The main drawback of the Herfindahl-Hirschman Index (HHI) is that: A) It only go
ID: 1165756 • Letter: T
Question
The main drawback of the Herfindahl-Hirschman Index (HHI) is that:
A) It only goes to 100
B) It does not work for a monopoly market
C) It does not work for a perfectly competitive market
D) You have to know the market share for all the firms in the market
True or False: Price changes for complements and substitutes have the same effect on demand
The Herfindahl-Hirschman Index (HHI) is a measure of:
A) Market concentration
B) Perfect price discrimination
C) Price elasticity of demand
D) Ferro-magnetic permeability
E) Consumer Surplus
A firm will always elect to reduce production when marginal cost is greater than average total cost if:
A) The firm is a price taker and average total cost is maximum
B) The firm is a price setter and average total cost is maximum
C) The firm is a price taker and marginal cost exceeds the market price
D) The firm is a price setter and marginal revenue is greater that the market price
E) None of these
If the price elasticity of demand for cigarettes is 0.5, what is the impact on revenue if the price increases by 10%?
A) Revenue increases by 10%
B) Revenue increases by 5%
C) Revenue decreases by 9%
D) Revenue decreases by 18%
The price of salsa falls. What happens in the market for chips, which are a compliment for salsa?
A) The equilibrium price falls and the equilibrium quantity rises
B) The equilibrium price rises and the equilibrium quantity falls
C) The equilibrium price and quantity rise
D) The equilibrium price and quantity fall
Explanation / Answer
ans.
1) D. you have to know market share of all firms in market
HHI ranges from 0 to 10,000.Higher index value means industry is considered to be close to monopoly and market with value of 1,000 is cinsidered to be competitive.To know about consumer choice nad market competition market share of firms is important deteminant in index.
2) false
When price of good Y falls in complimentary good then demand for it increases which will also raise demand for good Y. Whereas in substitute goods if price falls for good Y then demand for it increases but decreases demand for good X.So price changes in complementary and substitute goods don,t have same effect on demand.
3) A. market concentration
HHI is measure of market concentration and calculated by squaring market share of each firm in market and then summing up the values. It ranges from zero to 10,000.
4) C . firm is price taker and marginal cost exceeds market price.
In a perfectly competitive market profit is maximised when price equls marginal cost where firm is a price taker.Firm will reduce production when marginal cost is greater than average total cost.This happens in perfect competition market where if marginal cost exceeds price as there will not be profit for firm. .Wherea if marginal cost is less than average cost then there is monopoly market.
5) b. revenue increases by 5%
Price eleasticity of demand = 0.5 and price increases by 10% will decrease quantity demand by 0.5*10/100 = 0.05 . Since cigrattes have inelastic demand that means whatever is the price people continue to have it which will increase revenue such that revenue will increase by (0.05 - 10) % = 5%.
6) A. equiliberium price falls and equliberium quantity rises
As salsa and chips are complimentary goods so decrease in price of salsa will increase the quantity demanded for chips and reduce the price for chips as salsa prices have been reduced.
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