ECON Homework for Chapter 6

| November 24, 2016

Homework for Chapter 6, Adapted End-of-chapter Questions

(10 points possible)

Dunne, Roberts, and Samuelson found that industries which have high entry rates, tend to also have high exit rates.

Can you explain this finding?(1 point)

What does this imply for pricing strategies of incumbent firms?(1 point)

.0pt;’=”” list=”” lfo1;=”” level1=”” l0=”” 0pt;=””>“All else equal, a firm would prefer blockaded entry to deterable entry.” Explain. (2 points)

7. How HEB behaves toward Walmart is a major determinant of whether it will face entry by new competitors. Explain. (2 points)

.0pt;’=”” 0pt;=””>9. Suppose HEB considers expanding the capacity of its fresh sushi making equipment at its stores at the corner of SPID & Staples and at the corner of SPID & Waldron. It can do so in one of two ways: (1) HEB can purchase fungible, general-purpose equipment that can be resold at close to its original value. Or (2) HEB can invest in highly specialized equipment which, once in place, has virtually no salvage value. Assuming that each choice results in the same production costs once installed, under which choice is the HEB likely to encounter greater likelihood of entry into fresh sushi-making by Walmart and other potential competitors, and why? (2 points)

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.0pt;’=”” 0pt;=””>14. Consider HEB selling two products, Hill Country Fare chicken fajitas and Tyson chicken fajitas, which substitute for each other. Suppose that Walmart introduces Great Value chicken fajitas, a product that seems to the typical consumer to be identical to Hill Country Fare chicken fajitas. Being careful to consider factors that may affect the following:

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.0pt;’=””>(a) Will a price war be initiated? (1 point)

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.0pt;’=””>(b) If so, which firm would be more likely to win the price war? (1 point)

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