (4)a. (5)a. (6)b. (7)b. (8)b. (9)a. (10)b.

### Quiz 6 Version B

(1)b. (2)d. (3)a. (4)b. (5)b. (6)a. (7)d. (8)c. (9)b. (10)c.

### Test 6 Version A

(1) [Measuring industry concentration: 30 pts]

1. Firm 1.
2. 4CR = 80.
3. 4CR = 90.
4. Industry B.
5. HHI = 3000.
6. HHI = 2100.
7. Industry A.
8. L = 0.1 .
9. L = 0.07 .

(2) [Equilibrium entry: 25 pts]

1. Use demand equation to find answers below.
2. Profit per firm = (P-AC)×Q/n. Answers are below.
3. PDV profit per firm = profit per firm / (0.10).
4. 2 firms.
5. 4 firms.

Number
of firms
Equilibrium
market quantity
Equilibrium
market price
Annual profit
per firm
PDV profit
per firm
1120\$13\$1440\$14400
2160\$9\$640\$6400
3180\$7\$360\$3600
4192\$5.80\$230.40\$2304
5200\$5\$160\$1600

(3) [Entry barriers and contestable markets: 39 pts]

1. min AC = \$3.
2. 7 million.
3. 4/7.
4. price = \$4.
5. AC = \$7.
6. loss.
7. \$9 million.
8. 8 million.
9. AC = \$3.
10. profit.
11. \$24 million.
12. \$3.
13. L = 0 because P = MC.

Critical thinking [9 pts]

• A credible threat is one that a firm has an incentive actually to carry out. This particular threat by Firm A is not credible, because if Firm B were to enter the market, Firm A would have no incentive to lower below its average cost, because in doing so, Firm A would make losses. Since Firm B has the same costs as Firm A, there is no reason to believe that a price war would induce Firm B to exit the market any sooner than Firm A.

### Test 6 Version B

(1) [Measuring industry concentration: 30 pts]

1. Firm 6.
2. 4CR = 90.
3. 4CR = 80.
4. Industry A.
5. HHI = 2150.
6. HHI = 2350.
7. Industry B.
8. L = 0.1075.
9. L = 0.1175.

(2) [Equilibrium entry: 25 pts]

1. Use demand equation to find answers below.
2. Profit per firm = (P-AC)×Q/n. Answers are below.
3. PDV profit per firm = profit per firm / (0.10).
4. 3 firms.
5. 4 firms.

Number
of firms
Equilibrium
market quantity
Equilibrium
market price
Annual profit
per firm
PDV profit
per firm
1120\$9\$720\$7200
2160\$7\$320\$3200
3180\$6\$180\$1800
4192\$5.40\$115.20\$1152
5200\$5\$80\$800

(3) [Entry barriers and contestable markets: 39 pts]

1. min AC = \$3.
2. 6 million.
3. 4/7.
4. price = \$4.
5. AC = \$6.
6. loss.
7. \$6 million.
8. 7 million.
9. AC = \$3.
10. profit.
11. \$21 million.
12. \$3.
13. L = 0 because P = MC.

Critical thinking [9 pts]

• Same as Version A.