Question

1.) The HHI in this market is

	Market share
Firm A	50%
Firm B	30%
Firm C	20%

a. 3800

b. 1800

c. 100%

d. 6800

2.) A good example of a vertical merger is a

a. Fast food franchise buying another franchise

b. Wire manufacturer buying a copper mine

c. Cigarette company buying a cookie company

d. Airline buying a car manufacturer

3. You would most often find economies of scale in a (n)

a. Natural monopoly

b. Very competitive firm

c. Oligopoly

d. Monopolistically competitive firm

Answer 1

Ans 1. Option A is the correct answer.

Explanation:

HHI stands for Herfindahl-Hirshman Index. It is calculated by squaring the market share of each of the firms competing in the market and then sum all the resulting numbers.

In the above question, the market share of Firm A = 50%, Firm B = 30% and Firm C = 20%.

So, HHI will be given by squaring the market share of Firm A, Firm B and Firm C and then summing the resulting numbers.

So, HHI = 50² + 30² + 20² = 2500 + 900 + 400 = 3800.

Ans.2- The answer is B.

Explanation:

A vertical merger occurs when two companies, offering different supply chain for the same good, decide to merge. In this case, wire manufacturer buying a copper mine will be the example of vertical merger.
So, correct answer is B.

its other examples can be:

• An automobile company merger with a company which produces its parts.
• A textile company merging with a cotton producing company.

Ans.3- The answer is A

Explanation:

Economies of scale is the cost advantage experienced by a firm when it increases its level of output or production. Its advantage is due to the inverse relationship between per-unit fixed cost and the quantity produced, the greater the quantity of output produced, the lower will be the per-unit fixed cost.

A natural monopoly has huge fixed cost and therefore as production increases average cost will decrease significantly. Therefore, economies of scale exist in natural monopoly.

So, correct answer is A