Question

V Question answering. (20%) Explain with economic model the pricing regulation of government on natural monopoly ma firms (million $): turnover Firm A 300 Firm B 100 Firm C 600 Firm D 50 Firm E 400 Firm F 650 Firm G 350 Firm H 2000 Firm I 1500 Firm J 50 Questions: (1) CR8 (5% (2) HHI (5%) (10%) if Firm H and Firm I merger (suppose data of individual firm does not change) (3) CR8,

Answer 1

First of all arrange the firms from highest turnover to lowest turnover. Then add the turnover of all the firms and take the sum of first 8 firms. Refer the attached picture below

Cumulative Turnover Firms turnover H 2000 2000 1500 3500 650 4150 C 600 4750 400 E 5150 350 5500 300 5800 100 5900 D 50 5950 50 6000 6000 LL LL

Concentration ratio of first 8 firms can be determined as follows

20001500650600 + 400 +350+ 300100 CRs x 100 20001500 650 600400 350 300 1005050

5900 x 100 CRs 6000

CRs=0.9833 x 100

CRS=98.33

Calculation of HHI

Refer the attached picture below for HHI

Sales Squared Firms Turnover Sales% H 2000 33.33 1111.11 1500 25.00 625.00 F 650 10.83 117.36 C 600 10.00 100.00 E 400 6.67 44.44 G 350 5.83 34.03 A 300 5.00 25.00 100 1.67 2.78 50 0.83 0.69 50 0.83 0.69 6000 HHI 2061.11 LL

CR8 when H and I merge after the merger the sales of H+I = 3500 and number of firms in the industry will be 9. Note: after merger the data of individual firms does not change.

Refer the attached picture for Sales after merger

Turnover After merger Firms H 2000 3500.00 1500 F 650 650.00 C 600 600.00 400 400.00 350 350.00 A 300 300.00 100 100.00 D 50 50.00 50 50.00 6000 6000

3500650 600400 350300+10050 CRS x 100 3500650600 400350300 +100 50 50

5950 x 100 6000 CRs

CRg=99.17

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