Oligopoly markets are similar to monopoly markets in that both generally involve

Question

Oligopoly markets are similar to monopoly markets in that both generally involve: Market outcomes that result in deadweight loss Free entry and exit of firms Setting the price in the market equal to the marginal cost of production All of the above Suppose there are six licensed marijuana dispensaries in Pullman. As a group, they sell 100 units per day, every day. For the purpose of these problems, assume they all sell their products at the same price. Use the following table, showing the amount sold per day for each shop, to answer questions 2 and 3. Based on the information in the table, what is the four-firm concentration ratio in this market? 100% 64% 86% 30% Based on the information in the table, what is the Herfindahl Index (HHI) for this market? 100 2076 2224 2548

Explanation / Answer

1) Option C is correct since both markets face a falling demand curve which implies more can be sold at a lower price. Thus MR = MC gives a profit maximizing quantity.

2) Concentration ratio is one of the measures of estimating the market power possessed by the firms operating in an industry. The four firm concentration ratio is the sum of market share of top four firms

Four firm concentration ratio is the sum of market share of 14%, 18%, 20% and 34% . This implies that the four firm concentration ratio is 86 percent.

Hence option C is correct

3) For 5 firms having a market share of 2%, 12%, 14%, 18%, 20% and 34% the Herfindahl-Hirschman Index is

HHI = 22 + 122 + 142 + 182 + 202 + 342 = 2224

Hence the correct option is C.

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