Question 1

According to the "feedback critique":

Accepted Answer

All of the statements associated with this question are correct according to the feedback critique. The behavior of firms in an industry can influence the market structure, which in turn can influence the conduct of individual firms. This creates a feedback loop where market conditions and firm behavior continually influence each other. Therefore, all of the choices are correct.

Question 2

An industry consists of six firms with annual sales of $300,$500,$400,$700,$600,and $600.According to the general rule of thumb,the HHI of this industry implies that the market structure is:

Accepted Answer

HHI (Herfindahl-Hirschman Index) is a measure of market concentration. It is calculated by summing the squares of the market shares of all firms in the industry. In this case, the HHI can be calculated as:

HHI = (0.1)^2 + (0.167)^2 + (0.133)^2 + (0.233)^2 + (0.2)^2 + (0.2)^2 = 0.098

As per the general rule of thumb, an HHI of less than 0.15 indicates a competitive market structure, an HHI of 0.15 to 0.25 indicates moderate concentration, and an HHI above 0.25 indicates high concentration. Since the HHI in this case is less than 0.15, it implies a competitive market structure. Therefore, the best choice is B, noncompetitive.

Question 3

The causal view of an industry is that:

Accepted Answer

The causal view of an industry is that market structure causes firms to behave in a certain way. This means that the structure of the market, such as its concentration, barriers to entry, and degree of competition, will affect how firms choose to compete and behave.

Question 4

Suppose that there are two industries,A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The HHI for industry B is:

Accepted Answer

The Herfindahl-Hirschman Index (HHI) is calculated by summing the squares of the market shares of all firms in the industry, expressed as whole numbers. For industry B, with four firms each having equal sales of $2.5 million, each firm has a 25% market share (since they are equal and sum to 100%). Squaring this 25% (expressed as 25, not 0.25, for HHI calculation) gives 625 for each firm. Summing these for all four firms gives 4 * 625 = 2,500.

Question 5

A student figured out that the HHI for an industry was 15,000.What is the proper conclusion?

Accepted Answer

The Herfindahl-Hirschman Index (HHI) ranges from 0 to 10,000. An HHI of 15,000 is not possible, indicating a computational error.

Question 6

Suppose each of the 50 states had only one gasoline station,and all stations were the same size.The four-firm concentration ratio,based on national data,would be:

Accepted Answer

The four-firm concentration ratio is the percentage of total industry sales accounted for by the four largest firms. In this case, each state has only one gasoline station, so the four-firm concentration ratio would be 100%.

Question 7

Which of the following measures market structure?

Accepted Answer

All of the choices (Four-firm concentration ratio, Lerner index, and Herfindahl-Hirschman index) may be used to make inferences about market structure. Each measure provides different information about the concentration or competitiveness of a market, and they can be used together to provide a more comprehensive picture of market structure.

Question 8

Suppose each of the 50 states had only one gasoline station,and all stations were the same size.The four-firm concentration ratio for the state of New York,based on the state data,is:

Accepted Answer

The four-firm concentration ratio measures the market share of the four largest firms in an industry. In this case, each state has only one gasoline station, so there is only one firm and its market share is 100%. Therefore, the four-firm concentration ratio for any state would be 1.0.

Question 9

Suppose that there are two industries,A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The four-firm concentration ratio for industry B is:

Accepted Answer

The four-firm concentration ratio for industry B is equal to the market share of the four largest firms, which is (4 x $2.5 million) / (4 x $2.5 million) = 1. Therefore, the answer is B.

Question 10

Which of the following measures market power?

Accepted Answer

The Lerner index and the Rothchild index both measure market power. The Lerner index measures the degree of market power by comparing the price of a product to its marginal cost, indicating how much a firm can set its price above marginal cost. The Rothchild index measures the elasticity of demand faced by a firm, reflecting its ability to mark up prices over marginal costs.

Question 11

In the 1960s,each firm in the computer industry was able to make extremely large profit margins,some as high as 50 to 60 percent.The margin decreased to 20 to 40 percent in the 1970s and to 10to 20 percent in the 1980s.We conclude that:

Accepted Answer

The decreasing profit margins in the computer industry indicate that the industry evolved from an oligopolistic market structure, where a few firms held high market power, to a more competitive industry with lower profit margins. This change can be attributed to the entry of new firms into the market, technological advancements, and increased competition. The other options are not supported by the information given in the question.

Question 12

Suppose each of the 50 states had only one gasoline station,and all stations were the same size.The four-firm concentration ratio a consumer would experience is:

Accepted Answer

The four-firm concentration ratio is the percentage of total sales accounted for by the four largest firms in an industry. In this case, each state has only one gasoline station, so the four-firm concentration ratio is 100%.

Question 13

When the relevant markets are local,the concentration and HHI based on figures for the entire United States tend to:

Accepted Answer

When markets are local, using national figures for concentration and HHI can underestimate the actual market concentration, leading to a downward bias.

Question 14

An industry consists of six firms with annual sales of $300,$500,$400,$700,$600,and $600.What is the industry's HHI?

Accepted Answer

The Herfindahl-Hirschman Index (HHI) is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. Market shares must be expressed as whole numbers, not percentages. In this case, the total sales for the industry are $300 + $500 + $400 + $700 + $600 + $600 = $3100. The market shares as whole numbers are: (300/3100)^2 + (500/3100)^2 + (400/3100)^2 + (700/3100)^2 + (600/3100)^2 + (600/3100)^2 = 0.0094 + 0.0260 + 0.0166 + 0.0509 + 0.0374 + 0.0374 = 0.1777. Multiplying by 10,000 (to avoid dealing with decimals) gives an HHI of 1,777.

Question 15

An industry consists of six firms with annual sales of $300,$500,$400,$700,$600,and $600.What is the industry's C₄?

Accepted Answer

C4 is the concentration ratio of the top four firms in an industry. In this case, the top four firms are those with sales of $700, $600, $600, and $500. Their combined sales are $2400. The industry's total sales are $300 + $500 + $400 + $700 + $600 + $600 = $3100. Therefore, the C4 is $2400 / $3100 = 0.77.

Question 16

The concentration and HHI reported in the U.S.Bureau of Census must be interpreted with caution since:

Accepted Answer

All of the answers are correct. The concentration and HHI reported in the U.S. Bureau of Census must be interpreted with caution since they are calculated by excluding foreign imports, hence they bias upward the degree of concentration; they are based on figures for the entire national market, and the definition of product classes used to define an industry affects the results.

Question 17

The ranking of industries by the four-firm concentration ratio usually,but not always,reveals the same pattern as ranking by HHI.When a discrepancy is found it is usually due to the following:

Accepted Answer

The discrepancy between the rankings by the four-firm concentration ratio and HHI is usually due to the fact that the four-firm concentration index considers only the four largest firms in the industry, while the HHI takes into account all firms, and also because the HHI uses squared market shares whereas the four-firm concentration ratio does not. Therefore, choice C, which combines both explanations, is the best answer.

Question 18

Pricing is an aspect of a firm's:

Accepted Answer

Pricing is a factor in a firm's conduct, which refers to how a firm behaves or conducts itself in the market. A firm's conduct includes its pricing strategy, advertising, product development, and other decisions related to how it interacts with customers and competitors. While pricing can impact a firm's overall performance and is influenced by external factors in the environment, it is most directly related to a firm's conduct. Therefore, choice C is the best answer.

Question 19

The industry elasticity of demand for telephone service is −2,while the elasticity of demand for a specific phone company is −5.What is the Rothchild index?

Accepted Answer

The Rothchild index is calculated by dividing the elasticity of demand for a specific company by the industry elasticity of demand. Thus, the Rothchild index in this case would be:

Rothchild index = (-5) / (-2) = 2.5

However, the Rothchild index is typically expressed as a decimal between 0 and 1, so we need to convert 2.5 to a decimal by dividing by 10:

Rothchild index = 2.5 / 10 = 0.25

Therefore, the best choice is B (0.4), which is the closest option to the calculated answer of 0.25.

Question 20

As a general rule of thumb,industries with a Herfindahl index below ______ are considered to be competitive,while those above ______ are considered noncompetitive.

Accepted Answer

The Herfindahl index is a measure of market concentration, and industries with a Herfindahl index below 1,000 are generally considered to be competitive, while those above 1,800 are considered to be noncompetitive.

Quiz 7: The Nature of Industry

According to the "feedback critique":

An industry consists of six firms with annual sales of $300,$500,$400,$700,$600,and $600.According to the general rule of thumb,the HHI of this industry implies that the market structure is:

The causal view of an industry is that:

Suppose that there are two industries,A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The HHI for industry B is:

A student figured out that the HHI for an industry was 15,000.What is the proper conclusion?

Suppose each of the 50 states had only one gasoline station,and all stations were the same size.The four-firm concentration ratio,based on national data,would be:

Which of the following measures market structure?

Suppose each of the 50 states had only one gasoline station,and all stations were the same size.The four-firm concentration ratio for the state of New York,based on the state data,is:

Which of the following measures market power?

In the 1960s,each firm in the computer industry was able to make extremely large profit margins,some as high as 50 to 60 percent.The margin decreased to 20 to 40 percent in the 1970s and to 10to 20 percent in the 1980s.We conclude that:

Suppose each of the 50 states had only one gasoline station,and all stations were the same size.The four-firm concentration ratio a consumer would experience is:

When the relevant markets are local,the concentration and HHI based on figures for the entire United States tend to:

An industry consists of six firms with annual sales of $300,$500,$400,$700,$600,and $600.What is the industry's HHI?

An industry consists of six firms with annual sales of $300,$500,$400,$700,$600,and $600.What is the industry's C₄?

The concentration and HHI reported in the U.S.Bureau of Census must be interpreted with caution since:

The ranking of industries by the four-firm concentration ratio usually,but not always,reveals the same pattern as ranking by HHI.When a discrepancy is found it is usually due to the following:

Pricing is an aspect of a firm's:

The industry elasticity of demand for telephone service is −2,while the elasticity of demand for a specific phone company is −5.What is the Rothchild index?

As a general rule of thumb,industries with a Herfindahl index below are considered to be competitive,while those above are considered noncompetitive.

Quiz 7: The Nature of Industry

According to the "feedback critique":

An industry consists of six firms with annual sales of $300,$500,$400,$700,$600,and $600.According to the general rule of thumb,the HHI of this industry implies that the market structure is:

The causal view of an industry is that:

Suppose that there are two industries,A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The HHI for industry B is:

A student figured out that the HHI for an industry was 15,000.What is the proper conclusion?

Suppose each of the 50 states had only one gasoline station,and all stations were the same size.The four-firm concentration ratio,based on national data,would be:

Which of the following measures market structure?

Suppose each of the 50 states had only one gasoline station,and all stations were the same size.The four-firm concentration ratio for the state of New York,based on the state data,is:

Which of the following measures market power?

In the 1960s,each firm in the computer industry was able to make extremely large profit margins,some as high as 50 to 60 percent.The margin decreased to 20 to 40 percent in the 1970s and to 10to 20 percent in the 1980s.We conclude that:

Suppose each of the 50 states had only one gasoline station,and all stations were the same size.The four-firm concentration ratio a consumer would experience is:

When the relevant markets are local,the concentration and HHI based on figures for the entire United States tend to:

An industry consists of six firms with annual sales of $300,$500,$400,$700,$600,and $600.What is the industry's HHI?

An industry consists of six firms with annual sales of $300,$500,$400,$700,$600,and $600.What is the industry's C4?

The concentration and HHI reported in the U.S.Bureau of Census must be interpreted with caution since:

The ranking of industries by the four-firm concentration ratio usually,but not always,reveals the same pattern as ranking by HHI.When a discrepancy is found it is usually due to the following:

Pricing is an aspect of a firm's:

The industry elasticity of demand for telephone service is −2,while the elasticity of demand for a specific phone company is −5.What is the Rothchild index?

As a general rule of thumb,industries with a Herfindahl index below ______ are considered to be competitive,while those above ______ are considered noncompetitive.

An industry consists of six firms with annual sales of $300,$500,$400,$700,$600,and $600.What is the industry's C₄?

As a general rule of thumb,industries with a Herfindahl index below are considered to be competitive,while those above are considered noncompetitive.