1 Introduction
1.1. Competition and performance.Empirical evidence from a sample of more than 600
UK firms indicates that, controlling for the quantity
... [Show More] 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.
2.2. Village microbrew. Village microbrew raised its price from $10 to $12 a case
(wholesale). As a result, sales dropped from 10,500 to 8,100 (in units). Based on your
estimate of the demand elasticity, what percent change in sales would you predict if price
were cut from $10 to $9? What demand level would this correspond to?
Figure 2.1
Indifference curves: Adam and Barbara [Show Less]