Answers to Week 8 Practice Questions

Multiple Choice

1) c 
2) b
3) b
4) c
5) c
6) d
7) c
8) c
9) c
10) a
11) b

Short Answer Questions

1A) HHI = (20)^2 + [4 * (10)^2] + [8 * (5)^2]
        = 400 + 400 + 200
        = 1000 

1B) A merger between two 5% firms means there would be 1 firm at 20%, 5
firms at 10% and 6 firms at 5% now.  The new HHI would be

HHI = (20)^2 + [5 * (10)^2] + [6 * (5)^2]
    = 400 + 500 + 150
    = 1050

This means that the HHI goes up by 50 points with a HHI range of 1000-1800
for the post-merger HHI.  Since it is less than 100 change in this range,
I would not challenge the merger.

1C) The new industry after the merger has 2 firms at 20%, 2 firms at 10%
and 8 firms at 5%.  The new HHI is

HHI = [2 * (20)^2] + [2 * (10)^2] + [8 * (5)^2]
    = 800 + 200 + 200
    = 1200

Since the merger changed the HHI by 200 points, which is more than the
allowed 100, I would challenge the merger.