Question

Please explain.

Suppose there are two firms, one of which has 70% market share and
one of which has 30% market share. Further, suppose a third firm enters so that the market shares
become 50, 25, and 25. What is the change in the Herfindahl-Hirschman Index as a result of entry?
(a) A decrease of 550
(b) A decrease of 2050
(c) An increase of 550
(d) An increase of 2050

Which of the following is true about “low” and “high” types as they relate
to price discrimination?
(a) A monopolist should only sell to low types under extremely special circumstances
(b) A monopolist should always set price low enough that the low types purchase
(c) Banning price discrimination can decrease welfare when it results in a monopolist no
longer serving low types
(d) Banning price discrimination typically favors the low types

Which of the following is true about collusion?

(a) Firms that heavily discount the future will have a harder time enforcing a collusive agree-
ment

(b) Collusion in the Cournot model involves each firm producing more than it would other-
wise

(c) Collusion is easier to sustain when firms take longer to detect a deviation from the collusive
agreement
(d) None of the above

Which of the following is true about contracts as a barrier to entry?
(a) A buyer should never agree to an exclusive contract with a monopolist seller
(b) A buyer will sometimes find it worthwhile to sign a contract with an monopolist seller
upstream that prevents entry upstream
(c) Exclusive deals always result in lower consumer surplus

(d) An exclusive deal between two parties makes it less likely that they will enter into relationship-
specific investments

Answer 1

1. Ans:  A decrease of 2050

Explanation:

HHI before entry = 70² + 30² = 5800

HHI after entry = 50² + 25² + 25² = 3750

So, Decrease in HHI = 5800 - 3750 = 2050

2. Ans: Banning price discrimination typically favors the low types

3. Ans: Firms that heavily discount the future will have a harder time enforcing a collusive agree- ment.

4. Ans: A buyer will sometimes find it worthwhile to sign a contract with an monopolist seller upstream that prevents entry upstream