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]
- Firm 1.
- 4CR = 80.
- 4CR = 90.
- Industry B.
- HHI = 3000.
- HHI = 2100.
- Industry A.
- L = 0.1 .
- L = 0.07 .
(2) [Equilibrium entry: 25 pts]
- Use demand equation to find answers below.
- Profit per firm = (P-AC)×Q/n. Answers are below.
- PDV profit per firm = profit per firm / (0.10).
- 2 firms.
- 4 firms.
Number of firms | Equilibrium market quantity |
Equilibrium market price | Annual profit per firm |
PDV profit per firm |
1 | 120 | $13 | $1440 | $14400 |
2 | 160 | $9 | $640 | $6400 |
3 | 180 | $7 | $360 | $3600 |
4 | 192 | $5.80 | $230.40 | $2304 |
5 | 200 | $5 | $160 | $1600 |
(3) [Entry barriers and contestable markets: 39 pts]
- min AC = $3.
- 7 million.
- 4/7.
- price = $4.
- AC = $7.
- loss.
- $9 million.
- 8 million.
- AC = $3.
- profit.
- $24 million.
- $3.
- 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]
- Firm 6.
- 4CR = 90.
- 4CR = 80.
- Industry A.
- HHI = 2150.
- HHI = 2350.
- Industry B.
- L = 0.1075.
- L = 0.1175.
(2) [Equilibrium entry: 25 pts]
- Use demand equation to find answers below.
- Profit per firm = (P-AC)×Q/n. Answers are below.
- PDV profit per firm = profit per firm / (0.10).
- 3 firms.
- 4 firms.
Number of firms | Equilibrium market quantity |
Equilibrium market price | Annual profit per firm |
PDV profit per firm |
1 | 120 | $9 | $720 | $7200 |
2 | 160 | $7 | $320 | $3200 |
3 | 180 | $6 | $180 | $1800 |
4 | 192 | $5.40 | $115.20 | $1152 |
5 | 200 | $5 | $80 | $800 |
(3) [Entry barriers and contestable markets: 39 pts]
- min AC = $3.
- 6 million.
- 4/7.
- price = $4.
- AC = $6.
- loss.
- $6 million.
- 7 million.
- AC = $3.
- profit.
- $21 million.
- $3.
- L = 0 because P = MC.
Critical thinking [9 pts]
[end of answer key]