2. (
5 points
) (a) The industry elasticity of demand for gadgets is −2, while the elasticity of demand for
an individual gadget manufacturer's product is −2. Based on the Rothschild approach to measuring
market power, what conclusion can we make about the degree of monopoly power in this industry
(high, low, something in between)? Please give an explanation.
R= E
T
/E
F
R= 1
(b). A local telephone company charges $.10/min. based on a $.08/min. marginal cost of operation.
What is the Lerner index?
L= (P-MC)/P
L= (0,1-0,08)/0,1
L= 0,2
3. (
5 points
) (a) Would a merger between T-Mobile and Microsoft increase concentration either in the
software industry or the cell-phone service provider industry.
No, a merger doesn't increase the concentration in one of the industries because the new company
will be still operating in both industries and therefore the number of the companies in the industries
will be the same. In total there is one firm less in the market but in the both industries as it own are
still the same number of firms only on firm is now in both industries but that fact doesn't change the
concentration.
4. (
5 points
) Determine whether integration between the following types of firms would constitute a
horizontal, vertical, or conglomerate merger. You must give an explanation in each case.
a. A food company and a drug company.
b. A milk producer and a cheese producer.
c. A computer chip manufacturer and a silicon producer. (Silicon is a necessary input in the
manufacture of computer chips).
a.)
conglomerate merger:
because we have an integration of two product lines into a single firm.
b.)
