Shavira Prita Nuraissa

1801425735

Quantitative Question Chapter 7

1. Ten firms compete in a market to sell product X. The total
sales of all firms selling the product are $1 million. Ranking
the firms sales from highest to lowest, we find the top four
firms sales to be $175,000, $150,000, $125,000, and
$100,000, respectively. Calculate the four-firm concentration
ratio in the market for product X.
2. An industry consists of three firms with sales of $200,000,
$500,000, and $400,000
a. Calculate the Herfindahl-Hirschman index (HHI).
b. Calculate the four-firm concentration ratio (C4).
c. Based on the FTC and DOJ Horizontal Merger Guidelines
described in the text, do you think the Department of
Justice would attempt to block a horizontal merger
between two firms with sales of $200,000 and $400,000?
Explain.
Answer
1. The four-firm concentration ratio is
C4 = $175,000 + $150,000 + $125,000 + $100,000
=
0.55
$1,000,000
2. a. The HHI is
HHI = 10,000 [($200,000/$1,100,000)2 +
($400,000/$1,100,000)2 + ($500,000/$1,100,000)2] = 3,719
b. The four-firm concentration ratio is 100 percent
c. If the firms with sales of $200,000 and $400,000 were
allowed to merge, the resulting HHI would increase by 1,322
to 5,041. Since the pre-merger HHI exceeds that under the
Guidelines (1,800) and the HHI increases by more than that

permitted under the Guidelines (100), the merger is likely to

be challenged.
Total sale of the industry = 300000+700000+250000 = 1250000
Share of firm1 = 300000/1250000 = 0.24
Share of firm2 = 700000/1250000 = 0.56
Share of third firm = 250000/1250000= 0.20
a) Herfindahl-Hirschman index (HHI) = 10000,
Where sidenote share of firm i and n denote number of firm in the
industry.So HHI =10000*(0.24^2 + 0.56^2+ 0.2^2) = 4112
Since HHI>2500, this industry is highly concentrated industry.
b) Four-firm concentration ratio (C4) = Sum of market share 4 largest
firm
4. A firm has $1 million in sales, a Lerner index of 0.65, and a marginal cost
of $35, and competes against 1,000 other firms in its relevant market.
a) What price does this firm charge its customers?
b) By what factor does this firm mark up its price over marginal cost?
c) Do you think this firm enjoys much market power? Explain
Answer

1
1
MC

1 65 35 100
1 L

a)

1
1
Factor _ Markup
2.86
1 L
1 65

b)
c) Since we know that when firms do not rigorously compete for consume
rs through free competition, the Lerner index is closer to 1 and since ou
r Lerner index is .65, which is closer, to 1 meaning for every dollar paid
by consumers $.65 is markup which is high. This tells us there are few
firms in market and this firm enjoys market power.
7. Based only on the knowledge that the premerger market share of two firm
s proposing to merge was 20 percent each, an economist working for the J
ustice Department was able to determine that, if approved, the postmerg
er HHI would increase by 800. How was the economist able to draw this co
nclusion without knowledge of the other firms market shares? From this i
nformation, can you devise a general rule explaining how the HerfindahlHirschman index is affected when exactly two firms in the market
merge? (Hint: Compare a2 + b2 with (a + b)
Answer
An industry consists of three Firms with sales of $300,000, $700,000and
$250,000

a) Calculate the HerFndahl-Hirschman index (HHI). SHOW ALLWORK

Solution:
(3/12.5)2+(7/12.5)22.5/12.5)2
HHI=10,000(3/12.5)27/12.5)22.5/12.5)2
HHI=10,0000.0576+0.3136+0.04HHI=10,000]
HHI=4,112
b) Calculate the four-Frm concentration ratio (C4).
Solution:
To calculate four Frm ratio it should be four Frm. Here there areonly
three Frm. So it is not possible to calculate four Frm ratio.
c) Based on the TC and DOJ Horizontal Merger Guidelines described in
the text, do you think the Department of Justice would attempt to block
a horizontal merger between two Frms with sales of $300,000 and
$250,000?
Explain Solution:
If the Frms with sales of $300,000 and $250,000 were allowed to
merge, the resulting HHI would increase by 712 to 3 156. Since the
pre-merger HHI exceeds that under the Guidelines (1 800)

12.5

12.5

HHI=4112
Total sales of the industry$300,000+$700,000+$250,000=1,250,000
Firm A: $300,000/$1,250,000=0.24
Firm B: $700,000/$1,250,000=0.56
Firm C: $250,000/$1250,000=0.2
HHI = 10000(0.24)2+(0.56)2+(0.2)2
= 10000 (0.0576 + 0.3136 + 0.04 )
=10000 X 0.4112
=4112
Since HHI>2500, this industry is highly concentrated
The C4 is ascertained by main four organizations in piece of the pie. On
the otherhand, there are just three organizations exist in the business,
so there are no response for the four firm focus proportion (C4) for this
situation.
C3=$10000x($300,000/$1250,000+$700,000/$1250,000+
$250,000/$1250,000),=1
Based on the FTC and DOJ Horizontal Merger Guidelines described in
the text,do you think the Department of Justice would attempt to block

a horizontalmerger between two firms with sales of $300,000 and

$250,000? Explain
HHI=10,000(550,000/1,250,000)2+(70,000/1,250,000)2
=10,000(0.44)2+(0.56)2
=10,000 (0.1936+0.3136)
=5072
If the firms with sales of $300,000 and $250,000 were allowed to
merge, theresulting HHI would increase by 960 to 5072. Since the premerger HHI exceedsthat under theGuidelines (1800) and the HHI
increases by more than thatpermitted under the Guidelines (100), the
merger is likely to be challenged.
A firm has $1.5 million in sales, a Lerner index of 0.57, and a marginal cost of
$50, and competes against 800 other firms in its relevant market.
a) What price does this firm charge its customers? SHOW all work (Answer)
$116.28 Lerners index formula: P=MC(1/1-L) =$50x 1/(1-0.57)
=116.27907
b) By what factor does this firm mark up its price over marginal cost? SHOW
all work
The imprint up component is 1/(1-0.57)=2.33 which is cost charged by the
firm 2.33
No3:
Suppose the own price elasticity of market demand for retail gasoline is
0.8, the Rothschild index is 0.5, and a typical gasoline retailer enjoys sales of
$1.5 million annually. What is the price elasticity of demand for a
representative gasoline retailers product?
Instruction: Round your answer to 1 decimal place.
-1.6 0.1
Explanation:
The elasticity of demand for a representative firm in the industry is 1.6. This
is because 0.5 = 0.8 / E f , which implies E f = 0.8 / 0.5 = 1.6.
Suppose the own price elasticity of market demand for retail gasoline is -0.9,
the Rothschild index is 0.7, and a typical gasoline retailer enjoys sales of
$1,450,000 annually. What is the price elasticity of demand for a
representative gasoline retailers product?
Instruction: Round your answer to 2 decimal places.
-1.29 .01
Explanation:
The elasticity of demand for a representative firm in the industry is -1.29.
This is because 0.7 = -0.9 / E f , which implies E f = -0.9 / 0.7 = -1.29.

Under what conditions might the Justice Department approve a merger

between two companies that operate in an industry with a premerger
Herfindahl-Hirschman index of 2,900 if the post-merger index is expected to
increase by 225?
There are significant diseconomies of scope rev: 06_08_2013_31455
Explanation: To the extent that the HHIs are based on too narrow a definition
of the product (or geographic) market or the impact of foreign competition,
the merger might be allowed. It might also be allowed if one of the firms is in
financial trouble, or if significant economies of scale exist in the industry.
Significant diseconomies of scope would only serve to make the merger less
likely to be approved