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: P=30-3Q. 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

1. TRUE

Reason:Economies of scale is refered to the advantage a firm experiences , when it's output is increased to a certain level. The reason for advantage is that greater the quantity of output is produced, the lower is the per unit fixed cost.

Hence it is true that economies of scale is produced beccause there is an inverse relationship between quantity produced and per unit fized cost. The reason for economies of scale inclued technological advancement like better equipments, having a large share in the market, etc.

2. False

Reason: In theory, even if a monopolist and oligopolist operating in market, even if it is contestable, works and survives if there are profits in the market. The majority of the profit extracted are usually from the consumer surplus , by charging high prices than the market price. Although in case of perfect competition, always there are number of producers and cellers , because of which the market charges the market price only. The are no situation of profit for the consumer or loss for the producer. Hence the consumer surplus is more or less constant. Thus comparing the two, contestable monopoly or ologopoly markets might bring the prices down, the overall gain to consumer is more in perfect competition.

3. FALSE

Reason:4.FALSE.

Reason: Concentration ratio finds the extend of market concentration in the hands of one limited firm. The range is from 1 to 100 percent. High percentage means less concentration meaning monopoly and vice versa for more competion , a perfect competition like situation.

In Herfindahl index, indicates the sixe of the firm in relation to the industry , which in other way can be understood as level of competition, based on the market share. If the markt share is equally distributed , as in case of perfect competition, the index value is small, while if the share is unequal for diffrent firms, more concentrated in one firm, index value is high. This means index shows higher value for monopoly and low for perfect competition.

Hence if concentration ratio of industry is small, HHI is likely to be small.