NAME_______________________________________________________________
FE461 Professor Schmitt
First Problem Set
Due 31 January 2012
1. (20 points) Suppose Tyco International has complete control over the plastic hangar
market. Suppose the inverse demand for hangars is given by: P(Q)  3 
Q
.
16,000
Suppose that the total costs is given by: C (Q)  100  Q
a) What is the equilibrium price and quantity of hangars in the market if the market is
competitive?
b) What is the equilibrium price and quantity of hangars if the market is monopolized?
c) What is the deadweight or welfare loss of the monopoly in this market?
2. (20 points) Use the following tables to answer questions about market concentration and
market power:
Firm
Daimler Chrysler
Mazda
Mitsubishi
Subaru
BMW
Hundai
Mercedes
Volkswagen
Suzuki
General Motors
Ford Motor Company
Toyota
Honda
Nissan
Other (Fringe Firms)
Market Share
0.087
0.019
0.026
0.013
0.018
0.026
0.017
0.049
0.002
0.281
0.228
0.101
0.071
0.041
0.021
Firm
Disney
Dreamworks
Fox
MGM/UA
Miramax
New Line
Paramount
Sony
Universal
Warner
Other (Fringe Firms)
Market Share
0.147
0.103
0.097
0.013
0.063
0.052
0.105
0.088
0.145
0.119
0.068
a) Use the information above to calculate the concentration of the top 4 firms in each
industry. Which is more concentrated based on your analysis?
b) Using the alternative measure of market concentration, the Herfindahl-Hirshman Index
which industry is more concentrated? (For Fringe firms you can IGNORE these in your
calculation, this does not mean 1 firms has 2.1% and 6.8% market share but that MANY
firms together have 2.1% and 6.8% market share.
3. (20 points) We defined the Lerner index LI 
1


1

, where     the absolute
value of the price elasticity of demand. We also showed (through profit maximization of
a monopolist) that LI 
P  MC
. Use these relationships to show that the LI can never
P
exceed 1. What does this imply is the minimum demand elasticity we should observe for
a monopolist?
4. (20 points) The Q & H Company produces a number of products including shampoo, qS,
and toothpaste qT. Suppose the cost functions for these products are given by
C (q S ,0)  4  q S2
C (0, qT )  4  qT
C (q S , qT )  7  q s2  qT
a) Does the production of shampoo exhibit economies of scale? Explain your
reasoning.
b) Does the production of toothpaste exhibit economies of scale? Explain your
reasoning.
c) Are there economies of scope associated with producing shampoo and
toothpaste? Explain your reasoning.
5. (20 points) Let a firm’s total cost function be TC  800  8q  8q 2 . Find the range of
production characterized by economies of scale (that is, for q < #).