Chapter 5
What occurs when the output increases as a firm incrementally increases its use of one input?
Increasing marginal returns
How many firms are involved within vertical integration?
2 or more firms
T/F: When calculating the C4 concentration ratio, you first take the top four firms within two industries and sum their sales up. Then, you divide that by the total sales within the industry.
False - only one industry
Ch. 5 Cost Curves: What average cost curve continuously declines as output expands?
AFC
In this production function, capital and labor cannot be substituted for each other and are used in a fixed proportion. Which production function is being described?
Leontieff production function
High pay, stock options, job flexibility, promotions bonuses, and appreciation are all examples of what (regarding jobs)?
Job incentives
In regards to the C4 concentration ratio, what is the number range to determine if an industry's structure is that of an oligopoly?
~0.5 to 0.99
(15 * 600) - (20 * 225) - 375 = $4,125
Max Profit = P * Q - W * L - C(K)
Why is the MC curve U-shaped?
Because increasing marginal returns and diminishing marginal returns exist
(Increasing marginal returns create the decreasing portion of the curve and diminishing marginal returns create the increasing portion of the curve)
T/F: In the short-run ATC curve, two inputs are fixed. In the long run ATC curve, inputs are variable and there is partial flexibility in input change.
False - there must be full flexibility in input change for LRATC
T/F: A horizontal merger occurs when two firms at different stages of the production process combine (e.g., a manufacturer merging with a supplier).
False - vertical merger
Ch. 7: The U.S. Department of Justice may block a merger if the post-merger HHI increases significantly, even if the C4 ratio remains the same.
True - HHI is more sensitive to changes in firm size distribution than C4.
Given: Q = 30L^1/3 K^1/3 - what is APk?
APk = 30L^1/3 K^-2/3
What are two ways decreasing to return (diseconomies) of scale exists?
Bureaucratic issues, company becomes too big
Solve for the price equation deriving from the Lerner Index.
P = (1/1-L) * MC
P = Markup Factor * MC
Ch. 6 Input Procurement: List at least 4 out of 6 PROS of a contract.
1) Avoids hold-up problem
2) Reduces uncertainty
3) Provides legal remedy for non-performance
4) Good w/ specialized investments
5) Helps avoid underinvestment
6) Large bureaucratic costs w/ vertical integration
Why does the HHI concentration ratio give more weight to larger firms than smaller ones when calculating concentration? (explain for points)
Because of the squaring of market shares - bigger
numbers will have larger exponential changes after
being squared in the HHI equation
2) Does vertical integration become less or more attractive?
1) Longer contracts are more desirable
2) Vertical integration becomes more attractive
1) Provide an ample definition for economies of scope.
2) Explain why it is different from economies of scale.
1) It is a situation where one firm can produce the output of multiple firms at a lower ATC.
2) Scope is different from scale because one firm produces multiple different things, versus in scale the firm is producing same/similar things.
Ch. 5 Cobb-Douglas: Assume Q = 5K^0.7 L^0.3. Find APL.
5K^0.7/L^0.7