Question

1a. The Herfindhahl Hirschman index is used to

A. measure the future earning of a perfect competitive firm.

B. measure the market share of a potential merger among oligopolistic firms.

C. measure the market share of a natural monopoly.

D. measure the production cost of an oligopoly.

E. measure the production costs of a perfect competitive firm

1b. Consider the following scenario where marginal social benefit equals marginal social cost at a quantity of 10 and a price of $50; and, the marginal private cost equals the marginal private benefit at a quantity of 5 and a price of $40. The government will offer a ________________of ________ to achieve market equilibrium.

A. tax of $10

B.  tax of $15

C. subsidy of $10

D. subsidy of $90

E.  tax of $90

Answer 1

1.a

Option B.

Explanation: The Herfindahl-Hirschman Index - HHI index indicates the market concentration in an industry. It also indicates the relative size of the firms compared to the industry size. It can help us to measure the market share of a potential merger among oligopolistic firms.

1. b. C. subsidy of $10

Explanation: Here, the socially optimal quantity (10) is higher than the market equilibrium quantity (5). Therefore, the government needs to provide a subsidy so that the production increases. The amount of the subsidy should be equal to $50 - $40 = $10