Question

Determine which of the following statements are correct.

		You have determined that the marginal benefit from a proposed contract is $200,000. The marginal cost of securing the contract is estimated to be: MC(L) = 50000 + 10000L, where is the length of the contract in months. The estimated length of the contract is 15 months. 1. Today, you receive new information that the benefits of the contract have increased from $200000 to $300000. As such, the recommendation should be to decrease the length of the contract to 10 months.
		2. Assume that you observe an industry where the four-firm concentration ratio is 0.95 and the Herfindahl-Hirschman index is 2500. This means that the largest four firms in the industry have approximately 95% of total sales in the industry but that no one firm dominates the entire industry.
		3. Assume that you have the following data on market share for the four firms in an industry: Firm one market share: 40% Firm two market share: 30% Firm three market share: 15% Firm four market share: 15% You determine the the Herfindahl-Hirschman Index is 2,950. As such, one firm dominates the other firms in the industry.
		4. As price decreases, consumer surplus increases because consumers are obtaining more quantity for less than they are willing to pay for the quantity consumed. As price decreases, own-price elasticity of demand decreases absolutely because consumers are consuming more and thus marginal satisfaction declines and consumers become less responsive to price. If you are along the elastic portion of the demand curve, decreasing price will decrease total revenue. If you are along the inelastic portion of the demand curve, increasing price will increase total revenue.

Answer 1

In my opinion, statement 3 is correct.

1. At Marginal benefit of $200000,  MC = 50000+10000L (Substituting MC as $200000 in the equation) L i.e. Length of contract is 15 months.

Now when MC increases to $300000,

300000=50000+10000L, L = 25

Thus, length of contract increases to 25 months and not decreasing to 10 month which makes this statement false.

2. The Four-firm concentration theory is that the higher percentage of the market controlled by these four firms, the less competitive the market is.

A ratio in the range of 0 % to 50 % is considered to have a low concentration and be competitive.

50 % to 80 % are moderately competitive,

above 80 percent is approaching from oligopoly to monopoly.

In this case its 95% which means firm can easily dominate the industry. Thus, the above mentioned statement is also false.

3. The HHI is calculated as:

HHI = 40² + 30² + 15² + 15² = 1,600 + 900 + 225 + 225 = 2,950

According to the U.S. Department of Justice, an HHI of less than 1,500 represents an industry with low market concentration. An HHI ranging between 1,500 and 2,500 represents moderate concentration. HHI values of more than 2,500 represents a highly concentrated industry. This makes it true that one firm dominates the other in industry.

4. Consumer surplus is the area between the demand curve and the price line for the quantity of goods sold. Assuming that there is no shift in demand, an increase in price will therefore lead to a reduction in consumer surplus, while a decrease in price will lead to an increase in consumer surplus. True

As price decreases, own-price elasticity of demand decreases absolutely because consumers are consuming more and thus marginal satisfaction declines (true) and consumers become MORE and not less responsive to price. Consumer will buy more only if the price falls. False

Total revenue is  TR = P x Qd. ... If demand is elastic, the % decrease in price will result in an even larger % increase in the quantity sold—thus raising total revenue. True