Problem Set #1 – ECON 121A, Spring Quarter 2023
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Problem Set #1 – ECON 121A, Spring Quarter 2023
Due: April 19 at 11:59pm. Problem sets are to be turned in through Gradescope
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Note: In order to receive credit, you must show your work.
1) The following table shows the top seven airlines in the United States and their respective
market shares (adjusted to equal 100%).
|
Airline |
Market Share (%) |
|
American |
21.2% |
|
Alaska |
7.7% |
|
JetBlue |
6.5% |
|
United |
18.0% |
|
Spirit |
5. 1% |
|
Southwest |
20.4% |
|
Delta |
21. 1% |
a. Graph the concentration curve for this industry
b. What is the Concentration Ratio of the top 4 firms (CR4)?
c. Calculate the Herfindahl-Hirschman Index (HHI) for this industry?
d. Why is the HHI usually regarded as a superior measure to the CR4 when describing the competitive nature of a particular industry? Briefly explain.
2) We showed in class how the Lerner Index is derived and how it can be represented through the elasticity of demand.
a. What does the Lerner Index measure?
b. What is the intuition (non-mathematical reason) behind the Lerner Index being
related to elasticity of demand? That is, why is it that when price elasticity of demand is more elastic, the Lerner Index is smaller?
c. How is deadweight loss related to the Lerner Index? Does a higher Lerner Index mean we should expect greater deadweight loss? Briefly explain.
3) Suppose a price discriminating monopolist is selling in two different markets such that the marginal revenue in one market is 20 and the marginal revenue in the other market is 10. What can the monopolist do to increase profits (without increasing production)?
4) Suppose you are given the following demand curves for adults and kids for the all-you-can-eat buffet at Sizzler:
Adults: QA = 20 - PA
Kids: QK = 12 - PK
The marginal cost of a meal is constant and equal to $2. For simplicity, assume there are no other costs.
a. What is the combined demand for meals and the combined marginal revenue?
b. What are profits if the monopolist can only charge one price?
c. What is the marginal revenue in each group if the monopolist does not price discriminate?
d. What price would the monopolist charge each group if it could price discriminate? What will profits be?
5) Suppose that you own the only car dealership in town (a monopoly). New technology allows you to access information through customers’ phones and suppose that this allows you to perfectly price discriminate. The cost of obtaining a car (marginal cost) is $5000 per car and the demand for cars is given by: Q = 200 − 
a. Assuming there are no fixed costs, what are the monopolist’s profits if it just charges one price?
b. What will the monopolist’s profits if it can first-degree price discriminate? That is, extract all of the consumer surplus from consumers? Depict your answer graphically.
2023-04-20