1. We have seen in class that there has been a rise in concentration and market power. I have argued that the welfare effects of this change are not obvious since it might be that output is more concentrated nowadays in more efficient firms, which are also ones that have higher markups. This could explain both the rise in concentration and market power. Remarkably, the increase in market share of the lower cost firms might have resulted in overall efficiency gains. The following problem is meant to illustrate this situation. There are two markets (e.g. corresponding to two different locations), each with demand function p = 100 - Q. There are two firms, with marginal costs c1 = 0 and c2 = 60, respectively. Initially there is only one firm in each market. (a) Calculate the prices in each market. Calculate total consumer and producer surplus (across both markets). Also calculate the markup in each market and the aggregate markup across the two markets, weighted by the corresponding output shares. m = m191 + m292 91 + 92 where mi = (Pi - Ci) /pi. Also compute a Herfindahl index tak- ing into account the market shares s1 = q1/ (91 + 92) and $2 = 92/ (91 + 92) . (b) Now suppose that both firms are allowed to participate in both markets as Cournot competitors. Will both firms produce? Find the equilibrium. Calculate total consumer and producer surplus (across both markets). What happens to each? Calculate the Herfindahl index and the aggregate markup in the same way as before. (c) Has concentration increased, as measured by the average herfind- ahl index? Has market power increased as measured by the av- erage markup? What happened to total surplus? Is the change good or bad for the economy