Management Engineering - Business & Industrial Economics

Multiple choice test

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. BUSINESS AND INDUSTRIAL ECONOMICS [M-Z] Final exam July 12th 2019 SURNAME - NAME (Matricola no.)____________________________________________________________ Multiple choice questions 1) A worker can produce x units of output (i.e. y = x, price of the output = 1) at a cost of c(x) = x 2/2. He can achieve a utility level of ū = 0 working elsewhere. In case of full information scenario for the principal, what is the optimal wage-labor incentive scheme s(x) for this worker, where this s(x) has to be equal to a lump sum (K) plus a variable one (wx)? Short calculations: omissis a) K = 2; w = 1. b) K = -1/2; w = 1. BONUS c) K = 1/2; w = 2. d) K = 1; w = 1/2. 2) 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. Game: omissis 3) 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. 4) Under the assumption that the focal firm has marginal costs equal to 0, what happens to the main intuition behind Baumol’s model of sales maximization? a) It is no longer meaningful, as profit maximization collapses into revenue maximization. BONUS b) It is weakened but it still holds, as managers are still incentivized to maximize sales to increase their prestige. c) Nothing happens, as Baumol’s main intuition is completely unrelated to the cost side. d) It is even stronger than before, because the absence of marginal cost increases managerial discretion. 5) Suppose there are 2 roommates . Each one has a wealth of 500 €. Suppose they have to decide whether to buy or not a TV. Each person values the TV at 100 €. Suppose that there is no way for one of the roommates to exclude the other one from watching. Suppose that the cost of the TV is 150€. Suppose that each roommate decides independently whether or not to buy the TV, and the two roommates cannot communicate. Which is the most likely outcome in this scenario? a) The TV will be bought since the sum of their willingness to pay exceeds the cost of the TV. b) The TV will not be bought due to an asymmetric information problem. c) The TV will not be bought due to a free-riding problem. BONUS d) One of the roommates will buy the TV and his/her utility will be lower than the one of the other roommate. 6) Which of the following scenarios is least likely to lead to an interpretative divergence between the concentration ratio C3 and the herfindhal index? a) A perfectly symmetric duopoly. b) An industry where the cumulated market share of the three biggest firms is 90%, and the remaining 10% is split equally among the next 100 firms. c) An industry with a total of six firms equal in size. d) Perfect competition. BONUS 7) Consider a second-hand market for bikes. There are high-quality bikes, which buyers value at most 800 euros, and low-quality bikes, which buyers value at most 400 euros. High-quality sellers accept at minimum 700 euros, while low-quality sellers accept at minimum 300 euros. Assume that buyers cannot observe quality before purchasing. We can conclude that both kinds of bikes are traded on the market if the fraction q of high-quality bikes is: a) q ≥ 3/4. BONUS b) q ≥ 1/4. c) q ≥ 1/2. d) None of the above. 8) A coal-fired power plant jointly produces electricity and air pollution. Air pollution adversely affects a nearby farm. Assume: p e = 24 the price of electricity, p f = 20 the price of the agricultural product of the farm (both firms are price-taker), c e(e,x) = e 2 + (x - 8) 2 the cost for the coal-power plant of producing electricity e jointly with x units of pollution, and c f(f,x) = f 2 + fx the cost for the farm of producing f units of agricultural products, when the coal-fired plant emits x units of pollution. If the two firms merge to internalize the negative externality, then: a) e* = 12, f* = 12/5, x* = 76/5. b) e* = 12, f* = 4, x* = 8. c) e* = 12, f* = 8, x* = 4. BONUS d) None of the above. 9) Perfect price discrimination (i.e. 1° price discrimination): a) Maximizes social welfare even if the output produced and sold is not the same as the one produced and sold under perfect competition. b) Maximizes social welfare and the output produced and sold is the same as the one produced and sold under perfect competition. BONUS c) Maximizes consumer and producer surplus and therefore maximizes social welfare. d) Maximizes producer surplus but doesn’t maximize social welfare. 10) The competitive selection model (Jovanovich, 1982, Econometrica) establishes that for a given firm: a) Output and profits are an increasing function of its θ. BONUS b) Output is an increasing function of its θ and profits are a decreasing function of its θ. c) Profits are an increasing function of its θ and output is a decreasing function of its θ. d) Output and profits are a decreasing function of its θ. 11) A firm is subjected to the following total cost function TC = q 2 + 8q + 9. Is this a natural monopoly? a) Yes, since the minimum efficient scale is equal to 3, which is one third of fixed costs. b) No, since the underlying AC curve is U-shaped. c) No, since this is not an affine cost function. d) It depends. BONUS 12) Suppose that demand in a market is given by: P = 80 – Q and all firms have constant marginal cost of MC = $40. Market is perfectly competitive. Let one firm have innovation that lowers cost to MC = $20. Evaluate the following statements: a) The innovation can be considered a drastic innovation. b) The innovation cannot be considered a drastic innovation. BONUS c) The innovation can be considered a drastic innovation but should be banned by Antitrust authority. d) None of the above. 13) Imagine two firms operating in the same market repeatedly for an indefinite amount of time. Both adopt a “grim” strategy (i.e. they collude until no one cheats, if one firm starts cheating the opponent will always cheat forever). If p is the probability of repetition of the game, the p that ensures collusion in the following game is: Firm B Firm A Cheat Collude Cheat 3,3 8,2 Collude 2,8 5,5 a) p > 1/5. b) p > 2/5. c) p > 3/5. BONUS d) p > 4/5. 14) Considering innovation policy, and looking at the establishment of public startup contests and competitions (i.e. selective subsidies, grants) in order to sustain entrepreneurship in high-tech and knowledge intensive sectors, it is, in your view important to: a) keep high participation costs so that only the most motivated entrepreneurs will participate to the contest. b) keep low participation costs and appoint a committee of non-experts in charge of deciding the winner(s). c) keep high participation costs and appoint a committee of experts, so that the contest is truly selective. d) keep low participation costs and appoint committees of experts, so that there can be a strong but fair competition among a large number of applicants. BONUS 15) Suppose you manufacture 5 million hard drives per year specifically for Dell laptop computers. Suppose your average variable cost C=$10/unit, annualized cost of investment to build a hard drive factory I=$40 million (I is an unavoidable cost, you have to make your payment even if you do not do business with Dell), and the market price (bailout market price in the event Dell does not buy) P m=$15/unit. If Dell agrees to purchase the 5 million hard drives at a price P *=$25/unit and the deal subsequently falls apart, what is your company’s “quasi-rent”? a) $10 million. b) $50 million. BONUS c) $30 million. d) -$10 million. Structured question (Write in a readable way) With reference to network economics: a) Following Rohlfs (1974, Bell Journal of Economics), formally derive the aggregate demand curve for a network good and draw it. b) Define the concept of critical mass in network economics and identify the critical mass on the aggregate demand curve for a network good. c) Suppose two consumers have to decide at the same time whether or not to migrate towards a new technology exhibiting network externalities. By finding the Nash equilibrium (or equilibria) of the following game and defining what excess momentum or excess inertia mean, please tell what should happen for the arising of one of the two: Consumer 2 Consumer 1 New Old New 3,3 1, 2 Old 2,1 4,4 d) Starting from the above reported game and related payoffs, now suppose Consumer 1 plays first and then Consumer 2 plays after. Suppose also that Consumer 1 suffers from a penalty of -3 in staying with the old technology. By representing the game in its extensive form, please find the sub-game perfect Nash equilibrium (or equilibria), and evaluate this outcome (or these outcomes) in terms of social welfare. a) See Lecture 17 Network economics 2: Slides 14 -17. b) See Lecture 17 Network economics 2: Slides 11 and 16. c) The adoption game has 2 Nash equilibria (New; New) and (Old; Old). In this case, we could have excess momentum, when (New; New) is the equilibrium that arises in the economy, while this is Pareto dominated by the other (Old; Old). See Lecture 18 & 19 Network economics 3_4: Slide 22. d) (New; New) is the only subgame perfect Nash Equilibrium. It does not Pareto dominates (Old; Old) so it is not possible to draw neat conclusions in terms of social welfare. But we can say either that: a) Consumer 2-type experiences excess momentum b) overall, this excess momentum is inferior to the advantage that consumer 1- type has to move forward towards the new technology (i.e., (4 + 1) < (3 + 3)). See Lecture 18 & 19 Network economics 3_4: Slides 23 and 24. BUSINESS AND INDUSTRIAL ECONOMICS [M-Z] Final exam September 12th 2019 SURNAME - NAME (Matricola no.)____________________________________________________________ Multiple choice questions 1) In industry Farplane, characterized by the following demand function: Q = 600 - 40P, a duopolistic competition is taking place according to the Cournot paradigm. Firm A is characterized by the following total cost function: C = q. On the other hand, firm B has the same cost function as firm A, except for the fact it has double marginal costs. Then, in equilibrium, the herfindahl index is: a) Greater than 0.6. b) Roughly equal to 0.5. BONUS c) Lower than 0.4. d) Exactly equal to 0.57 (rounded to the second decimal digit). 2) Which of the following situations encompass an externality? a) Elisabeth lives in an apartment above a restaurant, and her apartment always smells like burgers and fries. She has tried unsuccessfully to get the restaurant owner to remedy the problem. b) Mary graduated from college with a very good mark, she is looking forward to put this achievement in her CV as she thinks that this will be very helpful for finding a good job. c) Three friends of Mary have installed WhatsApp on their smartphones. Now Mary can communicate with each of them in a quick and inexpensive way. d) Both a and c are correct. BONUS 3) Imagine that labour market is perfectly competitive and workers can signal their ability through education. Firms pay workers their expected productivity (i.e., w = a), conditional on their education level, e. Specifically, the expected productivity of high-ability workers is a H = 300 and their cost of education (per unit of education) is c H = 5, while the expected productivity of low-ability workers is a L=100 and their cost of education (per unit of education) is c L= 5. Find the interval level of education of e H that allows high-ability workers to credibly signal their ability on the labour market. a) 20 P: Aggressive->(D:130; P:200) Not enter --> (D:200; P:600) Accommodating->(D:230; P:300) 3) The two analyses are not consistent for a very simple reason: Porter’s three tests are conservative tests. They are meant to be used conjointly to mitigate the risk of incurring unfruitful diversifications. Such a risk is very high because, in the real world, diversification decisions are plagued by strong information asymmetries and misaligned incentives. Conversely, in this case we have perfect information, which allows us to get to the optimal decision with no risk involved. 4) The structure of the game is as follows: P: Commit -------------------------------> D: Enter----------------------------------------> P: Aggressive->(D:130; P:200) Not commit->(D:230; P:300) Not enter->(D:200; P:600-C) Accommodating->(D:230; P:300-C) For the ex-ante investment to make sense, 300-C must be < 200, so that Aggressive becomes preferable to Accommodating. At the same time, 600-C must be > 300, in order for Commit to be preferable to Not commit. Rearranging, 100 < C < 300. Pay-off maximization entails that C must be as little as possible, so the optimal strategy is C = 101. BUSINESS AND INDUSTRIAL ECONOMICS [G-O] Final exam June 26 th 2020 NAME AND SURNAME (personal code) ________________________________________________________________ Multiple choice questions 1) The concept of heuristic is most relevant for: a) The resource-based view. b) The neoclassical view. c) The evolutionary view. BONUS d) The property rights theory. 2) The monopolistic firm Bluepill has serious agency problems: managers act totally in their own interest, according to Baumol’s assumptions. The demand function the firm faces is: q = 150 – 10p. The cost function of Bluepill is: TC = 200 + q. What is the cost of the agency problem for this firm? a) 2 b) 2.5 BONUS c) 3 d) 3.5 3) Margareth Inc. is a monopolist and sells a very popular mp3 player. It currently sells one million units for a price of $100 each. Marginal cost is estimated to be constant at $40. Its demand elasticity (at the current price level) is approximately -2. In your view: a) the price of the mp3 player is too high. BONUS b) the price of the mp3 player is the optimal one. c) the price of the mp3 player is too low. d) It is impossible to infer the optimal pricing policy from such data. 4) A firm is selling 3 products: Words (W), Spreadsheet (S) and Games (G) to 3 type of consumers: A, B and C. Consumer A prefers much more W than S, while B prefers much more S than W, but the sum of their willingness to pay for the two products is equal. C does not like at all neither W nor S. But all three consumers like a lot and in the same way G, and they like it much more than W and S, respectively. On the basis of these elements, and only considering pure-bundling, which policy the firm is likely to adopt: a) Bundling W, S and G altogether. b) Bundling W and G but not S. c) Bundling W and S but not G. BONUS d) Bundling S and G but not W. 5) Which of the following is not a characteristic of the ‘emissions trading’ (i.e. tradeable permits) policy instrument? a) It involves a mechanism whereby the permits available are initially distributed to producers who are potential emitters of a given pollutant. b) The price mechanism for tradeable emissions permits helps to allocate the restricted supply of permits to those who most value them. c) All producers are required to be equally efficient in reducing emissions of the pollutant. BONUS d) The right to pollute can be transferred between different parties at a price determined by the market in tradeable emissions permits. 6) An employer faces 2 types of employees. Regular workers are 70% of the labour force and generate 100,000€ in productivity. Exceptional workers are 30% of the labour force, and generate 120,000€ in productivity. Employees know their types, and reject salaries below their productivity. If the employer offers a salary equal to the expected productivity in the labour force, what will be the employer’s per-employee profit? a) -10,000€. b) -6,000€. BONUS c) 0€. d) 4,000€. 7) Firm A faces an R&D cost of 1 Million € to introduce an innovation and originate a new market, which is very profitable as long as firm A remains the only producer. But there is a second firm B which may embark into an expenditure of 100,000 € to perfectly imitate the innovation and to compete with firm A. Given the absence of capacity constraints, both firms know that the competition will immediately trigger a price war and will instantaneously result into a Bertrand(-Nash) equilibrium. In this scenario, considering what would be the only (sub-game perfect) Nash equilibrium in the dynamic game above sketched, evaluate the following statements: a) Firm B will decide to enter into this market. b) Patent is absolutely necessary to protect the innovation of firm A. c) Patent is absolutely not necessary to protect the innovation of firm A. BONUS d) Firm A will not introduce the innovation. 8) Suppose firm A signs a contract with Audi to produce 2,500,000 cup holders per year. Audi agrees to purchase the 2,500,000 cup holders at a price P A=$20 per unit. Suppose that the average variable cost of cup holders is C=$5 per unit, while the yearly cost of the investment I needed to build a factory that produces the cup holders is 10,000,000. Note that I is a sunk cost, firm A must bear it also in the case in which Audi reneges the contract. If Audi reneges, firm A still has the option to sell its cup holders to the jobbers at the price P J=$20 per unit. Given this situation, which are the Rent and the Quasi-rent? a) Rent: $ 27,500,000; Quasi-rent: $ 0. BONUS b) Rent: $ 27,500,000; Quasi-rent: $ 37,500,000. c) Rent: $ 37,500,000; Quasi-rent: $ 27,500,000. d) Rent: $ 0; Quasi-rent: $ 27,500,000. 9) The inverse demand function for a given service is given by p = 8 – 2*Q. In the market there are several firms which deliver this service. The total cost function of the representative firm i is given by the following expression: TC(q i) = 4 + q i2. Gauge the following statements: a) The market is not a natural monopoly since the demand curve intersects the AC curve in correspondence of the MES (i.e. minimum efficient scale). b) The market is a natural monopoly since the demand curve intersects the AC curve in correspondence of the MES (i.e. minimum efficient scale). BONUS c) The market is a natural monopoly since the demand curve intersects the AC curve, when this latter is decreasing (i.e. before the MES, minimum efficient scale). d) The market is not a natural monopoly since the demand curve intersects the AC curve, when this latter is increasing (i.e. after the MES, minimum efficient scale). 10) As to regulation of tariff dynamics in practice and implications in terms of efficiency: a) Cost plus, price cap and yardstick competition have similar implications in terms of efficiency, whether it is productive, allocative and dynamic. b) Cost plus and price cap have similar implications in terms of efficiency, whether it is productive, allocative and dynamic. c) Yardstick and cost plus have similar implications in terms of efficiency, whether it is productive, allocative and dynamic. d) Yardstick and price cap have similar implications in terms of efficiency, whether it is productive, allocative and dynamic. BONUS Structured question Soft International Video (SVI) is a world-player software house which is about to develop an information system for domotics (i.e. “digital home”). Specifically, it is projecting a rather sophisticated software for the complete home automation: allowing residential users to manage remotely home appliances (e.g. ovens, washing machines, dish washers). The firm is starting to have contacts with some home-appliances producers in order to make them designing appliances able to communicate with the new software. (1) What type of market is this? The main competitor DomoTechInt (DT) is also considering to enter into the same business. The situation can be summarized as follows. SVI and DT must simultaneously decide whether to invest a high or a low budget into the promotion of these “digital home” services. If they both choose a low effort then payoffs are (4, 3) for SVI and DT, respectively. If SVI chooses a low level and DT a high level, then payoffs are (2,4); if by contrast, the SVI chooses a high level and DT a low one, then payoffs are (3,2). Finally if both firms choose a high level, then payoffs are (1,1). (2a) Which factors in this type of market could cause the (expected) payoffs from the couple of strategies (high budget – high budget) to be the lowest possible? (2b) What is (are) the Nash equilibrium (equilibria) of the game? (Explain even in words how you identify it/them). Suppose now a first scenario where SVI has the option of committing to a strategy ahead of its rival (i.e. SVI moves first). (3a) What is (are) the (sub-game perfect) Nash equilibrium (equilibria) in this case? (Explain even in words how you identify it/them). (3b) Can you quantify the gain for SVI of being first mover? Suppose then that SVI is able to completely beat DT by setting a very low price for its software. (4) Can this pricing policy be considered predatory? 1) It is a network market exhibiting indirect network externalities: the more users of the software the more the incentives for producers of home appliances to produce smart products adopting that software (and this leads to a greater offer of complementary products); but the more domestic appliances adopt the Information System by SVI the more the incentive for consumers to buy that particular software for home automation because they have a greater offer of home appliances from which to choose. Thus, in a typical “hardware-software” paradigm, the software can be seen as “hardware” and home appliances as “software”. The market could also be seen as a two-sided market, where one side is represented by home appliances producers, the other side are consumers, and the software is a platform connecting the 2 sides. 2a) A standard war, where the 2 firms are competing for establishing their (incompatible) software in the market. This standard war whose outcome is difficult to predict may create “inertia” on consumers (they want to see how things unfold and who will be the winning standard) and on home appliances producers (they want to see who will be the winning standard, so to design their product for the winner). This inertia may easily lead to an unresolved chicken- egg paradox equilibrium that prevent the good to take off (i.e. to reach the critical mass and start the bandwagon effect), leading to a small payoff for the 2 firms. 2b) It is a dominant strategy for SVI to choose Low. Given that SVI chooses Low, DT's best response is to choose High. (Low, High) is thus the only Nash equilibrium of the simultaneous game (for a payoff of (2;4)). 3a) The most natural way to model this situation is by writing an extensive form game and solving the game by backward induction. DT's optimal strategy is to choose High if SVI choses L and to choose Low if SVI chooses High. Anticipating that strategy, the SVI optimal strategy is to choose High. The equilibrium is therefore (High ,Low). 3b) In the simultaneous move game, SVI and DT choose (Low, High), respectively, which gives SVI a payoff of 2. In the sequential move game (with SVI moving first), SVI and DT choose (High, Low), respectively, which gives the SVI a payoff of 3. It follows that the gain stemming from a first move of SVI is 3 – 2 = 1. 4) It is very unlikely, for several reasons. First of all, a predatory pricing is an abuse of a dominant position in a market, which requires that the firms has a dominant position in the market under consideration, since this is a nascent (or yet- to-be-born) market, this does not seem to be the case. Secondly, a low price is not indicative of anything. It should be lower than marginal costs (Areeda-Turner principle), and in the specific setting here analysed (software), marginal costs can be deemed low, so even a (very) low price could in principle be above costs, and so totally fair. Third, even in case it was not (price below costs) in network innovation markets this a typical strategy to lower the critical mass of reference and ease its achievement, so again it seems unlikely that antitrust could pursue that behaviour because it is essential to have a market in the first place (i.e. reach the critical mass and trigger the bandwagon effect). BUSINESS AND INDUSTRIAL ECONOMICS [G-O] Final exam September 9th 2020 SURNAME - NAME (Matricola no.)____________________________________________________________ Multiple choice questions 1) Considering the Edgeworth Box, the first theorem of welfare economics states that: a) a competitive equilibrium maximizes the supply of goods. b) a competitive equilibrium is Pareto efficient. BONUS c) a competitive equilibrium may be Pareto efficient if the endowment is appropriately allocated. d) a competitive equilibrium maximizes profits. 2) A team of applied economists at the Politecnico di Milano is conducting a policy-evaluation exercise which aims at gauging the effects of a one-year R&D policy intervention on the Italian economic system implemented in the year 2018. The policy program channeled in that year into the production system c.a. 200 Million Euro for supporting innovative activities of the Italian firms. After a rigorous econometric analysis the team observes that the value of R&D activities performed in the Italian production system has increased by c.a. 250 Million Euro in 2018, and that all this increase has remained intact when the policy expired. On the basis of this finding, which of the following statements is correct: a) The policy intervention has crowded-in private R&D expenditure. b) The policy intervention has been able to generate Behavioral Additionality in R&D expenditure. BONUS c) The policy intervention has partially crowded-out private R&D expenditure. d) The policy intervention has fully crowded-in private R&D expenditure. 3) Double monopoly markup (respect to a vertically integrated monopoly) makes: a) Firms worse off and consumers better off. b) Firms better off and consumers worse off. c) Both firms and consumers worse off. BONUS d) All the three other options are incorrect. 4) The competitive selection model (Jovanovich, 1982, Econometrica) aims at reconciling the concept of competition with which of the following stylized facts: a) Firms operating in the same market have different profit rates even in the long-run. b) The simultaneous entry and exit of firms in the same market at the same time. c) Firms of different sizes co-exist operating in the same market. d) All the three other stylized facts reported are indeed correct. BONUS 5) The Solow Residual refers to the: a) obsolete products left in a market due to accelerated product life cycles. b) less developed nations of the world being left behind due to their obsolete technology. c) increased amount of output achievable from a given quantity of labour and capital due to technological innovation. BONUS d) process of dumping goods in developing and underdeveloped countries at a price lower than the home-market price. 6) A risk-averse manager is hired to run a firm for shareholders. If the manager’s effort can be observed and specified in a contract, which would be the best employment contract? a) a high-powered incentive contract to elicit the most effort. b) a fixed salary paid as long as the required effort is undertaken. BONUS c) a proportion of profits paid as long as the required effort is undertaken. d) a wage well in excess of his or her outside opportunity. 7) A steel mill jointly produces steel and pollution. Nearby there is also a fishery firm. Both firms are price takers (P steel = 10 and P fish = 8). The cost function for the steel mill is S 2 + (x - 4) 2, where S is the quantity of steel produced and x are the units of pollution. The cost function for the fishery is 2f 2+ fx, where f is the quantity of fish produced and x are the units of pollution. a) When the two firms are separate, the steel mill will produce S = 5 and the fishery f = 1. The negative effect of pollution (x = 4) can be internalized by merging the two firms, with the result that the steel mill will produce S = 5, the fishery will produce f = 8/7 and the pollution is totally eliminated (x = 0). b) When the two firms are separate, the steel mill will produce S = 5 and the fishery f = 1. The negative effect of pollution (x = 4) can be internalized by merging the two firms, with the result that the steel mill will produce S = 5, the fishery will produce f = 8/7 and the pollution will be reduced (x < 4). BONUS c) When the two firms are separate, the steel mill will produce S = 5 and the fishery f = 1. The negative effect of pollution (x = 2) can be internalized by merging the two firms, with the result that the steel mill will produce S = 5, the fishery will produce f = 8/7 and the pollution will be reduced (x < 2). d) When the two firms are separate, the steel mill will produce S = 6 and the fishery f = 1. The negative effect of pollution (x = 4) can be internalized by merging the two firms, with the result that the steel mill will produce S = 5, the fishery will continue to produce f = 1 and the pollution will be reduced (x < 4). 8) Two consumers have to decide whether or not to migrate towards a new technology exhibiting network externalities. In a first scenario, their decision is simultaneous (i.e. they decide at the same time). By migrating towards the new technology, they both gain 3. When they stay with the old technology they both gain 4. When they mismatch, the purchaser of the new technology gains 1, while the other staying with the old technology gains 2. In a second scenario, there is a consumer who moves first. Gauge the following statements: a) in the first scenario, there are two Nash equilibria and a potential excess momentum problem; in the second scenario, there is only one (subgame perfect) Nash equilibrium and this is Pareto efficient. BONUS b) in the first scenario, there are two Nash equilibria and a potential excess inertia problem; in the second scenario, there is only one (subgame perfect) Nash equilibrium and this is Pareto efficient. c) in the first scenario, there is one Nash equilibrium and a potential excess momentum problem; in the second scenario, there is only one (subgame perfect) Nash equilibrium and this is Pareto efficient. d) in the first scenario, there are two Nash equilibria and a potential excess momentum problem; in the second scenario, there is only one (subgame perfect) Nash equilibrium and this is not Pareto efficient. 9) Consider a Bain, Sylos Labini and Modigliani model. The inverse demand function in the market is P = 500 – 3Q. The incumbent and the potential new entrant have the same cost structure, summarized by the following function: C = 5000 + 10Q. Both players are perfectly informed. If the incumbent produces 150 units: a) It does not manage to deter the new entrant. b) It is irrational. BONUS c) It is irrational only under the assumption that deterring the new entrant is irrelevant. d) None of the other options are correct. 10) Firm A and firm B compete in the same market and are characterized by the same types of resources and capabilities: cash, design and brand. However, firm B is superior in each of these resources and capabilities. Namely, it has more cash, better design capabilities and a stronger brand than firm A. Then, the “resource-based view of the firm” affirms with certainty that: a) firm B is competitively superior to firm A. b) firm B has a sustainable competitive advantage. c) firm B will drive firm A out of the market. d) None of the other options can be stated for certain, given the information provided. BONUS Structured question 1) Consider a market where we have an incumbent monopolistic firm (Monopoly profit = 50) 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 20%. In a first scenario, the innovation is incremental (i.e. gradual) and duopoly profit for each firm is equal to 20: 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 20. Both firms recognize their strategic interaction, and realize that by colluding they can split equally monopoly profit (50 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 90%: 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 demand curve is equal to p = 45 – 10q and the total cost function of the firm is given by: TC = q 2 + 9q + 9. 4a) Is this a natural monopoly? Explain why yes or no. 4b) Which is the best price from a social welfare point of view? Solutions: 1a) 50 – 0.2*20 – 0.8*50 = 6 1b) 20 – 0 = 20 1c) 50 – 0.2*0 – 0.8*50 = 10 1d) 50 – 0 = 50. 2) Firm B Firm A Cheat Collude Cheat 20,20 50,0 Collude 0,50 25,25 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 230 (=50 + 20*(0.9/0.1)). The one of colluding is 250 (=25/0.1). So collusion is possible and convenient for the two firms. 3) Explicit collusion is always prosecuted (formal agreements) while tacit collusion through “conscious parallelism” is difficult to detect and will generally not prosecuted. In the middle of this spectrum there is a grey area of “concerted actions” that may or may not be considered illegal by Antitrust. 4a) Yes it is a natural monopoly since AC = q + 9 + (9/q) with a MES = 3. Demand curve p = 45 - 10q intersects AC in correspondence of MES = 3. 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 = 15. BUSINESS AND INDUSTRIAL ECONOMICS [G-O] Final exam January 15 th 2021 NAME AND SURNAME (personal code) ________________________________________________________________ Multiple choice questions 1) A monopolist is facing the potential entry of a new start-up in the same product market. If the new firm enters, the market will become a symmetric duopoly (let’s say in a Cournot style). Please gauge the following statements: a) The monopolist has an incentive to acquire the new entrant and to make an offer to the entrant that this latter will not find convenient to accept. b) The monopolist has an incentive to acquire the new entrant and to make an offer to the entrant that this latter will find convenient to accept. BONUS c) The monopolist has no incentive to acquire the new entrant and the entrant would have not found convenient to be acquired in any case. d) The monopolist has no incentive to acquire the new entrant and the entrant would have found convenient to be acquired for a fair offer. 2) Josephine Inc. is a monopolist and sells a very popular smartwatch for fitness. It currently sells one million units for a price of $100 each. Marginal cost is estimated to be constant at $60. The firm faces an exponential demand curve with constant demand elasticity. Needless to say, the firm wants to maximize profits. On the basis of this aim, in your view:: a) the price of the smartwatch is too high. b) the price of the smartwatch is the optimal one. c) the price of the smartwatch player is too low. d) It is impossible to infer the optimal pricing policy from such data. BONUS 3) If a monopolist is able to perfectly price discriminate, then: a) The marginal revenue curve coincides with the demand curve. b) There is no deadweight loss. c) There is no consumer surplus. d) All the other three options are correct. BONUS 4) All scientists who work in the lab of a pharmaceuticals company tend to use the working hours and lab’s facilities to pursue their own personal scientific interests rather than the objectives of company’s projects. However the R&D manager can’t demonstrate that the slow progress of lab’s research projects is caused by the lack of scientists’ efforts given that projects are highly uncertain. Please gauge the following statements: a) this is a case of adverse selection. The company should commit to pay large royalties on the patents obtained from projects to the scientists. b) this is a case of moral hazard. The company should commit to pay large royalties on the patents obtained from projects to the scientists. BONUS c) this is a case of moral hazard. The company should be very selective when hiring the scientists, for example recruiting those who have a PhD degree from top universities. d) this is a case of adverse selection. The company should be very selective when hiring the scientists, for example recruiting those who have a PhD degree from top universities. 5) The inverse demand function for a given service is given by p = 8 – 4*Q. There are several firms which could in principle deliver this service. The total cost function of the representative firm i is given by the following expression: TC(q i) = 4 + q i2. Gauge the following statements: a) the market is not a natural monopoly since the demand curve intersects the AC curve in correspondence of the MES (i.e. minimum efficient scale). b) the market is a natural monopoly since the demand curve intersects the AC curve in correspondence of the MES (i.e. minimum efficient scale). c) the market is a natural monopoly since the demand curve intersects the AC curve, when this latter is decreasing (i.e. before the MES, minimum efficient scale). d) the market should not exist from a social welfare point of view. BONUS 6) If a production process generates pollution, then a competitive market will: a) produce zero output. b) produce more of the good than is socially optimal. BONUS c) produce the socially optimal quantity of that good. d) produce less of the good than is socially optimal. 7) Please read the following Schumpeter’s excerpt from his masterpiece “Capitalism, Socialism and Democracy”: “[….]More precisely, our question may be formulated as follows: given a socialist system […], is it possible to derive, from its data and from the rules of rational behavior, uniquely determined decisions as to what and how to produce by the central board or ministry of production? The answer is in the affirmative. There is nothing wrong with the pure logic of socialism.” What the Austrian School (e.g. von Hayek) would object about this statement: a) necessary data are too dispersed for socialism to work properly, and competitive prices emerging from markets are effective “information vehicles” (i.e. conveyers) to signal scarcity in the economic system. BONUS b) necessary data are too concentrated for socialism to work properly, and competitive prices emerging from markets are effective “information vehicles” (i.e. conveyers) to signal scarcity in the economic system. c) necessary data are too concentrated for socialism to work properly, and non-competitive prices emerging from markets are effective “information vehicles” (i.e. conveyers) to signal scarcity in the economic system. d) necessary data are too dispersed for socialism to work properly, and non-competitive prices emerging from markets are effective “information vehicles” (i.e. conveyers) to signal scarcity in the economic system. 8) You are organizing an exclusive fashion event, which is subject (to some extent) to a snob effect (i.e. negative network externalities). Basically the number of actual participants to the fashion event will be given by the following equation: A = 100 - Ae - p, where A is the number of actual participants, Ae is the number of expected participants and p is the entry ticket price. Suppose everybody is able to understand the aforementioned equation governing the affluence of participants to the party and that moreover the perfect foresight hypothesis applies. If the cost per participant to the exclusive event for you is equal to 0$, and you bear a fixed cost for organizing the event of 500$ overall, which is the price that you should fix in order to maximize profits? How many participants the exclusive fashion event will have? a) p = 50; A = 50. b) p = 25; A = 50. c) p = 50; A = 25. BONUS d) p = 25; A = 25. 9) Which of the following problems can be mitigated through profit-contingent compensation? a) the imperfect alignment between managers and owners’ goals. BONUS b) owners’ risk aversion. c) managers’ excessive focus on profits. d) ownership concentration. 10) In perfect competition: a) the concentration curve is flat with a sudden spike at the end. b) the Herfindahl index is minimum, while the Entropy index is maximum. BONUS c) the Entropy index is minimum, while the Herfindahl index is maximum. d) none of the three other options are correct. Structured Question Note: all the points should be developed and justified fully. When calculations are needed, no shortcut formulas are allowed. 1) Define and explain the concepts of strategic interdependence and reaction function. Why are they related, and why are they useful in modelling oligopolistic competition? 2) Firms A and B compete à la Cournot, facing the following inverse market demand: P = 270 – Q. Both have the same cost function: C = 500 + 150q. What is the (total) equilibrium quantity in the market? 3) Explain why, in a Stackelberg oligopoly, ceteris paribus, the leader is better off with respect to the follower. Also explain why the assumption of perfect information is critical to this outcome. (Note: in this case both the explanations should be intuitive, no numbers are needed). 4) Assume that baseline market and cost conditions are the same as in point 2. However, before competing, Firm A and Firm B simultaneously decide whether to make a particular investment in an advanced technology. Such an investment would increase the firm’s own fixed costs by 100. If both firms decide to make it, competition à la Cournot is played as in point 2. The same happens if both firms decide not to make it. If only one firm decides to make it, however, competition à la Stackelberg is played, with the firm that made the investment as the leader. Assuming perfect rationality and perfect information on everything, illustrate the payoffs (i.e. profits) of the 2 firms in all 4 different possible scenarios in a one-shot game matrix 2×2 and identify the Nash equilibrium(a) of the game, by also indicating how this type of game is often referred to in the economics lingo. Solutions 1) In oligopolistic competition, by definition, all competing firms have some market power. Thus, the actions of each firm influence the profits of every other. Hence, the strategy of each firm depends on the expectations on the strategy of all the other firms (strategic interdependence). Given strategic interdependence, a useful analytical tool is the reaction function, denoting the locus of optimal responses by a given firm to any action performed by the rival firm. Given perfect rationality and perfect information, the point of intersection between reaction functions is a Nash equilibrium and identifies the likely market outcome. 2) From the perspective of firm A, the following reasoning holds: Total profit = (270 – (qA + qB))qA – 500 – 150qA Max profit  270 – 2qA – qB – 150 = 0  qA = 60 – 0.5qB The reasoning is symmetric for firm B, thus: qB = 60 – 0.5qA qA = 60 – 0.5(60 – 0.5qA)  qA* = 40 ; qB* = 40; Q = 80. 3) In a Stackelberg oligopoly the leader is better off because, by acting first and having perfect information on the follower, it can perfectly control the reaction of the follower with a view to maximizing its own profit. Since the follower is constrained to an automatic reaction, and the leader knows it, the leader can integrate the follower’s reaction into its profit-maximizing decision, thus gaining a wider margin for optimization. This outcome does not necessarily hold in the absence of perfect information. In that case, it may even be preferable to act second in order to gain information on the rival and react optimally (as in the game of poker). 4) From point 2, the Cournot profit for both firms without the investment is equal to (270 – 80)*40 – 500 – 150*40 = 1100. With the investment, it becomes equal to 1100 - 100 = 1000. To compute the Stackelberg profit, we need to find the equilibrium quantities for the leader (qL) and the follower (qF). Given that the leader must have necessarily made the investment, its cost function becomes 600 +150qL (but fixed costs do not matter in any case in finding equilibrium quantities). Total Leader Profit = (270 – qL – (60 – 0.5qL))qL – 600 – 150qL Max Leader Profit  270 – 2qL – 60 + qL – 150 = 0  qL = 60  qF = 30 Thus, the leader’s profit is: (270 - 90)*60 – 600 – 150*60 = 1200. Conversely, the follower’s profit is: (270 – 90)*30 – 500 – 150*30 = 400. Given perfect rationality and perfect information, we can model this interaction through game theory: B A Invest Not invest Invest (A: 1000; B: 1000) (A: 1200; B: 400) Not invest (A: 400; B: 1200) (A: 1100; B: 1100) This game is analogous to the Prisoner’s Dilemma. Invest is a dominant strategy. Thus, the only Nash equilibrium is given by the couple of strategies: Invest/Invest. Thus, the profit for both firms is going to be 1000. The equilibrium is not Pareto efficient since both firms would have be better off in the “Not Invest” outcome. BUSINESS AND INDUSTRIAL ECONOMICS [G-O] Final exam February 4th 2021 SURNAME - NAME (Matricola no.)____________________________________________________________ Multiple choice questions 1) If both a monopoly and a competitive market with the same marginal cost would produce a quantity that is greater than the social optimum in a market because of externalities, then: a) welfare is greater under monopoly. BONUS b) welfare is the same for both market structures. c) welfare is greater under competition. d) the social optimum must be zero. 2) Assume that there are two individuals, A and B, and that they can both produce two goods, X and Y. In a given time frame (i.e. 24hrs), A can produce 20 units of X and 10 units of Y; while B can produce 60 units of X and 10 units of Y. Assuming monotonic and convex preferences for both individuals, allowing for trade and for equal bargaining power among parties, how many units of X will B possess at the end of this time frame: a) 30. b) 40. BONUS c) 50. d) 60. 3) There is a monopoly in a retail market with an inverse demand curve given by p = 10 – (1/2)q, no fixed costs and use of only 1 input for each unit of output (e.g. 1 engine for 1 car). Now suppose that the wholesale market where this input is produced is also a monopoly, and the wholesale monopolist bears a constant marginal cost for producing the input equal to 2. Please indicate the price settled by the monopolist in the retail market. a) 2. b) 4. c) 6. d) 8. BONUS 4) Please gauge the following statements about the “decoy” effect and select the correct one: a) The decoy effect states that adding a close and strictly dominated alternative may help orientate undecided consumers, but only as long as these latter are perfectly rational. b) The decoy effect states that adding a distant and strictly dominated alternative may help orientate undecided consumers, but only as long as these latter suffer from some cognitive bias. c) The decoy effect states that adding a close and equally preferable alternative may help orientate undecided consumers. d) None of the other options is correct. BONUS. 5) One way the “lemons problem” in the used-car industry can be mitigated is by: a) raising the price of used cars. b) hiring auto experts to sell used cars. c) requiring sellers to guarantee cars. BONUS d) none of the other options is correct. 6) Suppose the start-up Alpha is asked to supply an input to incumbent Beta for a given period of time, and the relationship is regulated by a contract among the parties that specifies the dimensions of such transaction (price, quality, quantity, etc.). Gauge the following statements: a) if Alpha has to bear a positive relationship-specific investment, quasi-rent will be greater than zero. BONUS b) if Alpha does not bear any positive relationship-specific investment, quasi-rent will be greater than zero. c) if Alpha has to bear a positive relationship-specific investment, the rent needs to be lower than the quasi-rent. d) if Alpha has to bear a positive relationship-specific investment, rent and quasi-rent are the same thing. 7) Two consumers have to decide whether or not to migrate towards a new technology exhibiting network externalities. In a first scenario, their decision is simultaneous (i.e. they decide at the same time). By migrating towards the new technology, they both gain 4. When they stay with the old technology they both gain 3. When they mismatch, the purchaser of the new technology gains 2, while the other staying with the old technology gains 1. In a second scenario, there is a consumer who moves first. Gauge the following statements: a) in the first scenario, there are two Nash equilibria and a potential excess inertia problem; in the second scenario, there is only one (subgame perfect) Nash equilibrium and this is Pareto efficient. BONUS b) in the first scenario, there are two Nash equilibria and a potential excess momentum problem; in the second scenario, there is only one (subgame perfect) Nash equilibrium and this is Pareto efficient. c) in the first scenario, there is one Nash equilibrium and a potential excess inertia problem; in the second scenario, there is only one (subgame perfect) Nash equilibrium and this is Pareto efficient. d) in the first scenario, there are two Nash equilibria and a potential excess inertia problem; in the second scenario, there is only one (subgame perfect) Nash equilibrium and this is not Pareto efficient. 8) The presence of valuable, rare, inimitable and non-substitutable resources and capabilities in a specific industrial domain might be: a) a good reason not to diversify. b) a good reason to internationalize. c) a good reason to expand within national borders. d) all of the other answers are correct. BONUS 9) You are evaluating expansion in a foreign country where it is very difficult to draft and enforce contracts, and local firms are generally untrustworthy. This impacts the most on: a) Ownership advantages. b) Location advantages. c) Internalization advantages. BONUS d) All the three letters of the OLI framework are impac