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# Industry environment and indifference curves

Assume that Donna buys only xavier steak ("x") or yams ("y". Donna's indifference curves, if mapped into a geometric plane, would have a slope of -2 when she has more y's than x's, but would fall at a rate of -1/2 when the opposite is true (more x's than y's). If Donna has 24 x's and 36 y's and you offered her 34 x's, how many y's would she need to remain at the same level of satisfaction? Be sure to show your work.

2) The widget industry is comprised of six firms of varying sizes. Firm 1 has 35% of the market. Firm 2 has 25%, and the remaining firms have 10% each. What is the Herfindahl- Hirschman index for the widget industry? Based on the U.S. Department of Justice merger guidelines described in the text, do you think the Justice Department would be likely to block a merger between firms 5 and 6? What factors surrounding the HHI might the department consider as it decides?

3) In the 1900s, five firms supplied amateur color film in the United States: Kodak, Fuji, Konica, Agfa, and 3M. From a technical viewpoint, there was little difference in the quality of color film produced by these firms, yet Kodakâ??s market share was 67 percent. The own price elasticity of demand for Kodak film was -2.0 and the market elasticity of demand was -1.75. Suppose that in the 1900s, the average retail price of a roll of Kodak film was \$6.95 and that Kodakâ??s marginal cost was \$3.475 per roll. Based on this information, discuss industry concentration, demand and market conditions, and the pricing behavior of Kodak in the 1990s. Do you think the industry environment is significantly different today? Explain.

#### Solution Preview

Note that every point on her indifference curve is a point where she has the same satisfaction. So, we simply need to determine the number of y's that would keep her on her indifference curve. Giving up a certain number of y's will keep her on the same curve. When Donna has more y's than x's, her MRS is -2. This means she is willing to give up 2 yams for every steak. However, with an additional 34 x's she now has more x's than y's and is only willing to give up 1/2 a y for each x. Two y's are therefore equivalent to each x after the 36th x. So taking the difference in the number of x's she gained after 36 (22) and dividing we find part of our answer (11). Taking the number of y's she gained up to 36 (t with 17 fewer y's, she remains ...

#### Solution Summary

Indifference curves, industry concentration, and Kodak's market power

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