Question

Indicate whether each of the following statements is true or false and why (reasons in support of your answer):

(a) Economies of scale arise because of the inverse relationship between the quantity produced and per unit fixed costs.

(b) In theory, monopolists and oligopolists operating in contestable markets may benefit consumers more than firms operating under conditions of perfect competition.

(c) Suppose that a profit maximizing monopolist has a constant marginal cost equal to 6 and faces the following inverse demand: . The Learner’s Index at profit maximizing price is 0.76.

(d) If the concentration ratio for an industry is small, then the Herfindahl index is likely to be large.

(e) The economic theory of regulation holds that regulation is a response by government to cases in which number of firms in the industry should be limited.

(f) Sometimes market leaders in particular product markets have lost their leadership to new entrants.

(g) A Nash equilibrium results when every firm in an industry chooses a strategy that is optimal given the strategies chosen by its competitors.

(h) If a shoe shop were to take over a shoe manufacturing company, it would be a case of horizontal integration.

(i) In market structure/condition where firms have market power, the marginal revenue curve always will be above the average revenue curve.

(j) Suppose that the five firms in industry A have annual sales of 30, 30, 20, 10, and 10 percent of total industry sales. For the five firms in industry B, the figures are 60, 25, 5, 5, and 5 percent. The Herfindahl index of industry A is greater than industry B.

Answer 1

Answer a:

(a) Economies of scale arise because of the inverse relationship between the quantity produced and per unit fixed costs:- True

It arises due to the inverse relationship that exists between the per-unit fixed cost and the quantity produced – the greater the production, the lower the fixed costs per unit. This is due to the fact that the production costs have been spread out to a large number of goods.

Answer b:

(b) In theory, monopolists and oligopolists operating in contestable markets may benefit consumers more than firms operating under conditions of perfect competition.: True

Whenever there is contestable always the consumer is the owner .In perfect competition all the consumer will get at similar product at same price so the gain is moderate, but in case of monopolists and oligopolists operating in contestable market better product is offered to consumer at resonable price .

Answer c:

Suppose that a profit maximizing monopolist has a constant marginal cost equal to 6 and faces the following inverse demand: . The Learner’s Index at profit maximizing price is 0.76. Cannot say

No equation of Inverse demand is given so value cannot be calculated.

Answer d:

(d) If the concentration ratio for an industry is small, then the Herfindahl index is likely to be large.:- True

The Herfindahl index is equal to the sum of the market shares of all firms in an industry. If the concentration ratio for an industry is small, then the Herfindahl index is likely to be large. An oligopolistic industry is likely to have a large concentration ratio and a large Herfindahl index.

Answer e:

(e) The economic theory of regulation holds that regulation is a response by government to cases in which number of firms in the industry should be limited: False

Economic theory of regulation are to explain who will receive the benefits or burdens of regulation, what form regulation will take, and. the effects of regulation upon the allocation of resources. Regulation may be actively sought by an industry, or it may be thrust upon it.

Answer f:

(f) Sometimes market leaders in particular product markets have lost their leadership to new entrants:- True

It might be so because market leadership depends on strategies of business not on who is existing or who is new entrant a new entrant can pick up a new strategy which could shift the existing leader.

Answer g:

(g) A Nash equilibrium results when every firm in an industry chooses a strategy that is optimal given the strategies chosen by its competitors.:- True

Optimal Strategy is  A strategy that maximizes a player's expected payoff.Nash equilibrium is always the optimal strategy.

Answer h:

(h) If a shoe shop were to take over a shoe manufacturing company, it would be a case of horizontal integration.:- False.

Undergoing horizontal integration can benefit companies and typically takes place when they are competing in the same industry. The advantages include increasing market share, reducing competition, and creating economies of scale. A shop is is not cometing with manufacturing company

Answer i:

(i) In market structure/condition where firms have market power, the marginal revenue curve always will be above the average revenue curve:- False.

The relationship between average revenue and marginal revenue where firms have market power is the same as between any other average and marginal values. When average revenue falls marginal revenue is less than the average revenue. When average revenue remains the same, marginal revenue is equal to average revenue.

Answer j:

(j) Suppose that the five firms in industry A have annual sales of 30, 30, 20, 10, and 10 percent of total industry sales. For the five firms in industry B, the figures are 60, 25, 5, 5, and 5 percent. The Herfindahl index of industry A is greater than industry B.: False.

The Herfindahl Index formula is calculated by squaring the market share for each firm and then summing the squares.

Herfindahl Index for Industry A: For industry A we have: Herfindahl index = 900+900+400+100+100= 2400

For industry B we have: Herfindahl index = 3600+625+25+25+25= 4300

We would expect industry A to be more competitive than Industry B because the largest two firms in industry B control a greater percentage of the market. If all firms controlled an equal share of the market (20% for the five firms above ) the Herfindahl index would equal 2000. If one firm (out of the five) controlled the entire market (100%) the Herfindahl index would equal 10,000. The latter case is obviously a monopoly. The closer the Herfindahl index is to the monopoly case the less competition there will be in the market.