Economics Solver

Analysis
This problem asks whether market competitiveness rose or fell after a new firm entry. We apply the Herfindahl–Hirschman Index HHI as our measure of market concentration. A rise in HHI implies higher concentration and thus less competition

Solution
Step 1 Define Herfindahl–Hirschman Index
HHI equals the sum of squared market shares

Step 2 Calculate HHI before entry
Using shares 0.3 0.2 0.2 0.2 and 0.1 we compute
$HHI_{before} = 0.3^2 + 0.2^2 + 0.2^2 + 0.2^2 + 0.1^2 = 0.09 + 0.04 + 0.04 + 0.04 + 0.01 = 0.22$

Step 3 Calculate HHI after entry
Using shares 0.5 and five times 0.1 we compute
$HHI_{after} = 0.5^2 + 5 \times 0.1^2 = 0.25 + 5 \times 0.01 = 0.25 + 0.05 = 0.30$

Step 4 Compare concentration levels
$HHI_{after} = 0.30$ exceeds $HHI_{before} = 0.22$ indicating increased market concentration and thus reduced competition

Answer
The market became less competitive with $HHI$ rising from $0.22$ to $0.30$.

Analysis
This is a macroeconomic policy‐analysis question on the euro‐area debt crisis. We will use the following frameworks and concepts:
• The Optimum Currency Area criteria and Mundell‐Fleming model under a fixed exchange rate regime (the euro).
• Key macro‐indicators: the debt‐to‐GDP ratio $\frac{Debt}{GDP}$, the fiscal deficit‐to‐GDP ratio $\frac{Deficit}{GDP}$, the current‐account balance and private‐sector debt indicators.
• Structural competitiveness measures such as unit labor costs and productivity.
Approach

• Identify EMU constraints on national fiscal and monetary policy.

• Calculate and compare key ratios for Greece and Ireland.

• Explain the origin of imbalances in each economy.

• Contrast the nature of the Greek sovereign crisis with the Irish banking crisis.

Solution
Step 1 Operation
Define the debt‐to‐GDP ratio function and note EMU policy constraints.
Calculation
$\frac{Debt}{GDP}$ measures public indebtedness. Under the Stability and Growth Pact EMU members must keep $\frac{Deficit}{GDP}$ under 3 percent and $\frac{Debt}{GDP}$ under 60 percent. Monetary policy is centralized at the European Central Bank so individual states cannot devalue their own currencies.
Reasoning
Loss of exchange‐rate flexibility amplifies real shocks when competitiveness erodes.

Step 2 Operation
Compute Greece’s key ratios around the crisis peak.
Calculation
• Sovereign debt rose to about 180 percent of GDP in the year 2010 so $\frac{Debt}{GDP} \approx 1.8$.
• Fiscal deficit reached nearly 13 percent of GDP in the year 2009 so $\frac{Deficit}{GDP} \approx 0.13$.
Reasoning
Chronic budget deficits and rising debt made markets doubt solvency.

Step 3 Operation
Compute Ireland’s pre‐ and post‐crisis ratios.
Calculation
• Before 2008 the Irish fiscal deficit was under 5 percent so $\frac{Deficit}{GDP} < 0.05$ until the banking crash.
• Private‐sector debt peaked near 280 percent of GDP in the year 2008.
• After the state guarantee of banks public debt spiked to about 115 percent of GDP in the year 2010 so $\frac{Debt}{GDP} \approx 1.15$.
Reasoning
A property and banking bubble created massive private liabilities that ultimately fell onto the sovereign balance sheet when the government intervened.

Step 4 Operation
List structural and cyclical factors for each country.
Calculation & Reasoning
Greece
• High public‐sector wages and pensions outpaced productivity gains.
• Weak tax administration led to widespread evasion.
• Loss of competitiveness in goods and labor markets.
Ireland
• Rapid credit expansion to property developers.
• Bank leverage ratios soared, creating systemic risk.
• Prior fiscal prudence limited initial sovereign exposure until the bank bailout.

Step 5 Operation
Contrast the crises using the Mundell‐Fleming insight.
Calculation & Reasoning
Under zero national monetary autonomy, both countries could not adjust via devaluation. Greece faced a pure sovereign‐funding shock aggravated by structural rigidities. Ireland faced a private banking shock that became sovereign. Both endured severe recessions but the transmission channels differed.

Answer
The present euro‐area financial crisis in Greece and Ireland arose from a common constraint – loss of exchange‐rate policy under the euro – combined with country‐specific imbalances. Greece suffered a sovereign debt crisis driven by persistent budget deficits, excessive public wages and pensions, low productivity and tax evasion, yielding $\frac{Debt}{GDP} \approx 1.8$ and $\frac{Deficit}{GDP} \approx 0.13$. Ireland experienced a banking and property bubble whose collapse imposed private losses on the state, raising its $\frac{Debt}{GDP} \approx 1.15$ by 2010 despite earlier fiscal prudence. The Greek crisis is fundamentally one of public finances and competitiveness, whereas the Irish crisis originated in the private banking sector but became sovereign when the government provided large guarantees.

Analysis
This is a horizontal‐merger problem in industrial organization. We will use the Herfindahl–Hirschman Index (HHI) to measure market concentration both before and after the merger, then apply the 2010 U.S. Horizontal Merger Guidelines thresholds to classify the merger.

Solution

• Calculate the pre‐merger HHI Operation: square each firm’s market share (in percent) and sum. $H_{\text{pre}} = 25^2 + 20^2 + 20^2 + 15^2 + 10^2 + 10^2 = 625 + 400 + 400 + 225 + 100 + 100 = 1850$

• Calculate the post‐merger HHI when D (15%) and E (10%) merge into D′ (25%) Operation: replace D and E by D′ = 25%, keep others unchanged, then sum squares. $H_{\text{post}} = 25^2 + 20^2 + 20^2 + 25^2 + 10^2 = 625 + 400 + 400 + 625 + 100 = 2150$

• Classify the merger under the 2010 Guidelines - Pre‐merger HHI = 1850 → moderately concentrated (1500–2500) - Post‐merger HHI = 2150 → still moderately concentrated - Change in HHI: $\Delta H = H_{\text{post}} - H_{\text{pre}} = 2150 - 1850 = 300$ - In a moderately concentrated market, a ΔHHI > 200 creates a presumption of likely anticompetitive effects (“black”).

Answer
The merger is classified as black under the 2010 Horizontal Merger Guidelines.