1. Explain why the definition of the relevant market is important when examining antitrust issues.
2. A water utility with everywhere increasing returns to scale is regulated to price at what used to be average cost. Recently, however, its average costs have dropped, because of lower pollution levels in the river it draws its water from. This fall in costs is expected to be permanent. Why may it nevertheless be socially desirable to wait a while before adjusting the regulated price downward to the new average cost level?
3. Explain why price regulation of a monopoly in a contestable market will not correct a market inefficiency.
4. An industry consists of three firms. All three have identical variable costs VC(q) = 5q + q2, but whereas Firms 2 and 3 have fixed costs of $2,000, Firm 1's fixed costs are $3,000. Market demand is Q = 335 - p and the firms play Cournot. What is the Herfindahl-Hirschman Index of the industry?
5. Explain how the cross-elasticity of demand may provide insight into the definition of a market.