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S4 Economics Market Structure Practice Paper 4 | Concentration Ratios, HHI and Monopoly Pricing – 10 Questions with Answers
S4 Economics Market Structure Practice Paper 4 | Concentration Ratios, HHI and Monopoly Pricing – 10 Questions with Answers
The fourth set of ten market structure questions, from the price maker and concentration ratios and HHI to monopoly pricing, comparison with perfect competition and deadweight loss.
Direct answers This paper has 10 questions covering downward-sloping demand, concentration ratios and HHI calculations, monopoly profit maximisation and deadweight loss; suggested time is 20 minutes.
01 Paper details (check answers afterwards)
| Item | Detail |
|---|---|
| Questions | 10 |
| Suggested time | 20 minutes |
| Difficulty mix | Foundation 3 · Intermediate 4 · Challenge 2 · Error redo 1 |
| Chapter | S4 Economics: Market Structure |
| Level | S4 (DSE) |
02 Questions (10 items)
- FoundationWhy does the demand curve facing a monopolist slope downward?
- FoundationWhat are the two main features of monopolistic competition?
- FoundationWhat does the concentration ratio (CR4) measure?
- IntermediateSix firms have market shares of 30%, 22%, 18%, 12%, 10% and 8%. What is the four-firm concentration ratio?
- IntermediateContinuing from the previous question, what is the Herfindahl-Hirschman Index (HHI)?
- IntermediateDemand is P = 80 – 4Q and marginal cost is constant at 16. Find the profit-maximising output and price of the monopolist.
- IntermediateContinuing from the previous question, if the market were perfectly competitive, what would output and price be?
- ChallengeContinuing from the previous question, what is the deadweight loss of monopoly compared with perfect competition?
- ChallengeContinuing from the previous question, what is the monopolist’s profit?
- Error redoWhat is wrong with the claim that a fall in HHI means the market has become more concentrated?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | It supplies the whole market, so the market demand curve is its demand curve, and it must cut price to sell more. | A monopolist is a price maker and cannot sell any quantity it likes at the going price. |
| 2 | Products are differentiated, and firms can enter and exit the market freely. | Differentiation brings a little pricing power, while free entry and exit leave only normal profit in the long run. |
| 3 | The combined market share of the four largest firms in the market. | The larger the figure, the more concentrated the market and the more share a few firms hold. |
| 4 | 82%. | Add only the four largest: 30 + 22 + 18 + 12. |
| 5 | 2,016. | 900 + 484 + 324 + 144 + 100 + 64. |
| 6 | Q = 8, P = 48. | MR = 80 – 8Q; MR = MC gives Q = 8, and substituting into demand gives P = 48. |
| 7 | Q = 16, P = 16. | Under perfect competition P = MC, so 80 – 4Q = 16 gives Q = 16. |
| 8 | 128. | Half of (48 – 16) x (16 – 8), the value of the units of trade that are lost. |
| 9 | 256. | (48 – 16) x 8, earning 32 per unit on 8 units sold. |
| 10 | HHI is the sum of squared market shares, so a larger value means greater concentration; a fall in HHI means the market is becoming more dispersed. | A pure monopoly has an HHI of 10,000, while perfect dispersion approaches 0. |
04 What to do after marking
- After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
- Repeat the same item two days later; move to the next paper only when both attempts are correct.
- Parents only need the answer and note columns; there is no need to explain every item.
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