Regulation & Antitrust Policy (Econ 198) Signature:
Drake University, Spring 2005
William M. Boal Printed name:
Quiz #4
"Market Structure"
INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing
calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be
correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points
are 100.
I. Multiple choice: Circle the one best answer to each question. [4 pts each: 32 pts total]
(1) If an industry is a monopoly, its Hirschman-
Herfindahl Index (HHI) is
a. zero.
b. 20.
c. 100.
d. 10,000.
(2) If an industry consists of 20 firms of equal size,
its Hirschman-Herfindahl Index (HHI) is
a. 5.
b. 25.
c. 400.
d. 500.
(3) Suppose an industry consists of two firms: #1 and
#2. Consider two possible distributions of market
shares:
A. Each firm has 50% market share.
B. Firm #1 has 70% market share and Firm #2
has 30% market share.
Which distribution is more concentrated according to
the Hirschman-Herfindahl Index (HHI)?
a. Distribution A.
b. Distribution B.
c. The two distributions are equally concentrated
because the number of firms is the same (2).
d. Cannot be determined from the information
given.
(4) Suppose an industry behaves like a Cournot
oligopoly. If the elasticity of demand is -2 and the
Hirschman-Herfindahl Index (HHI) is 1000, then the
average Lerner index (or "price-cost margin") for this
industry is
a. 0.02.
b. 0.05.
c. 0.10.
d. 0.50.
(5) Suppose an industry is a Cournot oligopoly but
entry is possible after firms pay a fixed, sunk entry
cost. In equilibrium, the number of firms is
a. positively related to the entry cost.
b. negatively related to the entry cost.
c. unrelated to the entry cost.
d. Cannot be determined from the information
given.
(6) A contestable market is
a. perfectly competitive.
b. an oligopoly with a large number of firms.
c. an oligopoly with a small number of firms.
d. a natural monopoly with entry costs that are not
sunk.
(7) Suppose a dominant firm shares a market with a
competitive fringe of smaller firms. If the dominant
firm cuts price,
a. total market quantity increases and fringe
quantity supplied increases.
b. total market quantity increases and fringe
quantity supplied decreases.
c. total market quantity decreases and fringe
quantity supplied increases.
d. total market quantity decreases and fringe
quantity supplied decreases.
(8) Suppose a dominant firm shares a market with a
competitive fringe of smaller firms. Everything else
equal, the more elastic is the competitive fringe's
supply curve, the
a. more market power the dominant firm has.
b. less market power the dominant firm has.
c. The elasticity of fringe supply has no effect on
the market power of the dominant firm.
d. Cannot be determined from the information
given.
