Industrial Organization

Industrial Organization

Starbow Airlines has monopoly on the route from Accra to Takoradi. Supposed Starbow sells plane tickets at a total cost function of TC = 1200 + 0.5Q2 and a corresponding demand curve of P = 300 – 0.5Q.
i. Find Starbow’s profit maximizing output and price.
ii. Is this route profitable to Starbow?
iii. Compute the price elasticity of demand for Starbow at the profit maximizing price and quantity.
iv. What is the LERNER Index for this route? Do you think Starbow enjoys strong monopoly powers over this route?

b. The mobile telecommunication industry of Ghana comprises 6 firms. Statistics on the market share per mobile operator for the past 2 years is provided in the following table. Use it to answer the questions that follow:

OPERATOR 2011 2012
EXPRESSO 0.88% 0.69%
MILLICOM (TIGO) 18.53% 15.28%
SCANCOM (MTN) 47.99% 48.48%
GT/VODAFONE MOBILE 20.20% 21.72%
AIRTEL- MOBILE 12.40% 13.19%
GLO MOBILE – 0.64%
TOTAL 100.00% 100.00%

i. For each year, compute the 4 firm concentration ratio. Interpret your results.
ii. Compute the Herfindahl-Hirschman Index for the industry for each of the 2 years.
iii. Based on the HHIs, do you think the industry became more competitive after the introduction of GLO Mobile?

Question 2 (50 marks)
Most weeks, the demand for long-stem roses can be approximated by QD = 2400 – 50p, where QD is the total quantity demanded (in dozens) at price p (per dozen). Currently, roses are supplied by 100 identical growers, each having total costs C=0.25q2 + 0.5q + 36, where q is the number of roses (again, in dozens) supplied by the grower. The $36 cost can be avoided on a daily basis.
i. What is the short-run supply curve for each individual grower? Describe this curve both algebraically and graphically.
ii. Derive the short-run market supply schedule, which gives quantity supplied as a function of price.
iii. What is the equilibrium price for a dozen roses in this market? Sketch the market supply and market demand schedules.
iv. How many dozens of roses will be supplied by each grower?
v. Assuming there is free entry into and exit from this market. Will there be entry or exits from this market going into the long-run? Explain your answer.
vi. Suppose the long-run average cost (LAC) is 4q – 0.5q2, determine the market equilibrium price and quantity in the long-run.
vii. How many individual growers of roses will there in the long run?