Week 9 CYU

Week9 – Check Your Understanding
(See bonus point option in Problem 2, part c)

Chapter 16: (9 Points)

1. Suppose an industry is composed of eight firms with the following market shares:

Firm Share Firm Share

A 35% E 8%

B 20% F 6%

C 15% G 5%

D 10% H 1%

· Based on the (revised 1997) merger guidelines, would the Antitrust Division likely challenge a proposed merger between Firms B and C? (1 point)

a. Yes

b. No

· Based on the (revised 1997) merger guidelines, would the Antitrust Division likely challenge a proposed merger between Firms F and G? (1 point)

a. Yes

b. No

2. The industry demand function for bulk plastics is represented by the following equation:

P = 1600 – 40Q

Where: MR = 1600 – 80Q

And where Q = represents millions of pounds of plastic.

The total cost function for the industry, excluding the required return on invested capital, is:

TC = 600 + 1000 Q + 10Q2

Where: MC = 1000 + 20Q

And where Q = represents millions of pounds of plastic.

a) If the industry acts like a monopolist, what is the profit maximizing price, output, and total industry profit? (Hint: Set MR = MC and solve for Q.) (3 points)

b) Assume that the industry is comprised of many small firms, such that the demand function facing any individual firm is: (2 points)

P = 1,200

Where: MR = P

What is the industry’s profit-maximizing level of output and total profit (assuming the industry’s total cost function remains unchanged)? (Hint: Set MR = MC and solve for Q.) (2 points)

c) (Optional – 4 Bonus points) Because of the risk involved in this industry, investors require a 15% rate of return on investment. Total industry investment amounts to $7.5 billion.

i. If the monopoly solution prevails, as calculated in Part (a), how would you describe the profits of the industry? (2 points)

ii. If the competitive solution prevails, as calculated in Part (b), how would you describe the profits of the industry. Would you expect the number of firms to increase, decrease, or stay the same in the long run? (2 points)

3. Discuss the problems of aircraft noise around an airport from an externality perspective and propose a possible solution if: (2 points)

a. Housing existed in the airport area before the airport was built.

b. Housing was built adjacent to the airport after the airport was built.