Economics - Economics Section 1
36. The market price of a dominant firm in an oligopolistic market is most likely based on the:
- Option : B
- Explanation : The dominant company determines its profit maximizing quantity by equating its marginal revenue and marginal cost. The price is then set based on the dominant company’s demand curve.
- Option : C
- Explanation : In first-degree price discrimination, a company is able to charge each customer the highest price the customer is willing to pay. In seconddegree price discrimination, a company offers a menu of quantity-based pricing options designed to induce customers to self-select based on how highly they value the product. The scenario given in the question is an example of third- degree price discrimination where customers are segregated by demographic or other traits.
- Option : C
- Explanation : Profits are maximized when MR = MC. For a monopoly: MR = P [1 − (1 / Price Elasticity)] 5000 = P [1 − (1 / 1.25)] P = 25000.
- Option : C
- Explanation : The concentration ratio for the top three firms is 20 + 20 + 20 = 60 percent. The HHI is 0.20² * 3 = 0.12.
40. One of the disadvantages of the Herfindahl-Hirschmann index is that the index:
- Option : C
- Explanation : The HHI does not reflect low barriers to entry that may restrict the market power of companies currently in the market
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