# Chapter 7: Answers to Questions and Problems

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1 19. Based on the nformaton contaned n Table 7-3 of the text, the food and apparel ndustres are most compettve and therefore probably represent the best match for the expertse of these managers. Chapter 7: Answers to Questons and Problems Answerkey ProblemSet3 1. The four-frm concentraton rato s, \$175, 000 \$150, 000 \$15, 000 \$100, 000 C4 " " \$1,000,000 Chapter7. a. The HHI s " # \$00, 000 \$ # \$400, 000 \$ # \$500, 000 \$ HHI " 10, 000 %' =3,719 ( ' & ( ' (. % + ) * ) * ) * &, b. The four-frm concentraton rato s 100 percent. c. If the frms wth sales of \$00,000 and \$400,000 were allowed to merge, the resultng HHI would ncrease by 1,3 to 5,041. Snce the pre-merger HHI exceeds that under the Gudelnes (1,800) and the HHI ncreases by more than that permtted under the Gudelnes (100), the merger s lkely to be challenged. 3. The elastcty of demand for a representatve frm n the ndustry s 1.5, snce # 0.9 # " - EF " " # E F a. \$100. To see ths, solve the Lerner ndex formula for P to obtan 1 1 P " # ' \$ ( MC " # ' \$ ( \$35 " \$100. ) 1 # L * ) 1 # 0.65 * # 1 \$ # 1 \$ b. Snce P " ' ( MC, t follows that the markup factor s ' ( ".86. ) 1 # L * ) 1 # 0.65 * That s, the prce charged by the frm s.86 tmes the margnal cost of producng the product. c. The above calculatons suggest prce competton s not very rgorous and that the frm enjoys market power. 5. Managers should not specalze n learnng to manage a partcular type of market 17. structure. Market structure generally evolves over tme, and managers must adapt to See Table 7-1. these changes. Own Prce Elastcty 6. To the extent that the HHIs are based on too narrow a defnton of the product (or of Demand for geographc) market or the Own mpact Prce Elastcty of foregn of competton, Representatve Frm's the merger mght be allowed. It mght also be allowed Market Demand f one of the frms Product s n fnancal Rothschld trouble, Index or f sgnfcant economes of scale exst n the ndustry. Agrculture Constructon Durable manufacturng Nondurable manufacturng Transportaton Communcaton and utltes Manageral Economcs and Busness Strategy, 7e Page 1 Wholesale trade Retal trade Fnance Servces Table 7-1 Based on the Rothschld ndces n Table 7-1, wholesale trade most closely resembles a monopoly, whle fnance most closely resembles perfect competton. P MC \$3 \$ The Lerner ndex s L " " " 0.9, whch ndcates the frm has P \$3 consderable market power. Ths makes sense because the product that the frm sells s currently under patent protecton, whch essentally makes the frm a legal monopoly.

3 '# "++,-)./>\$(?# # "1+,-)./# ># )# F1,-)./# ))# G'0,.""&#1,-)./# <# a# cf " &+H +++ # <H +++ " \$# QF \$ # QL \$ # QL \$ "H 5++ # +#1QL # & b & & 1 & '# 3 I 4":++63 J 4F++# (# 74&+H+++819&1++;4*FH1++# # I 4*:#"K)AA)0-6 J 4*&#<1K)AA)0-# 1# \$# L>.74MN.0O>.1++8&34*"++#L0AP)-OQ)>A/34&++,-)./# '# 74MN4*"++# (# R\$(?D)BK>\$B-/S>B0>(0-0K)(CB0D)./# " Part. Problem1. Manageral Economcs and Busness Strategy, 7e Page 1 Seepage41 43ofthetextbook.

4 1 Part II 1.1 Problem Margnal revenues MR = 100 Q Margnal cost San Jose MC SJ =4q sj Margnal cost Santa Cruz MC SC =6q sc We know that a suffcent condton to produce n both plants s MR = MC SJ = MC SC workng out the algebra, we get q sj =3/q sc and 100 q sj q sc = 6q sc 100 3q sc q sc = 6q sc 100/11 = q sc Therefore, q sj = 150/11 For completeness we need to check f jont profts s hgher than profts producng usng one plant. π BOT H = / (150/11) 3(100/11) Notce that q 1 SJ = 100/6 and q1 SC = 100/8 π SJ = /6 75 (100/6) π SC = /8 5 3 (100/8) comparng profts, we can check that t s optmal to produce ONLY n Santa Cruz 1. Problem 3 - from the game n class let s work out a general case and then use the varables gven n the problem set, assume a lnear nverse demand P = A b( N =1 q )=A bq and a lner cost functon C = cq where q represents the quantty produced by frm,n s the total number of frms n the market and Q the total quantty produced n the market. the profts for the frm j s gven by π j = Pq j cq j the FOC s N A b( q ) bq j c =0 =1 then addng the FOC for each frm n the market N A N b Q bq Nc =0 1

5 then solvng for Q Q = N(A c) b(n + 1) Now, let s check the parameters gven n the problem set. We know that A = 100, N =4, c =4, b =1 therefore, the total quantty n the market s Q = then each frm produces q = 96/5 19 Note: Notce that game n class, groups are choosng quanttes smultaneously. Therefore, the appropate model to study the game played s the COURNOT model. Cournot was one of the poneers n mcro-theory.

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