Economics of Law and Regulation

Economics of Law and Regulation

Subject: Economics    / General Economics
Question
443: Economics of Law and Regulation
Homework 1 Lecture 1-4
Chapters 1 to 4 This is Homework #1. You need to explain your answers. Each problem has 20 points. The
answers are due Wednesday January 25 in class. If you want to submit them electronically
(via email or Canvas), you should do so before the class.
Problem 1: Concentration. A cigarette industry consists of 4 firms, each producing a
differentiated product. The demand functions are Q1 = 100?P , Q2 = 60?P , Q3 = 160?2P ,
and Q4 = 120 ? 2P . As common in the tobacco industries, the prices of the differentiated
products are the same at P = 40.
(a) What is the market share of each of the four firms?
(b) What is the 2-largest-firm concentration?
(c) What is the HHI?
(d) Come up with market shares of two industries with three firms, such that one industry
is more concentrated according the 2-largest-firm concentration, and the other industry
is more concentrated according to HHI. (For example, an industry with shares 10,10,
and 80 is more concentrated than an industry with shares 30, 30, and 40 according to
both measures, and is not an answer to the question.)
Problem 2: Cost-benefit Analysis. A project costs 5 this year, has a benefit of 1 this
year, and has a benefit of 5 next year.
(a) Assuming that the interest rate is r = 1, what is the present value (sum of the discounted benefits minus costs) of the project?
(b) For what value of interest rate r, the present value of the project will be exactly equal
to zero? 1 Problem 3: Markets and Regulation.
(a) Name 3 reasons for market failure.
(b) Name 2 reasons for government failure.
(c) Name 2 reasons in support of state regulation instead of national regulation.
(d) Name 2 reasons in support of government regulation instead of state regulation.
Problem 4: Monopolies. The total cost of producing Q units of output to a monopolist
is T C(Q) = Q2 /2. The market demand is given by Qd = 10 ? P .
(a) What are the total revenue and marginal revenue functions?
(b) What price should the monopolist set to maximize its profit? Illustrate your answer
on a graph.
Problem 5: Competitive markets, equilibriua, and surplus. The market demand is
Qd = 10 ? P , and the market supply is Qs = P . The market is perfectly competitive.
(a) What is the market equilibrium?
(b) What is the consumer, producer, and total surplus in equilibrium?
(c) In order to support producers by increasing prices, the government imposes a production quota of Q = 4 units. What will the market clearing price be? At that price,
what is the consumer, producer, and total surplus? What is the deadweight loss? 2