Problem Set #1 - ECON 121A, Spring Quarter 2024
Due: April 18, at 11:59pm. Problem sets are to be turned in through Gradescope
Note: In order to receive credit, you must show your work.
1) The following table shows the top seven airlines in the United States and theirrespective market shares (adjusted to equal 100%).
|
Airline
|
Market Share (%)
|
|
American
|
21.2%
|
|
Alaska
|
7.7%
|
|
JetBlue
|
6.5%
|
|
United
|
18.0%
|
|
Spirit
|
5.1%
|
|
Southwest
|
20.4%
|
|
Delta
|
21.1%
|
a. Graph the concentration curve for this industry. Show all of your work.
b. What is the Concentration Ratio of the top 4 firms (CR4)?
c. Calculate the Herfindahl-Hirschman Index (HHI) for this industry? Show all of your work.
d. Why is the HHI usually regarded as a superior measure to the CR4 when describing the competitive nature of a particular industry? Briefly explain.
2) We showed in class how the Lerner Index is derived and how it can be represented through the elasticity of demand.
a. Explain what does the Lerner Index measure?
b. What is the intuition (non-mathematical reason) behind the Lerner Index being
related to elasticity of demand? That is, why is it that when price elasticity of demand is more elastic, the Lerner Index is smaller?
c. How is deadweight loss related to the Lerner Index? Does a higher Lerner Index mean we should expect greater deadweight loss? Briefly explain.
3) Suppose a price discriminating (third-degree) monopolist is selling in two different markets such that the marginal revenue in one market is 20 and the marginal revenue in the other market is 10. What can the monopolist do to increase profits (while keeping overall production the same)?
4) Suppose you are given the following demand curves for adults and kids for the all-you-can-eat buffet at Sizzler:
Adults: QA = 20 - PA
Kids: QK = 12 - PK
The marginal cost of a meal is constant and equal to $2. For simplicity, assume there are no other costs.
a. What is the combined (both market together) demand for meals and the combined marginal revenue? Show all of your work and make sure to denote how the demand curve changes at different prices.
b. What are profits if the monopolist can only charge one price for the entire market? Show your work.
c. What is the marginal revenue in each group if the monopolist does not price discriminate? Show your work.
d. What price would the monopolist charge each group if it could third-degree price discriminate? What will profits be?