1. A firm has $1,000,000 in sales, a Lerner index of 0.65 and a marginal cost of $35, and competes against 1,000 other firms in its relevant market.
a. What price does this firm charge its customers?
b. By what factor does this firm mark up its price over marginal cost?
c. Do you think this firm enjoys much market power? Explain.
2. Under what conditions might the Justice Department approve a merger between two companies that operate in an industry with a premerger of Herfindahl-Hirschman index of $2,900 if the post merger index is expected to increase by $225?
3. Forey, Inc., competes against many other firms in a highly competitive industry. Over the last decade, several firms have entered this industry and as a consequence, Forey is earning a return on investment that roughly equals the interest rate. Furthermore, the 4-firm concentrations ratio and the Herfindahl-Hirschman index are both quite small, but the Rothschild index is significantly greater than zero. Based on this information, which market structure best characterizes the industry in which Forey competes. Explain.
4. Several years ago, Phizer and Warner-Lambert agreed to a 90 billion merger, thus creating one of the world's largest pharmaceutical companies. Pharmaceutical companies tend to spend a greater percentage of sales on R & D activities than other industries. The government encourages these R & D activities by granting companies patents for drugs approved by the Federal Drug Administration. For instance, the Phizer and Warner-Lambert spent large sums of money developing its popular cholesterol-lowering drug, Lipitor, which is currently protected under a patent. Lipitor sells for about $3 per pill. Calculate the Learner Index if the marginal cost of producing Liptor is $.30 per pill. Does the learner inndex make sense in this situation? Expain.