Critical Thinking 5 Assignment
NAME GRADE 76

Questions Salvatore 10: Discussion Question 2

(a) What are the advantages of the Herfindahl index over concentration ratios in measuring the degree of concentration in an industry? (b) What is the disadvantage of both?

ANSWER:

(a) The advantages of the Herfindahl index are: (1) uses information on all the firms in an industry, not just market share of the largest 4,8 or 12. (2) appropriately gives more weight to larger firms than to smaller firms within the industry. (b) Disadvantage to both is that they may overestimate the market power of the largest firms in the industry. Neither model considers contestable markets; this is also a disadvantage of both.

Salvatore 10: Discussion Question 8

In what way does OPEC resemble a cartel? How successful is it?

ANSWER:

OPEC resembles a cartel because it represents a group of producers that exist with the desire to set prices beyond the competitive level. They do this by controlling supply of oil produced by its members. Much like a cartel, OPEC's decisions are dictated in the manner to which they will provide the greatest profit for the cartel members. (b) Not very successful, when OPEC increased prices beyond competitve levels, the market responded by decreasing demand for product, which in turn decreased production and export activity for OPEC members. A number or geo-political factors have both historically and recently created spikes in oil prices. Find the Herfindahl index for an industry composed of ( a) three firms— one with 70 percent of the market, and the other two with 20 and 10 percent of the market, respectively; (b) one firm with a 50 percent share of the market and 10 other equal-sized firms; (c) 10 equal- sized firms. NOTE : Use 70 instead of 70% in your Herfindahl index calculation (p.415)

Salvatore 10: Problem 1

ANSWER:

(a) 5400 (b) 2750 ( c) 1000 (see