(1) Assume the market for beer is characterized by the following structure.
Firm MC Sales
1 15 100
2 12.5 90
3 13 40
4 13 10
5 13 8
6 13 7
7 12.5 5
The marginal cost is assumed to be constant for each firm. A competitive firm would have incurred a MC equal to 12. The market price is equal to $20.
(a) Calculate CR4 and HHI
(b) Calculate
(c) Calculate the Lerner Index for each firm and the weighed market Lerner Index
(d) Calculate the welfare loss per sale and the overall welfare loss due to the high degree of industry concentration
(2) According to Sutton, the number of firms on a market is determined by the market size, the price-cost margin and the fixed set-up cost (such as advertising cost), which is sunk.
Assume the following features:
Market size S (= sales): $3,500
price P = 20
average cost AC = 14
the sunk fixed set-up cost F is a function of S and is given by
F = 1.03333*S - 3000
(a) Calculate the number of firms on this market
(b) Now assume that the market doubles in size. Will the number of firms increase or decline? Calculate and round to the next integer.