Business
Questions for Critical Thinking 5
Salvatore’s Chapter 10:
Discussion Questions: 2
(a) The advantages of the Herfindahl index over concentration ratios is that the former uses information on all the firms in the industry, not just information on the market share of the largest 4, 8, or 12 firms in the industry, and gives a larger weight to the larger firms in the industry.
(b) The disadvantage of concentration ratios and the Herfindahl index is that for the reasons indicated in Case Study 9-3, both may grossly overestimate the market power of the largest firms in the industry.
Discussion Questions: 8
A cartel is a group of firms that behave as a single firm. All decisions are taken jointly in a manner that maximizes profit for the entire group. This is how OPEC works. The Organization of the Petroleum Exporting Countries (OPEC) consists of 12 oil producing and exporting countries, spread over America, Asia and Africa. The members are Algeria, Angola, Ecuador, the Islamic Republic of Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi, Arabia, United Arab Emirates & Venezuela. It decides the amount of crude oil that will be supplied to the world in a manner that stabilizes prices. It maintains prices such that the profits of oil exporting nations do not suffer. This is done by carefully controlling the amount of oil sold. It is successful as price of oil has risen, despite adequate supplies. There has been no instance of a member walking out of the cartel. While it may make sense in short run to deviate from the targets of production given by OPEC. No nation has done so as the long term effects are harmful.
Problems: 1
(a) H = (70)2 + (20)2 + (10)2 = 4,900 + 400 + 100 = 5,400
(b) H = (50)2 + 10(5)2 = 2,500 + 10(25) = 2,750
(c) H = 10(10)2 = 10(100) = 1,000
Problem 5
Removing the parenthesis from B’s reaction function [QB = 1/2(12−Q A)]
QA = 1/2(12 − Q B) QB = 6 − 1/2Q A QA = 6−1/2Q B.
Substituting B’s reaction function into
Salvatore’s Chapter 10:
Discussion Questions: 2
(a) The advantages of the Herfindahl index over concentration ratios is that the former uses information on all the firms in the industry, not just information on the market share of the largest 4, 8, or 12 firms in the industry, and gives a larger weight to the larger firms in the industry.
(b) The disadvantage of concentration ratios and the Herfindahl index is that for the reasons indicated in Case Study 9-3, both may grossly overestimate the market power of the largest firms in the industry.
Discussion Questions: 8
A cartel is a group of firms that behave as a single firm. All decisions are taken jointly in a manner that maximizes profit for the entire group. This is how OPEC works. The Organization of the Petroleum Exporting Countries (OPEC) consists of 12 oil producing and exporting countries, spread over America, Asia and Africa. The members are Algeria, Angola, Ecuador, the Islamic Republic of Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi, Arabia, United Arab Emirates & Venezuela. It decides the amount of crude oil that will be supplied to the world in a manner that stabilizes prices. It maintains prices such that the profits of oil exporting nations do not suffer. This is done by carefully controlling the amount of oil sold. It is successful as price of oil has risen, despite adequate supplies. There has been no instance of a member walking out of the cartel. While it may make sense in short run to deviate from the targets of production given by OPEC. No nation has done so as the long term effects are harmful.
Problems: 1
(a) H = (70)2 + (20)2 + (10)2 = 4,900 + 400 + 100 = 5,400
(b) H = (50)2 + 10(5)2 = 2,500 + 10(25) = 2,750
(c) H = 10(10)2 = 10(100) = 1,000
Problem 5
Removing the parenthesis from B’s reaction function [QB = 1/2(12−Q A)]
QA = 1/2(12 − Q B) QB = 6 − 1/2Q A QA = 6−1/2Q B.
Substituting B’s reaction function into