Question

5. If a government wants to establish a marketable permit program for controlling pollution, it must begin by determining

a. how many permits will be issued in the overall market.

b. the overall price to be charged for each permit.

c. the overall quantity of a certain pollutant that should be allowed.

d. whether or not permits will be issued free of charge.

6. The marginal revenue curve for a monopolist _________ the market demand curve.

a. always rises above

b. always lies beneath

c. always runs parallel

d. always is the same

7. A narrowly defined market will tend to make concentration appear lesser while a broadly defined market will tend to make it appear greater.

True or False

8. The Higher the HHI, the greater the concentration of market share in the hands of fewer firms....such that in the case of a monopoly, the HHI is 10,000.

True or False

Answer 1

Answers and explanations are as follows:

5. If a government wants to establish a marketable permit program for controlling pollution, it must begin by determining

c. the overall quantity of a certain pollutant that should be allowed.

In a system of marketable permits, the first decision is regarding what level of pollution is permissible. According to this level, the number of permits will be issued.

For example if there are 10 equal sized firms, and the government wants only 100 units of pollution, each firm will initially be allowed to pollute only 10 units. Accordingly, permits will be issued.

In fact, any market based system will yield the same result. However, in a permit system, the quantity is set first. In a tax system, the price is set first.

6. The marginal revenue curve for a monopolist _________ the market demand curve.

b. always lies beneath

For a monopoly, the marginal revenue will always decrease with every additional unit sold. This is because the market demand curve is downward sloping. Thus, with every marginal increase in quantity, the marginal revenue earned falls. This is because , and to sell more, the firm has to reduce price.

7. A narrowly defined market will tend to make concentration appear lesser while a broadly defined market will tend to make it appear greater.

False

The true statement is the opposite of this. A narrowly defined market resembles a monopoly and is more concentrated, while a broadly defined market is less concentrated and resembles high competition.

For example, Italian Pizza is a narrow market, and one firm can have monopoly in Italian Pizzas. Food is a broad market, and no firm has monopoly in food.

8. The Higher the HHI, the greater the concentration of market share in the hands of fewer firms....such that in the case of a monopoly, the HHI is 10,000.

True

The HHI is the sum of squares of market shares of the firms in a market. Highest HHI value is 10,000 in case of a monopoly.

For example, if there is one firm with 100% market share,

If there are two firms with 50% market share each,

Thus, HHI will decrease with the number of firms

For markets very close to perfect competition, this value will come very close to zero.