Final exam 12 July 2019

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BUSINESS AND INDUSTRIAL ECONOMICS Final exam July 12th 2019 SURNAME - NAME (Matricola no.)____________________________________________________________ Multiple choice questions 1) The market for light bulbs is currently dominated by the BigBulb (BB) company, which earns monopoly profits equal to 600. The Lord of Light (LoL) company is considering the possibility to enter the market. If LoL enters and BB responds aggressively (price war scenario), both firms are going to incur losses (i.e. negative profits) equal to 100. Instead, if LoL enters and BB responds in an accommodating way, both firms are going to earn profits equal to 50. Furthermore, BB has the possibility to make an ex -ante investment, before LoL decides whether to enter or not. This investment will reduce the profits of BB by 500 in all cases, apart from the price war scenario, where the profit reduction will be equal to 400 (indeed, the ex -ante investment covers all of the price war expenses). BB’s possible ex-ante investment will not affect LoL’s profits in any way. Given that both players are perfectly rational and perfectly informed, what will be the outcome of their strategic interaction? a) BB will make the ex-ante investment and Lol will not enter. Thus, BB will earn profits equal to 100. b) BB will not make the ex -ante investment, Lol will enter and BB will respond in an accommodating way, with both firms earning profits equal to 50. BONUS c) BB will not make the ex -ante investment and Lol will not enter. Thus, BB will earn profits equal to 600. d) None of the above. 2) A patent can be conceived as: a) An institutional barrier to entry. b) An ownership advantage. c) Both of the above. BONUS d) None of the above. 3) Under the assumption that the focal firm has marginal costs equal to 0, what…