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PART 2. Are existence of profits / higher rates of return a sure sign of market power and DWL inefficiency? Imagine two industries: Industry A:
PART 2. Are existence of profits / higher rates of return a sure sign of market power and DWL inefficiency? Imagine two industries: Industry A: All firms use a common technology with the cost function c(q) = 50+ 10q + 2q'. Industry B: Most firms use a common technology with the cost function c(q) = 50 + 10q + 2q?, but two firms in the industry have, for some unexplained reason, a superior technology with this cost function: c(q) = 50+ 10q+ q. The market demand is given by Q(P) = 80 -P in both industries. Your task is to compare the long run equilibrium in these industries: A. Which industry will have a higher profit/revenue ratio (which is used as a proxy for the market power index L when only industry totals for profit and revenues are available) B. In which industry do we have higher concentration as measured by HHI? C. How is the profit/revenue ratio which is a proxy for L (as defined in part a above) correlated with HHI across these two industries
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