Introduction to Industrial Organization, 2nd Ed Solutions to End-of-Chapter Exercises

Introduction to Industrial Organization, 2nd Ed Solutions to End-of-Chapter Exercises Lu´ıs Cabral This draft: March 2017 Please address questions or corrections to 1 Introduction 1.1. Competition and performance.Empirical evidence from a sample of more than 600 UK firms indicates that, controlling for the quantity of inputs (that is, taking into account the quantity of inputs), firm output is increasing in the number of competitors and decreasing in market share and industry concentration.1 How do these results relate to the ideas presented in this chapter? Answer: In Section 1.2, I argued that one of the implications of market power is the decline of productive efficiency. Controlling for input levels, the level of output is a measure of productive efficiency. The number of competitors and the degree of concentration are measures of the degree of competition (concentration is an inverse indicator). The empirical evidence from UK firms is therefore consistent with the view presented in the text. 2 Consumers 2.1. Fruit salad. Adam and Barbara are big fruit salad fans (and both agree that the more the better). However, their tastes differ regarding the way the salad is made. For Adam, for each apple you throw in, there should be one and only one banana (if you give him more than one banana, he will throw it way). For Barbara, as long at it’s fruit, it doesn’t matter; in other words, all that counts is the number of pieces of fruit. (a) Show what Adam’s and Barbara’s indifference curves look like. Answer: Figure 2.1 depicts Adam’s and Barbara’s indifference curves (left and right panels, respectively). (b) Are apples and bananas substitutes or complements? Answer: For Adam, apples and bananas are perfect complements; for Barbara, perfect substitutes.