1.A production function exhibits constant returns to scale if a twofold (threefold, etc.) increase in all inputs leads to a twofold (threefold, etc.) increase in output. For example, by doubling the use of capital and labor, the firm would exactly double its output.

a.What would the average and marginal cost curves look like under constant returns to scale? Explain.

b.Give an example of a production function that exhibits constant returns to scale.

c.What type of an industry might show this kind of production function and why?

2.A production function exhibits decreasing returns to scale if a twofold (threefold, etc.) increase in all inputs increases output by less than twofold (less than threefold, etc.). For example, by doubling the use of capital and labor, the firm would less than double its output.

a.What would the average and marginal cost curves look like under decreasing returns to scale? Explain.

b.Give an example of a production function that exhibits decreasing returns to scale.

c.What type of an industry might show this kind of production function and why?

3.The widget industry is comprised of six firms of varying sizes. Firm 1 has 35 percent of the market. Firm 2 has 25 percent, and the remaining firms have 10 percent each. What is the Herfindahl-Hirschman index for the widget industry? Based on the U.S. Department of Justice merger guidelines described in the text, do you think the Justice Department would be likely to block a merger between firms 5 and 6?

4.Star Computer and a small telecommunications company are considering a merger. A socially minded member of Star Computer's board of directors is against the merger, however, because she is concerned that the merger might not benefit society as a whole. Provide the board member with an argument for why it may be socially beneficial for the merger to take place.

5.As a manager of the WeDoWell Corporation, you have negotiated with several vendors and are on the verge of signing an eight-year contract with Bolts Enterprises. Under the contract, they would ship to you 2,000 titanium bolts per month at a price of $1,000 per bolt. Your assistant has just brought you an article from a trade publication that indicates another company has developed a new technology that reduces the cost of producing the titanium bolts. How would this information affect the optimal length of your contract with Bolts Enterprises? Explain.