Suppose Firms B and C merge. Compute the market shares of Firm A and the newly-formed firm. Obtain the corresponding HHI value.
[Assume that the sales of Firm A have not changed, and that sales of the merged entity is the sum of the sales of B and C prior to the merger.]
From the preceding, we note that when firms in an industry merge, the HHI for the industry will [ increase / decrease / remain the same ].
If Firm A were a monopoly, the industry's HHI would be ______________. Explain.
Suppose an industry has 3 firms and it has an HHI value of around 3500. Does the fairly high HHI value indicate that the firms are unlikely to compete vigorously in the market? Discuss critically, noting the importance of the presence -- or absence -- of barriers to entry in the industry.
IV. Additional Questions
Consider the Chicago-Detroit flight for Continental Airlines.
A jet has to be 65% full in order to earn ticket sales of $4,000.
With 50% capacity, the revenue is $3,000.
The average cost of a flight is $4,000.
The cost of an additional flight (due to variable inputs such as extra flight attendants, ground crew personnel, in-flight meals and jet fuel) is $2,000.
Suppose only half the seats on Continental's flight from Chicago to
Detroit are sold out. Should Continental cancel the Chicago-Detroit flight?
Provide an explanation.
The price of oil, an important input for airlines, increases slightly.
You observe, however, that Northwest Airlines does not increase its ticket
price.
How is the HHI computed? If the merger of two large firms in an industry results in an HHI greater than 1800, the Department of Justice might frown upon the merger. Why?
Consider a recent example of merger activity (in the U.S. or in some other country).
What is the rationale for the merger?
Is the merger likely to lead to higher prices for consumers? Explain how a merger might possibly lead to lower prices.
Which of the following is true about a firm in monopolistic competition in the long run?
(a) The firm makes zero profits
(b) Price equals marginal cost
(c) The demand curve is tangential to the AC curve
(d) All of the above
(e) Both (a) and (c)
In an oligopoly
(a) A firm's actions affect other firms in the industry
(b) A firm takes the market price as given
(c) There are several firms
(d) A firm faces a horizontal demand curve
For a firm in monopolistic competition, at the optimal output level,
(a) Price is greater than marginal cost
(b) Price is less than marginal revenue
(c) Marginal revenue is equal to marginal cost
(d) Both (b) and (c)
(e) Both (a) and (c)
In contestable markets,
(a) Firms cannot recover their fixed costs if they exit the industry
(b) Firms will make economic profits in the long run
(c) Barriers to entry keep out potential entrants
(d) Both (a) and (b)
(e) None of the above
A cartel is
(a) A group of oligopolists that try to behave like a monopoly and split
the benefits among themselves
(b) A government-approved organization for the exchange of technical information
among firms
(c) A form of competition among oligopolists
(d) A regulated industry that is officially permitted to set the price
of its good above long-run average cost.
Which of the following is true about a firm's optimal price and output in monopolistic competition in the long run?
(a) Price equals average cost.
(b) The firm makes positive economic profits, but zero accounting profits.
(c) Marginal cost equals average cost.
(d) Both (a) and (b)
(e) Both (b) and (c)
In an oligopoly
(a) There are no barriers to entry and exit.
(b) Firms consider the prices set by their rivals when making their own
decisions.
(c) Firms make zero profits in the long run.
(d) Both (a) and (b) are true.
(e) Both (a) and (c) are true.