Management Engineering - Business & Industrial Economics

Full exam

BUSINESS AND INDUSTRIAL ECONOMICS [G-O] Final exam June 29 th 2021 NAME AND SURNAME ________________________________________________________________ Multiple choice questions 1) Suppose a competitive selection model (i.e. Jovanovich, 1982) where the θ parameter that estimates the value of a firm’s own productivity is in the interval [1; 10]. Total cost for each single firm is TC = (4q 2)/2θ. Which is the optimal quantity level that the least efficient firm will produce? a) (1/2)p. b) (1/4)p. BONUS c) (1/8)p. d) Data are insufficient to answer. 2) Suppose the following numbers regarding the consumers’ willingness to pay (WTP) for Sony’s Playstation4 (PS4) and Playstation5 (PS5), and consider (for the sake of simplicity) that all development costs are sunk and costs of production are zero. -Low-end users are 80 million and have (on average) WTPs for PS4 = 800$ and PS5= 1100$ -High-end users are 20 million and have (on average) WTPs for PS4 = 1200$ and PS5= 2200$. Evaluate the following statements. a) Selling the 2 products simultaneously (i.e. versioning) for a price of 800$ for PS4 and 1800$ for PS5 is the most profitable strategy. BONUS b) Selling the 2 products simultaneously (i.e. versioning) for a price of 800$ for PS4 and 1900$ for PS5 is the most profitable strategy. c) Selling the 2 products simultaneously (i.e. versioning) for a price of 800$ for PS4 and 2200$ for PS5 is the most profitable strategy. d) Selling only PS4 at a price of 800$ is the most profitable strategy. 3) Villagers graze their cows in a park. The milk production function in liters is given by the following expression: 10c – c 2 where c is the number of cows. The cost of a cow is equal to 2$, while the price of 1 liter of milk is equal to 1$. Please, assuming sequential entry, indicate how many cows will enter when the park (1) is privately owned (2) none owns it and every villager can graze cows freely. a) c = 8 in scenario (1) and c = 4 in scenario (2). b) c = 4 in scenario (1) and c = 8 in scenario (2). BONUS c) c = 6 in scenario (1) and c = 4 in scenario (2). d) None of the proposed solutions. 4) When uninformed buyers of used cars are willing to pay a price that is the average of the value of a lemon and the value of a good used car, which of the following will occur? a) Most used cars offered for sale will be lemons. BONUS b) Most used cars offered for sale will not be lemons. c) The quantity supplied of lemons will be identical to the quantity supplied of good used cars. d) Only good used cars will be offered for sale. 5) Suppose two neighbours share a park. One neighbour, Al, leaves trash in the park. This bothers the other neighbour, Bert. According to Coase’s theorem, one necessary condition to alleviate the externality is that: a) Bert has the right to a clean park and Al cannot leave trash. b) Al has the right to leave trash and Bert cannot do anything about it. c) Al is fined by the government. d) Either Al or Bert owns the park. BONUS 6) Considering Farrell and Saloner (1985)’s model, the probability that a network market will “tip” (i.e. evolve towards a winner-takes-all configuration) is greater: a) The lower is the consumer’s disutility for buying his/her least preferred brand. BONUS b) The higher is the “love for variety” of consumers. c) The lower is the consumer’s disutility for buying his/her least preferred brand and the higher is the “love for variety” of consumers. d) None of the proposed solutions. 7) Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers. If your average variable cost C=$20/unit, annualized cost of investment to build a hard drive factory I=$50 million, and market price (bailout market price in the event Dell does not buy) Pm=$23/unit, what is your company’s RSI (relationship specific investment)? a) $10 million. b) $0 million. c) $20 million. BONUS d) -$10 million. 8) Two consumers, A and B, must decide whether to switch to a new network technology or not. A plays first, and B for second. If they both decide to switch they both gain 3. If both decide not to switch, player A gains 4 and player B gains 1. If one switches to the new technology and the other doesn’t, the one who has switched afford a loss of -2, while the payoff of the other shrinks to 0. Please gauge the following statements: a) The only sub-game perfect Nash equilibrium is the one where both players switch, and there is excess momentum for player A. b) A choosing to switch and B choosing to remain with the old technology is the only sub- game perfect Nash equilibrium, and there is excess inertia for player B. c) B choosing to switch and A choosing to remain with the old technology is the only sub- game perfect Nash equilibrium, and there is excess momentum for player A. d) The only sub-game perfect Nash equilibrium is the one where both players remain with the old technology, and there is excess inertia for player B. BONUS 9) Which of the following can be both a structural and a strategic barrier to entry? a) Predatory pricing. b) Economies of scale. c) Switching costs. (BONUS) d) Economies of scope. 10) Which of the following theories of the firm is the least related to Dunning’s eclectic paradigm? a) Transaction cost theory. b) Evolutionary theory. (BONUS) c) Resource-based view. d) The eclectic paradigm has the same degree of relatedness to each of the three mentioned theories. Structured question 1) Consider a market where we have an incumbent (neutral-to-risk) monopolistic firm (Monopoly profit = 100) and a potential entrant (new firm); where both firms have the possibility to buy a patented innovation from an R&D lab. The probability perceived by the incumbent that the new firm will acquire the patent is equal to 50%. In a first scenario, the innovation is incremental (i.e. gradual) and duopoly profit for each firm is equal to 10: 1a) what the incumbent will be willing to bid at maximum? 1b) what the rival firm will be willing to bid at maximum? In a second scenario the innovation is drastic (i.e. radical): 1c) what the incumbent will be willing to bid at maximum? 1d) what the rival firm will be willing to bid at maximum? 2) Suppose now that the rival firm enters into the market, and the duopoly is symmetric (i.e. firms are equal in every aspect) where each of the firm is obtaining a profit of 10. Both firms recognize their strategic interaction, and realize that by colluding they can split equally monopoly profit (100 as before). 2a) Express the game in its normal form (i.e. as a one-shot game), and by describing what “type” of game this game is, identify the Nash Equilibrium (or equilibria). Now suppose that the game is repeated an indefinite length of time. In case of collusion, firms plan to adopt grim strategies (they collude until no one cheats, if one firm starts cheating the opponent will cheat forever). If the firms believe that the probability that the game will be played over time is 30%: 2b) is collusion possible? Why yes or no? 3) Suppose that the two firms decide to collude. Is there any difference in terms of an Antitrust Authority that wants to legally prosecute them to know if this collusion is tacit or explicit? 4) Suppose that the rival firm does not enter into the market, which therefore remains a monopoly. After some years, the public authority wants to better understand the demand curve faced by the monopolist and its costs structure, in order to consider the possibility to ex-ante regulate its price. The appointed consultancy company estimates that the inverse demand curve is equal to p = 50 – 13q and the total cost function of the firm is given by: TC =4q 2 + 8q + 16. 4a) Is this a natural monopoly? Explain why yes or no. 4b) Which is the best price from a social welfare point of view? 4c) Which is the maximum level of social welfare? Solutions: 1a) 100 – 0.5*10 – 0.5*100 = 45 1b) 10 – 0 = 10 1c) 100 – 0.5*0 – 0.5*100 = 50 1d) 100 – 0 = 100. 2) Firm B Firm A Cheat Collude Cheat 10,10 100 ,0 Collude 0,10 0 50 ,50 2a) The only Nash equilibrium is Cheat; Cheat (both players have dominant strategies), the game is a typical prisoner’s dilemma game, since the outcome Collude; Collude Pareto dominates the resulting Nash equilibrium. 2b) Throughout time, the expected payoff by cheating is c.a. 104 (=100 + 10*(0.3/0.7)). The one of colluding is c.a. 71,5 (=50/0.7). So collusion is not convenient for the two firms. 3) Explicit collusion through formal agreements is always prosecuted while tacit collusion through pure “conscious parallelism” is difficult to ascertain with certainty and will generally be unlikely to be prosecuted. In the middle of this spectrum there is a grey area of “concerted actions” that may or may not be prosecuted by Antitrust, also depending on the political support endorsing ex-post regulation for making markets more competitive. Generally, answers that reported not just the simplistic and trenchant vision of the two extremes of the aforementioned spectrum, but that instead, gave account of the nuances of the issue at stake, were particularly appreciated. 4a) Yes it is a natural monopoly since AC = 4q + 8 + (16/q) with a MES = 2. Demand curve p = 50 -13q intersects AC in correspondence of MES = 2. So this is a natural monopoly given that the property of subadditivity of the cost function is verified. 4b) The best price from a social welfare point of view is the one in correspondence of Min AC = MC and so p = 24. 4c) Maximum social welfare = Consumer surplus + Producer surplus = [(50-8)*2]/2 = 42.