ECN 460/560, Fall 1997
Prof. Bruce Blonigen
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Multiple choice - pick the most appropriate answer (5 points each)
1) In the Kellogg's ready-to-eat breakfast cereal antitrust case we discussed in class, the Federal Trade Commission believed the introduction of so many new cereal brands by Kellogg's indicated
a) they were predatory pricing.
b) they were trying to form a cartel with
their rivals.
c) they were trying to deter entry.
d) they were playing a Cournot
game.
2) A firm's return on assets (ROA) measure of profitability will look smaller in the current period
a) the greater the depreciation rate on capital used by the firm.
b) the greater the industry concentration
ratio.
c) the greater the revenues by the firm
that period.
d) the greater the firm's Lerner index of
market power.
3) You're having an argument with a friend and they tell you that if you don't leave they will never talk to you again. You stay and you both keep talking until the argument is over. This is an example of
a) a prisoner's dilemma.
b) a Stackelberg game.
c) a threat that is not credible.
d) a cartel solution.
4) You and your friend are both afraid of haunted houses, but would be ashamed if the other one knew this. A third friend suggests that you all go to a haunted house and you both go, despite your fear. This is an example of
a) a prisoner's dilemma.
b) a Stackelberg game.
c) a threat that is not credible.
d) a cartel solution.
5) The greater the market power of a monopolist, the greater the
a) consumer surplus.
b) social welfare.
c) concentration of an industry.
d) deadweight loss.
6) Patty finds that picking mushrooms and huckleberries at the same time is easier than picking them separately. This is an example of
a) diminishing
marginal returns.
b) economies of scale.
c) economies of scope.
d) sunk costs.
Answer questions 7-11 by filling in the blanks (3 points per blank)
7) List three types of practices that can facilitate collusive (or cooperative) behavior.
a) _____________________________
b) _____________________________
c) _____________________________
8) List three assumptions of perfect competition.
a) ______________________________
b) ______________________________
c) ______________________________
10) List 2 results of the standard Cournot game that accurately depict an oligopoly market.
a) _____________________________
b) _____________________________
11) List two real life examples of third degree price discrimination.
a) _____________________________
b)
_____________________________
Use the following information to answer questions 12-17 (5 points each):
You are an economist for the U.S. Department of Justice, investigating a company called Minnie's Candy Canes that produces and sells candy canes. After a lot of work, you calculate that they have the following total cost fuction: TC = Q3 -50Q2 + 750Q.
12) Calculate the following as expressions of Q:
Total Fixed Cost (TFC): ____________________________________<
Total Variable Cost (TVC):
____________________________________
Average Total Cost (ATC):
____________________________________
Average Fixed Cost (AFC):
____________________________________
Average Variable Cost (AVC):
____________________________________
Marginal Cost (MC):
____________________________________
13) Show that the AVC = MC for this firm when Q=25.
At what level of output is AVC minimized?
14) Suppose the firm were a price taker and the market price was $178. Show that this perfectly competitive firm would produce 26 units to maximize profits. What profit or loss would the firm make? (Remember one way of expressing profits is = [P-ATC]*Q )
15) Using the Lerner index of market power, what is the elasticity of residual demand facing this perfectly competitive firm in 14) when it produces 26 units.
16) Now assume you know the firm, Minnie's Candy Canes is an oligopolist (not a perfect competitor) and you observe the firm produced 30 units last period and charged its customers a price of $350.
Was this firm predatory pricing last period? (Use the definition of predatory pricing to show your answer!)
How much profit or loss is the firm making?
17) A colleague comes into your office to tell you that Minnie's Candy Canes just merged with Kris Kringle's Candy Canes. You know that both companies had 8 percent of the market before the merger and thus, the combined company now has 16 percent market share. Assume there are 4 other firms in the industry, where each of the 4 firms has 21 percent market share. You don't want to allow any merger that increases the Herfindahl-Hirschmann Index (HHI) more than 150 points. Do you allow this merger?
Use the following information to answer questions 26-29. (5 points each)
Suppose Lena's fish shop has a monopoly in Eugene as the only place in town which sells lutefisk (a Scandinavian delicacy of white fish soaked in lye!). Lena's costs connected with supplying lutefisk are C(QL) = 6.5 + 2QL where 6.5 is the fixed cost component, 2QL is the variable cost component, and QL is the amount of Lutefisk produced by Lena.
Now suppose that a retired Minnesota farmer, Sven, moves to Eugene and wants to enter the market to sell lutefisk. Assume that Sven has the same costs of supplying lutefisk as Lena. Also assume that they compete in a Cournot game (each picks their own quantity) and the inverse demand function in the market each day becomes: P = 10 - QL - QS , where QS is the quantity of lutefisk supplied by Sven (in pounds).
26) Set up Lena and Sven's separate profit functions and solve for their reaction functions in this Cournot game.
27) Using the reaction functions you solved for above, calculate the quantities of lutefisk supplied by Lena and Sven. Calculate the market price in Eugene for lutefisk. Calculate the profits for both Lena and Sven.
28) Suppose that before Sven sets up his fish shop and sells lutefisk, Lena announces to Sven that if he enters the market, she will flood the market with lutefisk and make the market price fall so much that he will make a loss. Do you think this threat is credible? Why or why not?
29) Now suppose that Lena enters an agreement with the company she buys lutefisk from that commits her to buy and sell 3 pounds of lutefisk every day. Will Sven enter the market now?
(HINT: QL = 3 now, so substitute 3 for QL in the market inverse demand function and pick QS to solve Sven's profit maximization problem.)