Government and Product Markets:
Antitrust and Regulation
WORKING WITH NUMBERS AND GRAPHS
1. Calculate the Herfindahl index and the four-firm concentration ratio for the
The four-firm concentration ratio for this industry would be 60 percent and the Herfindahl index
would be 1,312.
Use the figure provided in the text to answer Questions 2-4.
2. Is the firm in the figure a natural monopoly? Explain your answer.
Yes. One firm can produce all of the output required by the market, and larger firms will always
be able to charge lower prices than small ones.
3. Will the firm in the figure earn profits if it produces Q3 and charges P3? Explain
The firm will lose money because its pricing at marginal cost and the average total cost is higher
at that point than price.
4. Which quantity in the figure is consistent with profit regulation? With price
regulation? Explain your answers.
P2 is consistent with profit regulation because P = ATC at that point. Price regulation requires P
= MC, which is P3.