Question

QUESTION 7 - 6.3

I dislike using Microsoft Word and prefer to use other work processing software. However, nearly everyone that I work with uses Word, so I have to use this product when writing articles, books, and other research reports. For this reason, Microsoft Word holds a near-monopoly position in the word processor market. What is the barrier to entry that helps Microsoft maintain their market power?

		Network externalities
		Input barrier
		Barrier created by the government
		Economies of scale

QUESTION 8 - 6.3

Suppose there are 100 firms that sell athletic shoes and each has one percent of the market share. What is the HHI statistic for this market?

		10
		100
		1000
		10000

QUESTION 9 - 6.3

Suppose there are six firms in the breakfast cereal market. The four largest firms have 20 percent of the market share each, and the two smallest firms have 10 percent of the market share each. If one of the largest firms buys one of the smaller firms, what is the market share of the largest firm in the market after the buyout is concluded?

		10 percent
		20 percent
		30 percent
		40 percent

QUESTION 10 - 6.3

What happens to the profits of monopolistically competitive firms in the long run?

		Profits remain positive and do not change over time
		Profits become negative
		Profits decline to zero
		Profits increase

Answer 1

7-6.3 Even though the consumer doesn't prefer Microsoft word and wanted to use other word processing software but as other persons with whom the consumer works are using the Microsoft word, he/ she also have to use it. Due to this reason the Microsoft have a near monopoly in the word processor market.

1. Network externality cen be defined as the effects or the externality created by usage of a product by other consumers on a consumer that is if other people are using a product, it will affect the consumer demand for the product. In this case as the number of existing users increases , the benefit of using the same product for the new consumer increases.

2. Input barrier can be defined as the barrier due to the ownership of the inputs by a single firm.

3. Barrier created by the government can be defined as the restritions set up on the entry of the firm by the government.Governmnet have not set up any barrier to entry in word processor market.

4. Economies of scale can be deined as the reduction in per unit cost as the production increases or the volume increases. The lower change in the production cost as compared to the change in the colume of the production. Microsoft per unit of cost may be low but it doesn't faces economies of scale.

Therefore, the barrier due to which microsoft is able to keep the market power is Network externality.

8-6.3

HHI can be defined as an index which helps to capture the concentration of the market by the firms. There are 100 firms in the athletic shoes market with each having 1% market share. The calculation for HHI for this scenario is given below:

HHI=(1)2+(1)2+(1)2+.......(100 times)

HHI=100*(1)2

HHI=100

The HHI statistics for this market is 100.

9-6.3

There are 6 firms in the market of cereals. Four largest firmns have 20% share each, whereas 2 smallest firm has 10% share each. If one of the largest firm buys one of the smallest firm, the share of the largest firm will become 20%+10%=30% after the buyout is concluded.

Therfore, the market share of the largest firm is 30%.

10-6.3

Monopolistically competitive markets are the markets where there are large number of sellers selling the differentiated products which are substituable. In monopolistic competitive market, the equilibrium output is obtained equating marginal revenue to marginal cost. In this market structure at equilibrium output, price is higher than the marginal cost. Monopolistic competition firms as monopolist firms are price makers. In the short run, by equating the marginal cost to marginal revenue and setting up the price at the point where margonal revenue=marginal cost, the firm earns profit but in the long run the firms can only breakeven that is there is no profits in the long run as in the market the substitutes are available.

Therefore, in the long run profits of monopolist firms will decline to zero.