Problem 1: An industry consists of three firms with sales of $300,000, $700,000 and $250,000.
a) Calculate the Herfindahl-Hirschman index (HHI). SHOW ALL WORK
b) Calculate the four-firm concentration ratio (C4). SHOW ALL WORK
c) Based on the FTC and DOJ Horizontal Merger Guidelines described in the text, do you think the Department of Justice would attempt to block a horizontal merger between two firms with sales of $300,000 and $250,000? Explain.
Problem 2. A firm has $1.5 million in sales, a Lerner index of 0.57, and a marginal cost of $50, and competes against 800 other firms in its relevant market.
a. What price does this firm charge its customers? SHOW all work.
b. By what factor does this firm mark up its price over marginal cost? SHOW all work.
c. Do you think this firm enjoys much market power? Explain.