1. a. Describe the empirical evidence showing a positive correlation between industry concentration and rate of return. Be specific as to citations.

b. What criticisms have been made of this evidence?

c. Does the above correlation imply that firms in profitable, concentrated industries are protected by long-lasting barriers to entry? Explain.

3. Briefly answer the following questions:

a. Should rate of return be calculated using the book value of assets, or the replacement cost of assets? Explain.

b. Suppose that Firm 1 and Firm 2 are similar in their cost structure, product lines, and customer bases. However, Firm 1 has a return on equity of 18%, whereas Firm 2 has a return on equity of only 10%. What could cause the difference? Explain.

c. How does economic depreciation differ from accounting depreciation? Explain.

4. Suppose that the widget industry is a duopoly and is well described by the "pure" Bertrand model. This includes the assumption that either firm can serve the entire market at marginal cost pricing. The market demand curve is given by: QD = 300 - 10P.

a. Suppose that both firms have a marginal cost equal to 3. What is the equilibrium price? Explain.

b. Now assume that Firm 1 is able to lower its marginal cost to 2, while Firm 2 still has a marginal cost equal to 3. What is the equilibrium price now? Explain.

c. Now assume that both firms have marginal costs of 3. Suppose that each has a binding capacity constraint of 135 units. What is the market equilibrium price? Explain.

d. Assume that Firm 1 has a marginal cost of 2 and a capacity constraint of 50 units of output. Firm 2 has a marginal cost of 3, but has unlimited capacity. What is the equilibrium price (or prices)? Explain