Business & Industrial Economics

CONTENUTI:

Summaries
Past Exams

Dear reader,

In these pages we provide models of firms’ competition and of the functioning of industries, focusing, in particular, on the determinants and consequences of market power.

We’ll analyse theories of the firm, production theory and production costs, competitive structures, entry barriers, market failures, externalities, economics of innovation processes, industrial and competition policies.

The concepts will be presented from the double point of view

Firms competing on the markets
Policymakers who supervise and regulate this competition.

Schemes:

Efficiency, Coordination and Economic Organization

“Economic organizations are created-entities within and through ...

Insight Competitive Structures

-> Time: made of several period At the beginning of each period firms has to decide whether remain...

Market Failures

Externalities -> DEF: action made by an agent in order to maximize the object function, either utility...

Externalities Example

Edgeworth box example -> Given: -> If there is not an authority defining if in the house...

Oligopolistic Markets

Strategic Interdipendence & Game Theory Basics: -> Market Structure is the more determinant...

Strategic Interdipendence & Game Theory Basics:

-> Market Structure is the more determinant thing that define the performance of a firm. -> Number...

Theories of the Firm and their Implications:

Theories of the firm: Contractual & Holistic Approach -> Firms are blackbox => we need to...

Technological Change & Innovation

-> DEF: improvement & generartion over time of new products & production techniques. Statically,...

Concentration Indices

Concentration: -> DEF: way to measure the degree of concentration (of market power) within markets Antitrust...

Industrial & Competition Policy

Industrial Policy: -> DEF: Industrial policy is any policy that affects a subset of firms, firms’...

Past Exams

Multiple Choice

WithOUT solution:

Scroll down to find the solutions

In order to predict the long run price of a perfectly competitive market, you need to find?

minimum value of total costs
the intersection between the marginal revenues and marginal costs
the minimum value of average costs
the industry supply by summing the inverse marginal cost functions of present firmsand tis interaction with demand

Economies of scale are a characteristic of car-making

the total cost of a larger car-maker are usually lower than the costs of a smaller one
a larger car-maker can produce cars at lower unitary cost than smaller one
the marginal cost of cars maker decreasing till the minimum efficient size
larger car-maker manage to have smaller fixed costs

In you country, electricity is provided by a monopolist and the price elasticity of electricity demand is

the monopolist will behave as a price taker
the mark-up of electricity price over marginal costs will be high
customers will reduce the demand to a large extent in response to price increase
the mark-up of electricity price over marginal cost will be low

Price elasticity of demand is equal to 5, it means that.

if the product price increases, the quantity demanded by the market increases
the quantity demanded by the market decreases, provided that the increase in productprice is larger than 5%
if the product price increase by 10%, the quantity demanded by the market decreasesby 15%
if the product price increases by 1%, the quantity demanded by the market decreasesby 5 units of product

Total cost are modelled as TC = 100 + 2q2 + 4q. What are the marginal and average cost function?

(a) MC = 0 ; AC = ¹⁰⁰ /q + 2q + 4 (b) MC = 4q + 4 ; AC = ^100/q + 2q + 4 (c) MC = 100/q ; AC = 4q + 4 (d) MC = 100 ; AC = 2q2 + 4q

When a market moves from perfect competition to monopoly, there is an efficiency loss, because?

the social welfare does not change
the increase of producer’s surplus is smaller than the decrease of consumer’s surplus
customers are worse oﬀ, while suppliers are better oﬀ
monopolists are less cost-eﬀective than firms in perfectly competitive markets

There is a trade-oﬀ between two given Sustainable Development Goals. It means that

the trade-oﬀ can’t be fixed by sustainable innovation
synergies between the two goals are weak
it is hard to achieve both Goals simultaneously
eﬀorts to move forward toward one of the two Goals regularly fail

The European automotive market is oligopolistic

only two firms compete in the market
each competitor can autonomously set the price
each firm sets its optimal strategy taking into account others’ behavior
firms cannot inﬂuence the price given by the market

The welfare outcome of Bertrand competition with unlimited production capacity

is the same as in monopoly
is the same as in perfect competition
is more favorable than the one in perfect competition

The main diﬀerence between Cournot and Stackelberg competition is ..

firms compete on prices in Cournot, on quantities in Stackelberg
Firms compete on quantities in Cournot, on prices in Stackelberg
Cournot competition can be modeled as a sequential game
Cournot competition can be modeled as a simultaneous game

Two cinemas make up a duopoly. They have equal marginal costs and compete on prices. The total number of available seats is low compared to current demand.

the equilibrium price will be equal to marginal cost
they will make negative profits
the equilibrium price will be higher than marginal cost
another firm will enter the market

The business customers of tax consulting firms suﬀer from adverse selection.

they do not observe the real eﬀorts put by the consultants in the consulting service
they can’t verify the quality of tax advice before receiving it
they signal their willingness to stay in the market through sunk investments
all the business customers are likely to be driven out of the market

External shareholders may suﬀer from moral hazard in the relationship with managers. However manager be more likely to make the expected eﬀorts in managing the firm

if the contracts that regulate their work has clear rules
if they can give signals about their eﬀorts in leading the firm
if they are compensated with a performance-based pay
if they have to pay a deductible

Industry concentration is large if…

new firms have entered the market
few large firms dominate the market
the Lerner index is small
there is symmetry between competitors

Five business enterprises operate in the same industry. Their market shares (decreasing order) are as follow [40%, 20%, 20%, 10%, 10%]. Compute the HHI concentration index.

HHI = 2000
HHI = 10000
HHI = 2600
HHI = 0.8

The concentration of car-making industry is greater in country A than in country B. The market power of carmakers is likely to be larger

in country B
in country However things could change if price elasticity is larger in country A
in country However things could change if price elasticity is larger in country B
in country A

The larger the market size

the larger the industry concentration, other things being equal
the smaller the industry concentration, other things being equal
the smaller the industry concentration and the higher the barriers to entry
the larger the industry concentration, as long as fixed costs are small

Limit pricing is an eﬀective strategy for dettering entry if

the incumbent has a cost advantage relatively to the entrant
the incumbent’s price is a credible signal of a cost advantage
the incumbent’s price makes both entrant and incumbent lose
the incumbent makes a sunk investment to improve the product quality

An online magazine publishes comments made available by journalists. The magazine exhibits indirect network eﬀects, because its utility for readers is greater if

the number of reader is larger
the number of available comments is larger, and this happens if the number of reader is larger
the number of available comments is larger
a lower price per comment is paid by the magazine to the journalists, and this happensif the number of available comments is larger

An industry is a natural monopoly if and only if

there are large scale economies
a monopolist serves the market demand at a lower cost than any other industry arrangement
the government concedes a legal monopoly right to the operators, g. a concession
the potential entrants can adopt a “hit-and-run” behavior

An industry follows the so-called “Schumpeter Mark-1” pattern of innovation when

if gradually improves the pre-existing products or processes or organization
the tradition products or processes of organization are disrupted by the new entrants
incombete are replaced by new entrants that are more productive yet less innovative

The number of patents obtained by a business enterprise is a good measure of its innovation capability

if it is a small-medium sized enterprise
in all industries
depending on the industry and business size
but input measures are more eﬀective indicators in his matter

A monopolist decides to undertake perfect price discrimination, and is successful in this. How its profits change

are larger than they were with a uniform price
are as large as they were with a uniform price
will decreases for a long time
are smaller than they were with a uniform price

A business firm sets diﬀerent prices for very similar products. We conclude that it is practicing price discrimination

in any case
if social welfare is reduced
if the diﬀerence in prices is driven by the diﬀerence of production costs
if the diﬀerence in price is not driven only by the diﬀerence of production costs

When an incumbent makes a large sunk investment

it shows in a credible way that it owns an advantage with respect to the prospective entrants
it makes its decision of staying in the market (and competing toughly with entrants)
it creates a structural barrier to entry
it will be more likely to benefit from scale economies

We expect State-owned enterprises to be managed less cost efficiently than investor-owned (private). Which explanation is WRONG

traditional performance measurement systems do not function well with SOEs (State Owned Enterprise) and natural monopolies
private managers have the same objectives as the enterprise owners, whereas SOE’s mangers do not
local politicians force SOE manager to make exceedingly costly decisions in the interest of their voters or supporters
accompanying factors, e.g. markets of products or market of managerial jobs, do not work well in natural monopolies

The CEOs of the country’s waste management utilities usually meet at the yearly sector. Last year they shared the view that all of them would better submit a proposal only to waste service tenders organized by cities close to own headquarters

this is an example of output restriction, because the overall supply will be limited and price will increase
this is an example of bid rigging, because the more distant utilities will not compete in the tender
this is an example of predatory pricing, because the lower transport costs will reduce the price submitted
this is an example of loyalty rebates because the service is likely to be awarded to the same utility over time

A business is vertically integrated along the supply chain. It is monopolizing downstream stage A, and confronts a few competitors in the upstream stage B. It is using a vertical foreclosure strategy if

it attempts to monopolize the upstream stage B in order to increase its profits
it prevents its competitors of state B from entering stage A market
it oﬀers the stage A product to B competitors at higher price or lower quality than to its own B division
it operates a bottleneck in the stage B market and leverages it to improving its profitability

The Antitrust authorities are investigating a possible abuse of dominant position. They can conclude that completion is reduced by the dominant business

based on the analysis of concentration and barriers to entry
based on the assessment of the conducts taken by the dominant firm in the case
if they find evidence of bid rigging

A structural remedy to the possible reduction of competition caused by a merger is

a monetari sanction to merging business with the aim of reducing the industry concentration
the prohibition to exert market power
limiting concentration increase by imposing the divestiture of assets
a commitment of merging businesses to give up the most harmful conducts

Your government is partially privatizing the SOE that operates the post service.

the government oﬀers the SOE’s stocks to the public
the government sells a part of stockholding but it retains the SOE’s control
the government contract out the provision of services through competitive tendering
the government transfer the SOE’s control to private

A small consulting firm considers whether to invest in training Human Resources to deal with a new large client and provide more eﬀective service. Other customers are small and would recognize a much lower price for those trained

it is making a site-specific investment
the investment will have a low risk because the quasi-rent is negligible
the risk of hold up may deter the consulting firm from performing the relation-specific
the consulting firm will have the change to hold the customer up

What is the correct statement related to integration decision?

agency efficiency is always higher for market transactions
agency efficiency is always higher for integration
technical efficiency is always higher for market transactions
technical efficiency is always higher for integration

The price regulation of natural monopoly is second-best when

the efficiency loss is null
the unitary rate is set equal to the average cost and the access fee is set equal to 0
the regulated firm does not manage to break even
the unitary rate is set equal to the average cost and the access fee is set equal to the fixed costs

The regulatory authority has set a two-part tariﬀ for a utility that operates in a natural monopoly.

all customers pay the same access fee
access fees collected from customers cover the utility’s variable costs
customer with low income are allowed not to pay the access fees
the utility does not break even

A cost-plus regulation approach

stimulates productive efficiency
requires the regulatory authority to set an expected “X” factor of productivity growth
exposes shareholders to variable returns (d) requires frequent regulatory reviews

A tapered integration choice makes sense

when there is no risk of hold-up
when you have an inefficient internal supplier as benchmark
when the minimum efficient size is not very large
always

A structural remedy to the possible reduction of competition caused by a merger is

A monetary sanction to merging businesses with the aim of reducing the industry concentration
The prohibition to exert market power
Limiting concentration increase by imposing the divestiture of assets
A commitment of merging businesses to give up the most harmful conducts

The Antitrust authorities are investigating a possible abuse of dominant They can conclude that competition is reduced by the dominant business

Based on the analysis of concentration and barriers to entry
Based on the assessment of the conducts taken by the dominant firm in the case
Based of predefined criteria
If they find evidence of bid rigging

A business is vertically integrated along the supply chain. It is monopolising downstream stage A, and confronts a few competitors in the upstream stage B. It is using a vertical foreclosure strategy if

It attempts to monopolise the upstream stage B in order to increase its profits
It prevents its computers of stage B from entering stage A market
It oﬀers the stage A product to B competitors at higher price or Lower quality thanto its own B division
It operates a bottleneck in the stage B market and leverages it to improving its

profitability

The CEOs of the country’s waste management utilities usually meet at the yearly sector Last year they shared the view that all of them would better submit a proposal only to waste service tenders organized by cities close to own headquarters

This is an example of output restrictions, because the overall supply will be limitedand price will increase
This is an example of bid rigging, because the more distant utilities will not competein the tender
This is an example of predatory pricing, because the lower transport costs will reducethe price submitted
This is an example of loyalty rebates because the service is likely to be awarded tothe same utility over time

We expect State – owned enterprises to be managed less cost efficiently than investor-owned (private) Which explanation is WRONG?

Traditional performance measurement systems do not function well with SOEs and natural monopolies
Private managers have the same objectives as the enterprise owners, whereas SOE’s manager do not
Local politicians force SOE managers to make exceedingly costly decisions in the interest of their voters or supporters
Accompanying factors, g., market of products or market of managerial hobs, do notwork well in natural monopolies

A small consulting firm considers whether to invest in training Human Resources to deal with a new large Clint and provide more eﬀective service. Other customers are small and would recognise a much lower price for those trained

It is maker a site-specific investment
The investment will have a low risk because the quasi-rent is negligible
The risk of hold up may deter the consulting firm from performing the relation-specific
The consulting firm will have the change to hold the customer up

What is the correct statement related to integration decision?

Agency efficiency is always higher for market transactions
Agency efficiency is always higher for integration
Technical efficiency is always higher for market transactions
Technical efficiency is always higher for integration

The price regulation of natural monopoly is second-best when

The efficiency loss is null
The unitary rate is set equal to the average cost and the access fee is equal to 0
The regulated firm does not manage to break even
The unitary rate is set equal to the average cost and the access fee is set equal to thefixed costs

The regulatory authority has set a two-part tariﬀ for a utility that operates in a natural

monopoly

All customer pay the same access fee
Access fees collected form customer cover the utility’s variable costs
Customer with low income are allowed not to pay the access fess
The utility does not break even

A cost-plus regulation approach

Stimulates productive efficiency
Requires the regulatory authority to set an expected “X” factor or productivitygrowth 8

Exposes shareholders to variable returns (d) Requires frequent regulatory reviews

A tapered integration choice makes senses

When there is no risk of hold-up
When you have an inefficient internal suppliers as benchmark
When the MES is not very large
Always

The main barriers to SMEs’ growth are

Coordination failures and constraints in access to finance
The presence of scale and learning economies and constraints in access to finance
The lack of industrial policy supporting them
Coordination failures that create vicious circles in investment decision

Industrial policy may take on the problems of infant industry by

Establishing agencies that coordinate the eﬀorts of players within and across supplychain stages
Oﬀering financial support through specialised intermediaries
Supporting employment through temporary unemployment salary, placement assis-tance and training
Investigating the anticompetitive abuses of dominant firm

Exhaustible resources are

Resources that are follis energy sources (coal, gas, oil)
Resources whose decay rate is larger than the exploitation rate
Resources that regenerate themselves too slowly given decay and exploitation rates
Resources that are the cause of polluting emissions

A water-saving innovation causes a rebound eﬀect. It means that after its adoption the quantity of water consumed

Decrease sharply
Decreases less than the increase in water efficiency
Decreases more than the increase in water efficiency
Decreases less than the regeneration rate

When firms that operate polluting plants have to compensate those who are harmed by emissions

They reduce pollution to a greater extent than in the first-best scenario
They produce pollution as in the market scenario
They produce the same pollution as in the first best scenario
They reduce pollution by they will not enhance social welfare

A business enterprise adopts an environmentally-friendly Abatement of emis- sions is efficient

If the government sets a performance standard
As long as the marginal external costs are greater than the marginal abatement costs
As long as the marginal external costs are smaller than the marginal abatement costs
If the environmentally friendly innovation belongs to the “end-of-pipe” type

The government pays as 3 Euro/Kg premium on the fruit price to the farmers when they replace agrochemical with biological pesticides.

All farmers will cease to use agrochemical pesticides
Farmers move to biological pesticides if the tax on fruit produced with agrochemical pesticides is higher than 3 Euro/kg
Farmers will use biological pesticides as long as the premium over the price coversthe extra cost of biological production
Farmers will use biological pesticides only when biological production will be as cost-

eﬀective as agrochemical production

Non-profit organisations are non-governmental organisations thats

Have a social mission
Do not make profit
Re-invest the generated profit into the organisation mission
Do not have special manager nor shareholders

Non-profit organisation are a particularly efficient form for providing services when

The service qualities and characteristics are multiple and diﬀerent
It is necessary to ensure a wide / universal diﬀusion of service at a lower costs
Only fee of the many service qualities and characteristics are well measurable
The public sector has a low productivity

Which one of these is NOT an example of cross-sector collaboration?

(a) A public-private partnership between a municipality and local business enterprise (b) An alliance between a food retailer and a media company

A philanthropic cash donation from a business enterprise to a non-profit organization
A multi-stakeholder project involving business firms, the regional government andcivil society organizations

Business enterprises cooperate with NPOs to get environmental sustainability certifications

(a) Because non-profit organisations are always more expert in environmental sustain-ability (b) Because non-profit organisations are reputed to be a more credible and trustworthythird party

Because non-profit organisations need resources to carry out their operations
Because non-profit organisations hold unique knowledge and capabilities

Which one of the following is NOT an assumption in the theory of contestable markets?

Free entry 10

Cost advantage of the incumbents with respect to possible entrants
No exit barriers
No possibility for the incumbent to change prices as a reaction to entry

Limit pricing works as an entry deterrence strategy only in some It may be eﬀective if

It is a credible signal of the incumbent’s capability to accommodate the new entrantsand to collude with them
It is a signal of the incumbent’s cost advantage over the entrants and is profitablefrom an economic point of view
It is a credible signal of the incumbent’s cost advantage over the entrants because itwould be unprofitable if the incumbent had higher costs
It is a signal of the incumbent’s capability to undertake further capacity investment

Your municipality has assigned the local transportation services in your metropolitan area to a private The service is a regulated natural monopoly, and a constant marginal cost is assumed. The regulatory authority is determining the tariﬀ scheme according to a first-best price regulation

The tariﬀ is set equal to the average cost
If the authority wants to ensure productive efficiency, a cost-plus regulation is appro-priate (c) The tariﬀ only covers the variable costs, and a subsidy is needed to cover the

(d) There is a loss of allocative efficiency because the market is regulated

Which of the following statements regarding vertical integration is correct

It always curbs market power, because it avoids double marginalization
Scale of operations is not relevant in the decision to integrate
It can be a means to extend market power along the vertical chain
It requires a lower internal investment compared to tapered integration

A large, dominant digital platform company is performing many vertical mergers. The acquisition targets are typically innovative startups that are developing new apps and Antitrust authorities should

Authorise the merger because only horizontal M&As may be harmful for competitionand

efficiency

Authorise the merger because a larger company can provide the startup with the necessary resources for developing its innovation projects
Control whether after the deal the large platform company can restrict competition through predatory pricing or refusal to deal strategies
Control whether after the deal the platform company can foreclose access to marketto

startup’s competitors or suppress the startup’s innovative projects

Which of the following is a solution to the Bertrand paradox?

Same marginal costs for the rivals
Linearity of the demand function

Presence of capacity constraints
Output as a decision variable

A renewable resource is

A resource whose decay rate is smaller than the regeneration rate
A resource whose exploitation rate is not larger than the sustainable exploitation rate
A resource whose exploitation rate is larger than the stainable exploitation rate
A never-ending energy source

Two industries are characterised by the following concentration ratio indexes: C4(1) = 53%, C4(2)=45%. If we compute the HHIs for the two industries, we can conclude that

According to HHIs, Industry 1 is for sure more concentrated than Industry 2
According to HHIs, Industry 2 is for sure more concentrated than Industry 1
According to HHIs, Industry 2 is for sure easier to enter for a newcomer than Industry1 (d) According to HHIs, Industry 1 may be more or less concentrated than Industry 2

A company supplies a customised mechanical part for an aircraft manufacturer, in the quantity of 400,000 units per year. To finance the construction of a dedicated production line, the company pays 500,000e/year as interests for a bank loan. Additionally, it spends 100,000e/year for specialised personnel. The variable production cost is 1e/unit, and the price agreed with the manufacturer is 4e/unit. If the company had to sell the part to another customer in the external market, it would be able to negotiate a price of 2e/unit.

The quasi-rent is 600,000e/year. There is no risk of hold-ups, since the company cansell

profitably to the external market

The quasi-rent is 800,000e/year. There is no risk of hold-up, since the company cansell

profitably to the external market.

The quasi-rent is 600,000e/year. There is a risk of hold-up, since the external market recognises a lower price than the aircraft
The quasi-rent is 800,000e/year. There is a risk of hold-up, since the external market recognises a lower price than the aircraft

While specialised doctors and healthcare professionals have an in-depth and appropriate knowledge about a given disease and treatment, patients suﬀering from that disease (or their family) do In addition, most diseases are complex and not all the competences and skills of doctors and professionals and the quality components of treatment are well measurable.

Given the situation and the presence of soft-budget constraints, public-sector providers may fail to ensure adequate quality because they have high incentives to cut costs, especially those related to the personnel
Given the situation, non profit providers may fail to ensure adequate quality be- cause they have incentives to spend less on resources that had a positive inﬂuence on “hidden ” quality dimensions highly valued by the patient
Given the situation and the presence of patronage practices in healthcare, private providers may fail to ensure adequate quality because they tend to behave oppor- tunistically and to neglect the “hidden” quality dimensions highly valued by the patient
Given the situation, private providers may fail to ensure adequate quality because they have high incentives to open less on resources that had a positive inﬂuence on “hidden” quality dimensions highly valued by the patient

With solution:

06 - 2024

1.Suppose the following situation: fruit farmers pay beekeepers for their honeybees’ pollination services since honeybees provide an external benefit to fruit farmers. However, remember that fruits also provide an external benefit to the beekeepers because their honeybees need fruits. From what written above, what can you conclude?

(1 punto)

Honeybees’ external benefit to fruit farmers is larger
Fruits’ external benefit to beekeepers is larger
The external benefits are probably the same size
It is impossible to determine which external benefit is larger given this information

2.Which of the following is NOT a case of moral hazard successfully avoided?

(1 punto)

You decide not to hire a certain instructor when you hear from a friend about another instructor who charges less for similar work
Before carrying out a repair on your house, you hire an inspector whose only job is to diagnose the necessary work. Then, you hire a contractor to perform only that work
You decide not to hire a certain mechanic when you hear from a friend that the mechanic cheats his customers. You choose another mechanic certified by a third-party consumer protection organization
Before buying headphones, you check online reviews that say they tend to stop working after a few months. Thus, you decide to buy other headphones with much better reviews

3.Which of the following concentration indices is larger?

(1 punto)

Concentration indices depend on the industry, thus it cannot be said a priori which concentration index is larger.
The concentration ratio C2 in an industry with 3 identical firms
The Herfindahl index in an industry with 2 identical firms
The entropy index in an industry with 2 identical firms

4.The estimated demand function for a given prospected service is given by: Q = 8 – p. In the market there is only one firm in the condition to deliver this service. The total cost function of this firm is given by the following expression: TC(Q) = 8 + 2Q + Q^2. Gauge the following statements:

(1 punto)

All the three other options are incorrect
This market should exist from a social welfare point of view but it is not necessarily a natural monopoly
This market should exist from a social welfare point of view and it is a natural monopoly
This market should not exist from a social welfare point of view

5.Consider a monopolist with demand: Q = 120 – 2p and marginal cost: MC= 40, with no fixed costs. What is the deadweight loss arising from the optimal solution of the monopolist?

(1 punto)

0
200
100
All the three other options are incorrect

6.Firm Jenova is a successful producer of nanotechnology for nanomedicine. Due to a sudden shortage of biomedical components impeding the application of its technology to its current field, it decided to enter the food industry and redeploy its assets to improve the barrier properties of packaging materials. This information is enough evidence to say that:

(1 punto)

The firm passes the better-off test
The firm possesses packaging capabilities
The firm passes the attractiveness test
The firm possesses dynamic capabilities

7.According to the classification of transactions (Williamson, 1986), transactions will be governed by unified governance (i.e. hierarchy) only when:

(1 punto)

Relationship-specific investments are low and frequency of transactions is high
Relationship-specific investments are high and frequency of transactions is low
Both relationship-specific investments and frequency of transactions are high
Relationship-specific investments are high, unregardless of the frequency of transactions which can be low or high

8.An insurance company aims at introducing a new health insurance in the market. The insurance company believes that with probability 50% prospective consumers are high-risk patients, with probability 50% low-risk patients. For a high-risk patient the health insurance is worth 10,000$, whereas for a low-risk patient, the value is 2,000$. For the insurance company, the cost of providing insurance is 5,000$ for a high-risk patient and 0$ for a low-risk patient. Based on these numbers, the insurance company is considering two possible prices for the new health insurance: 6,000$ or 15,000$. Considering the only (Bayesian)-Nash equilibrium of the sequential game, tell which will be the price charged for the health insurance (p) and who will buy the new health insurance:

(1 punto)

The insurance company will decide to fix p = 15,000$; neither low-risk nor high-risk patients will buy the new health insurance
The insurance company will decide to fix p = 6,000$; only high-risk patients will buy the new health insurance
The insurance company will decide to fix p = 6,000$; both low-risk and high-risk patients will buy the new health insurance
The insurance company will decide to fix p = 15,000$; only low-risk patients will buy the new health insurance

9.Suppose only 2 consumers and 1 good exist, where this good is first considered public and then private. Consumers have a willingness to pay (WTP) of 2 for the first unit and 1 for the second unit. Which is the highest WTP expressed by “the market” and the quantity demanded in correspondence of this maximum WTP in the two cases, i.e. a private and a public good?

(1 punto)

WTP = 4 in case the good is public, WTP = 2 in case the good is private; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private good
WTP will be equal to 4 in both cases; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private good
WTP = 2 in case the good is public, WTP = 4 in case the good is private; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private good
WTP = 4 in case the good is public, WTP = 2 in case the good is private; the quantity demanded will be 2 in the case of a public good and 1 in the case of a private good

10.Assume a firm is practicing “price discrimination by self-selection” by creating a few versions for its main product. A customer’s willingness to pay for the product:

(1 punto)

is revealed by customer’s observable characteristics
depends on the prices for the same version set by the firm’s rivals
depends on the volume of purchases made by the customer
is revealed by customer’s choice of the version

12.Structured question
There are 10,000 people in the population, each of whom is willing to pay 10 for at most 1 unit of a given good (i.e. each individual is interested in buying just 1 unit of the good, not 2, and for that unit is willing to pay 10). There are 2 identical firms providing the good. Currently, both firms have a constant marginal cost of 5, and they do not bear any fixed costs.

1) The two firms compete à la Bertrand. What is the equilibrium price and what are the firms’ profits? In case of repeated interactions (and “no game changer”), and both firms adopting a grim-trigger strategy (i.e. “I collude until you collude, if you cheat once, I will fix the minimum price possible forever”), determine the probability “p” that makes collusion sustainable.
Starting from the Bertrand equilibrium above identified, suppose now that one firm can adopt a new technology that lowers its marginal cost to 3.

2) Is this a drastic innovation? (Just on the basis of economic reasoning, i.e. no calculus is needed), explain why yes or no.

3) What is the equilibrium price in the market now and how much would this firm be willing to pay for this new technology?

4) Should this innovation be prosecuted by Antitrust? Explain why yes or no.
Suppose that this new technology is available to both firms (which are always competing à la Bertrand). The cost to a firm of purchasing this technology is 10,000. Firms simultaneously decide whether to adopt the new technology or not.

5) Express the game in a normal form and determine what is (are) the Nash equilibrium (equilibria) of this game.

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MULTIPLE-CHOICE QUESTIONS [10 points]

You do not need to provide explanations for your answers. However, if you want to add a note to a response (e.g., an assumption, a clarification, an illustration), please write it in the paper sheets you will upload as a

.pdf file.

Which of the following statements on the theory of public goods is FALSE?
1. Once a public good is produced, any additional consumer must pay an extra cost to use it
2. Public goods are generally under-supplied by firms because their provision generates positive externalities that benefit everybody else
3. A firm or an individual who releases open-source software without requiring any payment is releasing a public good
4. Examples of public goods encompass the national healthcare system and street lightening

Which of the following statements on vertical integration is FALSE?
1. The likelihood of vertical integration decreases in the presence of high market uncertainty
2. The likelihood of vertical integration increases as the scale of production increases
3. The likelihood of vertical integration decreases as asset specificity decreases
4. Technical efficiency is high when market specialists benefit from high economies of scale

Which of the following statements on firms’ market power is FALSE?
1. A higher market power translates into a higher firm’s profit to reward shareholders and make additional investments
2. Firms’ market power depends on the intensity of competition and market structure
3. Innovation plays an instrumental role in acquiring and maintaining market power
4. The role of public policy revolves around setting the conditions to concentrate market power among a few firms because this increases social welfare

Which of the following statements on competition is FALSE?
1. Incumbents can temporarily deter new firms’ entry into an industry because of the ownership of a patent, which is essential for developing the Incumbents use this strategic entry barrier to set prices higher than their marginal costs
2. If firms undertake a predatory pricing strategy, they set the price below their marginal costs in the short run to deter the entry of new firms and earn extra profits in the long run
3. Two firms in the market produce homogenous goods using the same If the firms compete à la Cournot, they choose the quantities they produce. The choice of each firm is simultaneous and independent. In equilibrium, firms’ profits are usually higher than profits in a Bertrand competition
4. Compared to perfect competition, a strategic interdependence among firms exists in oligopolistic competition

Which of the following statements on the firm’s boundaries is FALSE?
1. There is evidence that, on average, related diversification produces superior performance compared to unrelated diversification
2. Franchising contracts are alternative organizational structures between vertical integration and market transactions
3. Wall’s company produces both ice cream and meat products. The firm’s integration in these two markets with different seasonal peaks allows it to smooth out seasonal fluctuations
4. According to the Vernon model, internationalization is more likely in the mature phase of a product life cycle than in the introduction phase because, in the mature phase, new firms imitate the innovative products

A merger between firms that are active in the same “relevant market” can significantly impede effective competition because of “unilateral effects” when
1. The merged entity enjoys larger economies of scale than its rivals and can drive its competitors out of the market by charging lower prices
2. The merged entity combines different products/services that are very weak demand-substitutes
3. The merged entity has the incentive to increase prices above the pre-merger level because of the loss of anticompetitive constraints
4. None of the other statements is correct

Which of the following statements on platform businesses is FALSE?
1. The “winner-takes-it- most/all” phenomenon makes platform industries modern monopolies
2. The “winner-takes-it- most/all” phenomenon does not occur if firms differentiate their products/services so that they can survive and prosper in market niches
3. All the else being equal, a potential user likely prefers platform A to platform B if A allows multi- homing, while B does not
4. Platform-based firms tend to solve the “chicken-egg problem” by subsidizing the group of users who is less price-sensitive

Which of the following statements on industries and markets is TRUE?

A five-firm concentration ratio assesses firms’ sizes based on the number of employees. Since five firms operate in the industry, the discount factor for future profits that makes firms indifferent to collude or not amounts to 0.8
The firms in an industry with a high concentration ratio always operate in a highly competitive environment
Economic profits in a contestable market do not attract new entrants
None of the other statements is correct

Which of the following statements is TRUE? In a highly competitive market, potential entrants enter the industry when incumbents gain economic profit. This happens when the price is
1. Lower than the minimum average cost in the short run. In this case, new entrants can scale up the market quickly and attract customers
2. Lower than marginal costs in the short In this case, new entrants can scale up the market quickly and attract customers
3. Higher than the minimum average cost in the long run. However, the entry of new firms causes an increase in the price in the industry and the exit of firms which make losses
4. None of the other statements is correct

Firms 1-6 are active in industries A-F. The table reports firms’ shares of sales in each industry (a blank cell means that a firm does not operate in an industry; g., firm 1 does not operate in industry F). Industries A, B, and C are related industries; the same holds for industries D, E, and F. Which of the following statements is TRUE?

Firm	Industry A	Industry B	Industry C	Industry D	Industry E	Industry F
1	0.2	0.2	0.2	0.2	0.2
2		0.6			0.4
3	0.5		0.25	0.25
4	0.1	0.1	0.1	0.1	0.1	0.5
5			0.3	0.25	0.2	0.25
6	0.2	0.1	0.15	0.2	0.1	0.25

Basing on the Herfindahl index, the industries D and F are more concentrated than industries A and C
Basing on the Herfindahl index, the industries C and D are less concentrated than industries A and F
Basing on the Gort index (D2), firms 2 and 4 are more diversified than firms 1 and 5
Based on the Specialization index, firm 2 is the most diversified firm

STRUCTURED QUESTION MINI-CASE [5.5 points]

Please, read the section reported below from the article “Nostrums for rostrums: Online platforms,” which appeared in

The Economist on May 28^th, 2016.

The growing power of online platforms is worrisome. But regulators should tread carefully.

Platforms benefit from the power of networks: the more potential matches there are on one side of a platform, the greater the number that flock to the other side. The consequence may be a monopoly. That is normally a red flag for regulators, who are scrambling to keep pace with the rise of platforms.

The nature of platforms means established rules of regulation often do not apply. Think different. In a conventional, “one-sided” market, prices are related to the cost of supplying goods and services. If a business can charge a big mark-up over its marginal cost of production, a wise regulator would strive to ensure there are enough firms vying for business or, where that is not possible, to set prices in line with the monopolist’s costs.

Such precepts are of little use in regulating platforms. Their prices are set with an eye to the widest participation. Often consumers pay nothing for platform services-or are even charged a negative price (think of the rewards systems run by some payment cards). Pushing down prices on one side of the platform may cause charges on the other side to rise, a bit like a waterbed. That in turn may drive some consumers away from the platform, leaving everyone worse off. Such uncertainties mean that regulators must not act precipitously.

Tech giants like to claim there is no need for special regulation. The winner-takes-all aspect of networks may mean there is less competition inside the market, but there is still fierce rivalry for the market, because countless startups are vying to be the next Google or Facebook. Unfortunately, incumbents may be able to subvert this rivalry. One of their strategies is to use mergers. “Shoot-out” acquisitions is the name given to purchases of startups with the aim of eliminating a potential rival. Many claim that Facebook’s acquisition of WhatsApp was in this category. A recent parliamentary report in Britain noted that Google had made 187 purchases of other tech firms. Regulators tend to ignore mergers of businesses in unrelated markets and big firms hoovering up small fry. Buyers of firms with an EU-wide turnover of less than EUR 100m do not have to notify the European Commission.

Provide a real-world example of platform business, and explain your reasonings [1 point]

Provide an example of same-side network externalities, and explain your reasonings [0.5 points]

Provide an example of cross-side network externalities, and explain your reasonings [0.5 points]

Name three possible pricing strategies that may solve the chicken-egg problem and provide a brief explanation

[1 point]

Name 3 possible non-pricing strategies that may solve the chicken-egg problem and provide a brief explanation

[1 point]

Briefly explain the sentence from the text “The winner-takes-all aspect of networks may mean there is less competition inside the market, but there is still fierce rivalry for the market, because countless startups are vying to be the next Google or Facebook.” [1.5 points]

EXERCISE [4.5 points]

EXERCISE 1

Consider a duopoly situation with two firms (1 and 2) facing the demand curve P = 35 – Q, where Q = q1 + q2.

Both firms have the following cost function Ci(qi) = 5qi, i=1,2

Suppose that products are homogeneous and that the two firms (1 and 2) set their quantity level simultaneously. Find the resulting Nash equilibrium (quantities, prices, profits). [1.5 points]
Suppose that products are homogeneous and that firm 1 sets its quantity before firm 2. Find the resulting Nash equilibrium (quantities, prices, profits). [1.5 points]
Suppose that the two firms collude. Find the resulting Nash equilibrium (quantities, prices, profits). [0.5 points]

EXERCISE 2

Assume a market for car tires where tires are homogeneous. Two firms (1 and 2) have a combined demand of Q=100-0.4P. Their marginal and average costs amount to $100. Initially, the market price is $100. Firm 1 and 2 have decided to merge. They can lower their production costs from $100 to $85 because of economies of scale in combined operations, and now the monopolist charges a price of $120. Use the above demand curve to evaluate the merger.

Calculate the consumer surplus, producer surplus, and social (total) surplus pre-merger and post-merger. Should the merger be approved? Why? [1 point]

01 - 2023

MULTIPLE-CHOICE QUESTIONS [10 points]

.pdf file.

In the market for laptops, four companies are active, with the following market shares: BENOVO (30%), RELL (20%), AXUS (15%), and AXER (35%). BENOVO and AXER plan to merge and have asked you to write a report on the likelihood that an antitrust authority could block the merger. Based on the analysis of the structure of the market, and considering that it is a market with high entry barriers, you submit a report concluding that
1. The merger is likely to be challenged because it might create a dominant position
2. The merger is unlikely to be challenged because it does not give rise to unilateral effects
3. The merger is likely to be challenged because of its coordinated effects
4. The merger is unlikely to be challenged because there are other competitors

To solve the startup problem in network industries, firms should
1. Deny any support from the government
2. Charge high prices to attract users from the very beginning
3. Charge low prices (or free access) to attract users only after reaching critical mass
4. Collaborate with competitors by making network goods compatible

Which of the following statements on possible remedies to the principal-agent problem is FALSE?
1. Venture capital firms provide funds to startups in exchange for equity shares and membership on the Board of Directors
2. Governments impose firms to follow uniform accounting principles and punish accounting frauds
3. Firms finance their growth by increasing their equity instead of debt
4. Because of negative long-term performance, the Board of Directors is considering accepting an acquisition deal, which will lead to the replacement of the current CEO

A firm sets up an expensive advertising campaign to launch a high-quality product. This is a case of
1. First-mover advantage
2. Strategic entry barriers
3. Anticompetitive behavior caused by the firm’s dominant position
4. Signaling

Which of the following statements on network goods and industries is CORRECT?
1. The costs of switching from one network good A to another network good B decrease with the strength of indirect network externalities related to network good A
2. Consumers always incur low switching costs if they choose to switch from a network good A with a large installed base to a network good B of better quality but having a small installed base
3. The presence of large incumbents makes network industries attractive for new entrants
4. None of the other statements is correct

Consider two firms, a manufacturer (M, upstream firm) and a retailer (R, downstream firm). Both are monopolists in their markets. Economists label double marginalization the case in which M and R
1. Integrate and the market price of the good is higher than the case in which the two firms operate separately
2. Operate separately, both firms mark up the price above their marginal costs, and the market price of the good is lower than the case of an integrated firm
3. Operate separately, both firms mark up the price above their marginal costs, and the market price of the good is higher than the case of an integrated firm
4. None of the answers above is correct

Which of the following statements on collusion is FALSE?
1. Collusion is less likely when many firms operate in the industry
2. A large transaction, which grants immediate large profits, is an incentive to collude to reap (at least part) of the profits of this transaction
3. Clauses in long-term contracts prescribing price disclosure favor collusion
4. Price transparency reduces coordination costs and enables firms to reach a collusive agreement

The PC manufacturer ALPHA plans to merge with its competitor BETA. The American antitrust authority oversees the merger and takes a survey to assess the closeness of competition between ALPHA and BETA. 6,000 consumers were asked what they would do if ALPHA increased the prices of its PCs. The survey results are as follows: 1,000 consumers said that they would continue to purchase an ALPHA PC; 2,500 consumers said that they would instead purchase a GAMMA PC; 2,500 consumers said that they would instead buy a printer by Based on these figures, the diversion ratio from ALPHA to BETA is:
62.5%
40%
37.5%

Table reports data on the annual revenues in 2021 for the eight leading Italian automobile and software Consider the eight firms as the entire population in each industry. Which of the following statements on concentration ratio C3 and Herfindahl Index (HI) is TRUE? In 2021

Automobile industry		Software industry
Firms	Revenues 2021 (million euros)	Firms	Revenues 2021 (million euros)
1	2.000	A	1.950
2	1.800	B	1.845
3	1.500	C	912
4	1.200	D	839
5	500	E	577
6	1.900	F	544
7	450	G	460
8	250	H	384

According to HI, both industries were in a monopolist regime
According to HI, both industries were in an oligopolistic regime
According to the C3 index, the automobile industry was more concentrated than the software industry
According to the C3 index, the software industry was more concentrated than the automobile industry

The figure shows a horizontal merger model. Consider the following conditions. Demand is q=100-P; average pre-merger costs, AC₀=$50; average post-merger costs, AC₁=$45; and pre-merger price p₀=$50. Assume that the post-merger price, p₁=$60, results from the market power created by the merger. Which of the following statement is CORRECT?

The costs savings caused by the merger total 50 $
The deadweight loss in consumers’ surplus caused by the merger totals 50$
The merger should be blocked because its efficiency gains are lower than its losses

STRUCTURED QUESTION MINI-CASE [5.5 points]

Please read the following passage based on the article “It is complicated” which appeared in The Economist on Oct 18th, 2014. Take inspiration from the text and course material to answer the following questions.

Making sure companies compete fairly is a tricky business. The firms being regulated know far more about their business than those doing the regulating; bureaucrats can easily end up being too heavy-handed or too lax.

Mr Tirole began publishing in the 1980s, when many governments were busy privatizing big parts of their economies, from telecommunications to transport. It quickly became clear that the new, liberalized industries might not form perfectly competitive markets.

Consider a telecoms firm which has already spent heavily to build a network. Other firms will be unlikely to invest in a second network, as a price war between the two would make it hard to recoup the investment. Such a “natural monopoly” presents regulators with a problem. They do not want monopolists to overcharge consumers and hamper innovation, yet they often struggle to determine the extent to which such things are happening.

The officials trying to regulate the monopolists lack important information about their business: a phenomenon economists call “asymmetric information”. From the outside it is hard to see how much a service should cost or how much a firm should be investing in new products and equipment.

One option for governments is to cap prices at some markup to a firm’s costs. But that takes away the incentive for firms to become more efficient. Another option is to impose a hard price cap. But then firms will tend to pocket gains in efficiency, instead of passing them on to consumers in the form of lower prices.

Provide a real-world example of natural monopoly and explain your reasonings [1 point]
Which main regulatory instruments can policymakers adopt to regulate natural monopolies? [1 point]

Briefly explain the sentence from the text “natural monopoly presents regulators with a ” [1 point]

Analyze the graph below and answer the following questions.

What do points A, F, and E indicate? [1 point]

A indicates F indicates E indicates

Which point indicate the best case of a regulated single-product natural monopoly? Explain your

[1.5 points]

EXERCISE [4.5 points]

Consider a duopoly regime with two firms (firm 1 and firm 2) facing the demand curve Q = 120 – 3P, where Q

= q1 + q2. Both firms have the following cost function Ci(qi) = 4 qi, i=1,2.

Find the monopoly equilibrium (quantities, prices, profits) [0.5 point]
Find the Cournot equilibrium (quantities, prices, profits) [1.5 points]
Find the von Stackelberg equilibrium (quantities, prices, profits) [1.5 points]
Calculate the total consumer surplus, total producer surplus, and total welfare in the market in each of the cases above (under monopoly, Cournot and von Stackelberg). If you were the policymaker, which solution would you prefer? [1 point]

09 - 2022

MULTIPLE-CHOICE QUESTIONS [10 points]

The laser printer manufacturer “XP” plan to merge with its competitor” KANON.” The Japanese antitrust authority is in charge of analyzing the merger and has commissioned a survey to assess the closeness of competition between “XP” and “KANON”. In particular, it has asked 5,000 consumers what they would do if XP increased the prices of its laser The results of the survey are as follows: 2,500 consumers said that they would instead purchase an “EXSON” printer; 1,500 consumers said that they would rather buy a printer by the “KANON”; 1,000 consumers said that they would continue to purchase an “XP” printer. Use these survey data to calculate the diversion ratio from “XP” to “KANON”; it is
1. 5%
2. 40%
3. 5%
4. None of the other statements is correct

Which of the following statements is TRUE? Patents are an imperfect proxy of innovation because
1. Large firms rarely patent their innovations as they are reluctant to
2. Data on patents are complex to retrieve
3. Sometimes, large incumbents use patents just to block competition
4. None of the other statements is correct

Which of the following statements is TRUE?
1. Firms’ incentives to innovate do not depend on the level of competition in the industry
2. Free riding is more likely in small and groups
3. The invention of the transistor generated numerous improvements in the production of modern telecommunications and ICT. This is an example of knowledge spillovers that negatively influence the evolution of other technologies
4. The invention of the transistor generated numerous improvements in the production of modern telecommunications and ICT. This is an example of knowledge spillovers that positively influence the evolution of other technologies

Several studies have found an inverse U-shaped relation between firms’ size and We can explain this result by considering that
1. Small-medium firms have access to a variety of resources for innovation, but they fear product cannibalization
2. Very large firms have few resources for innovation, while very small firms experience core rigidities
3. Very small firms are very flexible, while very large firms have many resources for innovation
4. None of the other statements is correct

Which of the following situations do NOT encompass agency problems?
1. A landlord hires a plumber to fix plumbing issues
2. A financial advisor has several investment funds to offer but prefers to propose to her clients those for which the financial firm will pay her a sale commission
3. The company’s board of directors was selling their Enron stocks at higher prices due to false accounting reports making the stocks seem more valuable than they were. Once the scandal was uncovered, thousands of stockholders lost millions of dollars as Enron’s share values plummeted
4. All the other situations encompass agency problems

Which of the following statements is FALSE? The Scandinavian School
1. Explains internationalization strategies of manufacturing and service firms in small, developed countries
2. Views internationalization as a step-by-step process
3. Does not explain the phenomenon of the born global firms
4. Refers to the notion of psychic distance

Which of the following situations do NOT encompass externalities?
1. Mary and four of her friends have installed WhatsApp on their Now, Mary can communicate with each of them in a quick and unexpansive way
2. Mary graduated from college with an excellent She is looking forward to putting this achievement on her CV as she thinks that this will be very helpful in finding a good job
3. 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 fix the problem
4. Nowadays, many firms promote adopting sustainable mobility solutions (g., bicycles, electric scooters) among their employees to reach the office rather than using their cars.

Which of the following statements on collusion is FALSE?
1. A substantial transaction, which grants immediate large profits, is an incentive to collude to reap (at least part) of the profits of this transaction
2. For tacit collusion cases, the court looks for whether the defendants had met or communicated with one another
3. Firms may use price leadership to support tacit collusion
4. New entrants are less likely to enter collusive agreements

A small number of firms operate in an If the factor at which they discount future profits is 0.9, these firms are indifferent to collude or not collude. The number of firms in the industry is
1. 5
2. 4
3. 7
4. None of the other statements is TRUE

The figure shows a horizontal merger model. Consider the following conditions. Demand is q=100-P; average pre-merger costs, AC0=$50; average post-merger costs, AC1=$44; and pre-merger price p0=$50. Assume that the post-merger price, p1=$70, results from the market power created from the Which of the following statement is FALSE?

The costs savings caused by the merger total 200 $
A1 represents a deadweight loss in consumers’ surplus
The merger should be blocked because its efficiency gains are lower than losses
A2 area represents the cost savings caused by the merger

STRUCTURED QUESTION

MINI-CASE [5 points]

Please read the following passage from the article “Free exchange, Hard bargains,” which appeared in The Economist on Oct 13th, 2016. Take inspiration from the text and course material to answer the following questions.

“Contract theory” tells an important truth: that when people want to work together, individual self-interest must be kept under control. For a chef and a restaurant-owner to work together productively, for example, the owner must promise not to use the power he has to change the locks in order to deny the chef his share of future profit. Firms provide some advantage over dealing with others through exchanges of cash for services in the open market, but economists have struggled to pinpoint what that advantage is.

The difficulty in writing contracts that cover all future situations seems to be crucial. Agreeing beforehand how any hypothetical future windfall or loss ought to be shared can be impossible. Yet the uncertainty of working without such a complete contract could be big enough to prevent potentially profitable partnerships from forming. Firms solve this problem by clever use of the bargaining power bestowed by the ownership and control of key assets, such as machines or intellectual property. Instead of fussing over how to divide up the spoils in every possible future, in other words, workers agree to sell their labor to a firm that owns the machinery or technology they use, in the knowledge that ownership gives the firm the power to hoover up a disproportionate share of the profits.

This power comes with costs as well as benefits, which help shape how big companies become and exactly what they do. In other work, workers and managers who look after equipment can make decisions to improve its productivity (like maintaining the machinery and investing in training). But just how much time and energy they spend on such efforts depends on what share of future profits they can expect. A publisher might buy a printing company in order to have more control over its assets, and ensure its presses are used to print its own books first. Yet if the takeover means that the workers tending the presses see smaller rewards for their efforts, and their managers cannot keep tabs on them, they might shirk the extra sorts of work that keep the presses running as productively as possible.

We can state that [1 point]

(More than one statement may be true)

Asset ownership can help to mitigate inefficiencies that would otherwise arise from underinvestment in productive activities
Incomplete contract theory helps to explain firms’ boundaries
In a situation where party A’s investment is more important than party B’s investment, it is optimal to allocate property rights over the assets to party B, even if this discourages investment by party A
Asset ownership, as in the example of the printing company take over, always guarantees a higher productivity

Which of the following statements is FALSE? According to industrial economists [1 point]
1. Residual control rights are the rights to decide on what is not explicitly specified in a contract
2. Ownership should be assigned to the party whose relational specific investments are the most important for the transaction
3. If relational specific investments are not important, the parties are likely to resort to the hierarchy
4. When multiple parties make nonrecoverable relationship-specific investments that generate a joint surplus to be divided through ex-post bargaining, underinvestment may occur

Provide a real-world example of an industry in which contract incompleteness represents a major issue and explain your reasonings [1.5 points]

Provide an example of a relationship-specific investment and explain your reasonings [1 point]

Fill in the black with the most suitable theory [5 points]

According to the , parties are likely to write ex-ante incomplete contracts due for example to the costs of ruling out all possible contingencies. This will likely lead to ex-post renegotiations, which yield delays and inefficient decisions.

EXERCISE [5 points]

EXERCISE 1 [3.5 points]

Consider a duopoly situation with two firms (1 and 2) facing the demand curve Q = 40 – 1/2P, where Q = q1 + q2. Both firms have the following cost function are Ci(qi) = 8qi, i=1,2. Please, round off all calculations to the second decimal and round up where necessary.

Suppose that products are homogeneous and that the two firms (1 and 2) set their quantity level simultaneously. Find the resulting Nash equilibrium (quantities, prices, profits). [1.5 points]
Suppose that products are homogeneous and that firm 1 sets its quantity before firm 2. Find the resulting Nash equilibrium (quantities, prices, profits). [1.5 points]
Suppose that the two firms Find the resulting Nash equilibrium (quantities, prices, profits). [0.25 point]
Comparing the equilibrium prices and quantities in each competitive regime, which regime is likely to favor consumers the most? Explain why. [0.25 point]

EXERCISE 2 [1.5 points]

Assume a market for car tires, where tires are homogeneous. The two firms (1 and 2) have a combined demand of Q=300 – 1/2P. Their marginal and average costs amount to $100. Initially, the market price was $120.

Firm 1 and 2 have decided to merge. They can lower their production costs from $100 to $80 because of economies of scale in combined operations, and now the monopolist charges a price of $130. Use the combined demand to evaluate the merger.

Calculate the consumer surplus, producer surplus, and social (total) surplus pre-merger and post-merger. [1 point]
Should the merger be approved? Why? [5 point]

07 - 2022

MULTIPLE-CHOICE QUESTIONS [10 points

.pdf file.

In Canada, four companies are active in supplying laptops, with the following market shares: BENOVO (30%); RELL (20%); AXUS (15%); AXER (35%). RELL and AXUS plan to merge and have asked you to write a report on the likelihood that an antitrust authority could block the merger. Based on the analysis of the market structure, and considering that this is a market with high barriers to entry, you submit a report concluding that
1. The merger is likely to be challenged because it might create a dominant position
2. The merger is unlikely to be challenged because it does not give rise to unilateral effects
3. The merger is likely to be challenged because of its coordinated effects
4. The merger most likely does not create incentives to increase prices as it does not result in a dominant position

Which of the following statement is NOT an example of strategic entry barriers?
1. A computer manufacturer allows customers to buy laptops directly from its website. However, customers are allowed to purchase complementary products (g., printers, pen drives) from an online producer and distributor
2. A car manufacturer sells fully equipped cars, for instance, with satellite navigators and automatic transmission
3. After the entry of a few firms from related markets, one of the leading firms in the soda market decides to acquire some extant facilities to increase the number of its plants in the upcoming months
4. All the other statements are examples of strategic entry barriers

Which of the following statements on market failures and remedies to market failure is FALSE?
1. The invention of the transistor generated numerous improvements in the production of modern telecommunications and information and communication technologies
2. National defense, amusement parks, and cinemas are examples of public goods
3. Contaminated waste dumped by a chemical firm into a lake kills fish and negatively affects the health of people living nearby
4. Environmental activists of a small village raise money and volunteer to clean the local beaches

Table reports data on the annual production value in 2021 for the eight Italian automobile and consumer electronics Additional data on the other firms in the industries are NOT available.

Automobile industry		Consumer electronic industry
Value of production 2021 (million euros)		Firms	Value of production 2021 (million euros)
1	2.000	A	400
2	1.800	B	360
3	1.500	C	250
4	1.200	D	100
5	500	E	50
6	1.900	F	800
7	450	G	900
8	250	H	1.000

Which of the following statements on concentration ratio C3 and Herfindahl Index (HI) is correct?

According to HI, both the automobile and the consumer electronic industries were in a monopolist regime in 2021
According to the C3 index, the automobile industry was more concentrated than the consumer electronics industry in 2021
According to the C3 index, the consumer electronic industry was more concentrated than the automobile industry in 2021
None of the other statements is correct

0 manufactures 1 million hard disks per year for Dell laptop computers. Dell has committed ex-ante to assure DISK2.0 a rent of $20 million. The average variable cost of DISK2.0 is c = $15/unit, the yearly cost of investment to build a hard disk production plant is I = $15 million, and the market price (p^M) for DISK2.0 hard disks is p^M = $18/unit. What is the price Dell (p^D) has committed to pay to DISK2.0?
1. p^D is equal to p^M since Dell is a rational agent and wants to capture all the 0’s rent
2. p^D is equal to $32/unit
3. p^D is lower than p^M since relational-specific investments cause market imperfections
4. None of the other statements is correct

Which of the following statements on innovation is correct?
1. Empirical evidence found an inverse U-shaped relation between firms’ size and innovation. Indeed, small firms have financial resources for innovation because of their cost-efficacy, while large firms suffer from core rigidities and the risk of cannibalizing their current product portfolio
2. Empirical evidence found an inverse U-shaped relation between firms’ size and Indeed, small firms lack financial resources for innovation as they are resource-constrained, while large firms are highly flexible, and thus, they have a natural bent toward innovation
3. Interfirm R&D agreements may alleviate the free-rider problem in innovation activities
4. All the other statements are incorrect

Which of the following statements on diversification strategy is correct?
1. Firms may pursue diversification to stabilize revenue and overcome challenges related to the business cycle
2. An automobile manufacturer engages in the production of cars and light trucks by building up two business divisions. This is an example of unrelated diversification since the two business divisions cannot leverage on economies of scope
3. There is consistent evidence that unrelated diversification may be more profitable than related diversification
4. All the other statements are incorrect

A merger between firms that are direct rivals (e., are active in the same “relevant market”) can significantly impede effective competition because of “unilateral effects” when
1. The merged entity has an incentive to decrease prices because of the loss of competition with other players
2. The merged entity enjoys larger economies of scale than its rivals and can drive its competitors out of the market by charging lower prices
3. The merged entity combines different products/services that are very weak demand substitutes
4. None of the other answers is correct

Which of the following statements on network goods and industries is correct?
1. The value of a computer operating system depends only on users’ ability to exchange files and interact with other compatible systems
2. Network effects may make network industries unattractive for new entrants
3. Consumers always incur low switching costs if they choose to switch from a network good A with a large installed base to a network good B of better quality but having a small installed base
4. The costs of switching from one network good A to another network good B decrease with the strength of indirect network externalities related to network good A

Affiliations of a biotech startup with prestigious universities and venture capitalists are beneficial when the startup is going through an initial public offering (IPO) (Colombo et al., 2019). Which economic theory provides the most suitable explanation for the above statement?
1. Agency theory
2. Transaction cost theory
3. Contract incompleteness theory
4. None of the other theories

STRUCTURED QUESTION

MINI-CASE [5 points]

Please read the following passage from the article “How to get managers’ incentives right,” which appeared in The Economist on Feb 4th, 2021. Take inspiration from the text and course material to answer the following questions.

How best should managers be incentivized? When delegating authority, how can a principal be sure that their agents will act responsibly? The problem is usually discussed in terms of the potential for the agents to be greedy, and take money for themselves. In the corporate world, some say, fear plays as big a part as greed in distorting manager incentives. Critics claim that managers are unwilling to invest in long-term projects because they fret this will damage the company’s profit growth in the short term. If that happens, the managers may worry that they will be fired by the board, or that the company will be subject to a takeover bid.

Companies have several layers of agents. The board is worried about pressure from fund managers who are themselves acting on behalf of the underlying investors and fear losing clients if they do not deliver above-average returns.

Lucian Bebchuk of Harvard Law School argues that there has been too much focus on the role of institutional, and particularly activist, investors in driving short-termism. Writing in the Harvard Business Review*, he notes that managers at both Amazon and Netflix have been able to pursue long-term growth at the expense of short-term profits without experiencing any significant pressure from shareholders. Indeed, growth stocks in general (defined as those where the value depends on the expectation of future increases in profits) have been very much in fashion in recent years.

We can state that [1 point]
1. Managers are risk-averse; they prefer to invest in short-term projects to reduce uncertainty and assure firms’ profit This attitude, however, nurtures a short-term perspective
2. Managers are risk-seeking; they prefer to invest in long-term projects to assure firms’ profit growth
3. Managers are risk-neutral in their investment since they can quickly diversify their employment
4. None of the above

Firms’ capital structure influences the total agency costs in principal-agent Which of the following condition is correct? [1 point]
1. Equity increases professional CEOs’ incentives to act in the interest of the firm
2. An increase in the equity/debt ratio decreases professional CEOs’ incentives to act in the interest of the firm
3. A decrease in the equity/debt ratio decreases professional CEOs’ incentives to act in the interest of the firm
4. None of the other answers is correct

Name three agency problems that arise in the principal-agent relation of managerial firms and provide a brief explanation of each one [1.5 points]

(Please structure your answer in the following way: Problem 1)………; Problem 2)…….; Problem 3)………)

How to design effective incentives for managers? Provide one remedy to the problem described in the text with a very brief description of why your remedy aligns with managers’ and owners’ goals [1 point]

Fill in the black with the most suitable theory [0.5 points]

According to , managers of managerial firms seek to maximize revenues in each period and the growth rate of these revenues over time, subject to the constraint of earning satisfactory profits. The target level of profit results endogenously from the maximization of sales.

EXERCISE [5 points]

EXERCISE 1 [3.5 points]

Consider a duopoly situation with two firms (1 and 2) facing the demand curve Q = 14 – (1/5)P, where Q = q₁ + q₂. The firms’ cost functions are C₁(q₁) = 20 + 10q₁ for firm 1, and C₂(q₂) = 10 + 12q₂ for firm 2. Please, round off all calculations to the second decimal and round up where necessary.

Suppose that products are homogeneous and that the two firms (1 and 2) set their quantity level Find the resulting Nash equilibrium (quantities, prices, profits). [1.5 points]
Suppose that products are homogeneous and that firm 1 sets its quantity before firm Find the resulting Nash equilibrium (quantities, prices, profits). [1.5 points]
Suppose you are the CEO of firm 2 (the follower in case of ); which competitive regime would you choose? Explain why. [0.5 point]

EXERCISE 2 [1.5 points]

Consider a second-hand market for motorbikes. There are high-quality motorbikes, which buyers value at most 16,200 $, and low-quality motorbikes, which buyers value at most 6,500$. High-quality sellers will accept 9,450

$ while low-quality sellers will accept 4,500 $. Assume that buyers cannot observe quality before purchasing.

What is the maximum fraction of low-quality motorbikes up to which sellers will still have incentives to sell high-quality motorbikes? [1 point]
What may be the possible consequences in the second-hand market for motorbikes if the fraction of low- quality motorbikes is higher than what you found in point a.)? [0.5 points]

06 - 2022

MULTIPLE-CHOICE QUESTIONS [10 points]

Which of the following statements about the incentives to invest in R&D for small firms is TRUE?
1. Firms with small market share have a lower incentive to invest in R&D than firms with high market share because the former suffer from higher profit reductions than the latter
2. Small firms can easily access capital markets to finance their R&D Indeed, capital markets do not suffer from market frictions
3. Small firms can easily spread the risks of R&D investments by leveraging on their economies of scale and flat organizational structures
4. All the other statements are FALSE

Three out of these four statements provide examples of market failures; pick the exception
1. In managerial firms, managers and owners may not have aligned goals
2. Sellers are better informed than buyers on the quality of their goods
3. In an industry, fixed costs are very high, while variable costs are meager; this cost structure enables allocative efficiency
4. A firm mines coal and pollutes a nearby river where people bath during summer

A manufacturing industry consists of two large and several small manufacturers, which sell their products to many retailers. The two giant manufacturers establish exclusive contracts with large restaurants, fast foods, ballparks, and other retail outlets. We conclude that it engages in
1. Downstream vertical integration
2. Vertical restraints
3. Diversification
4. Technological alliances

Which of the following statements on possible remedies to the principal-agent problem is FALSE?
1. Venture capital firms provide funds to startups in exchange for equity shares and membership in the Board of Directors
2. Firms finance their growth by increasing their equity instead of debt
3. Governments impose firms to follow uniform accounting principles and punish accounting frauds
4. Because of negative long-term performance, the Board of Directors is considering accepting an acquisition deal which will likely imply the CEO’s replacement of the acquired firm

Table reports data on the annual production value in 2020 for eight leading firms and additional data on the other firms in the Italian software and footwear manufacturing industries (source: Orbis).

Software industry		Footwear manufacturing industry
Value of production 2020 (mln EUR)		Firms	Value of production 2020 (mln EUR)
1	1,950	A	557
2	1,845	B	381
3	912	C	379
4	839	D	208
5	577	E	180
6	544	F	167
7	460	G	150
8	384	H	143
Sum of the value of production for all the other firms	18,219		7,212
Sum of the squared market shares of all the other firms	0.0019		0,0025

Which of the following statements on concentration ratio C3 and Herfindahl Index (HI) are TRUE? Consider that more than one statement may be true

According to the C3 index, the software industry was slightly more concentrated than the footwear industry in 2020
According to the C3 index, the footwear industry was slightly more concentrated than the software industry in 2020
According to HI, both the software and the footwear industries were in a (monopolistic) competitive regime in 2020
According to HI, both the software and the footwear industries were in an oligopolistic regime in 2020

Which of the following statements on firms’ boundaries is TRUE?
1. According to the transaction cost theory, the likelihood of choosing vertical integration rather than market transactions decreases as the scale of production increases
2. The Scandinavian School argues that internationalization is a step-by-step Firstly, firms enter foreign markets by establishing production subsidiaries and then by developing sales subsidiaries
3. Diversifying firms pursuing market entry in related industries through M&A do not face post- acquisition implementation problems
4. All the other statements are FALSE

In a price-based oligopolistic regime, it follows that
1. If competition is one-shot, collusion always emerges
2. Firms have low incentives to deviate from a collusive agreement when competition unfolds over time
3. Firms have high incentive to deviate from a collusive agreement when the expected growth of demand is almost zero
4. If competition unfolds over time, a price war, which drives prices below marginal costs, always occurs

Which of the following statements on the free-riding problem is FALSE?
1. The free-riding problem is more likely when students work on a course’s final project in large teams (g., 6-7 members) rather than in pairs
2. The free-riding problem is more likely when people involved in the private provision of a public good (g., a kindergarten) do not care about their reputation
3. All firms producing sodas do some advertising for sodas without reference to any brand name; this practice increases the market demand for sodas. In this market, there is no free-riding
4. Providing comfortable fitting rooms is an essential determinant of the demand for clothes. However, consumers may try on shirts at one store and then buy from another store that have uncomfortable fitting rooms but offers low prices. This is an example of free-riding among retail stores

All the else being equal, a potential user likely prefers platform A to platform B if A
1. Has more substantial cross-side network externalities than B
2. Charges lower transaction fees than B
3. Allows multi-homing, while B does not
4. All the statements above are correct

The laser-printer manufacturer “XP” is merging with its competitor “EXSON”. The Japanese antitrust authority is analyzing the merger and has commissioned a survey to assess the closeness of competition between XP and EXSON. In particular, it has asked 5.000 consumers what they would do if XP increased the prices of its laser printers. The results of the survey are the following:

2,500 consumers said that they would switch and purchase a printer from EXSON
1,500 consumers said that they would switch and purchase a printer from KANON (the only other company selling laser printers in Japan)
1,000 consumers said that they would continue to purchase an XP

The Japanese antitrust authority is asking you to use the survey data to calculate the diversion ratio from XP to EXSON. You submit a report in which you conclude that the diversion ratio is:

25%
62.5%
40%
37.5%

STRUCTURED QUESTION MINI-CASE [4.5 points]

Please read the following passage from the article “Secrets and agents; Information asymmetry”, which appeared in The Economist, on July 23rd, 2016. Take inspiration from it and answer the following questions.

In 2007, the state of Washington introduced a new rule aimed at making the labour market fairer: firms were banned from checking job applicants’ credit scores. Campaigners celebrated the new law as a step towards equality-an applicant with a low credit score is much more likely to be poor, black or young. Since then, ten other states have followed suit. But when Robert Clifford and Daniel Shoag, two economists, recently studied the bans, they found that the laws left blacks and the young with fewer jobs, not more.

[…] In the labour market, the textbooks mostly assumed that employers know the productivity of their workers–or potential workers-and, thanks to competition, pay them for exactly the value of what they produce.

[…] Employers may struggle to tell which job candidates are best. Mr Spence showed that top workers might signal their talents to firms by collecting gongs, like college degrees. Crucially, this only works if the signal is credible: if low-productivity workers found it easy to get a degree, then they could masquerade as clever types.

Signalling helps explain what happened when Washington and those other states stopped firms from obtaining job-applicants’ credit scores. Credit history is a credible signal: it is hard to fake, and, presumably, those with good credit scores are more likely to make good employees than those who default on their debts. Messrs. Clifford and Shoag found that when firms could no longer access credit scores, they put more weight on other signals, like education and experience. Because these are rarer among disadvantaged groups, it became harder, not easier, for them to convince employers of their worth.

We can state that [1 point]

More than one statement may be correct.

There is ex-ante information asymmetry; employers cannot distinguish employees’ abilities. Therefore, employers pay every employee the expected marginal product. This generates, in turn, adverse selection
There is ex-ante information asymmetry; employers cannot distinguish employees’ abilities. Therefore, employers pay employees their marginal product. This generates, in turn, a pooling equilibrium
There is ex-ante information asymmetry; employers cannot distinguish employees’ abilities. Therefore, employers pay every employee the expected marginal product. This incentivizes employees to signal their abilities
There is ex-ante information asymmetry; employers cannot distinguish employees’ abilities. Therefore, employers pay employees their marginal product. Thus, the salary for high-ability employees is higher than the salary of low-ability ones

2. From your own reading of the passage, you can conclude that the introduction of the new law in 2007 [1 point]

1. Distorted the labor market, enlarging the pool of potential candidates
2. Made the selection process fairer, disadvantaged candidates could quickly be hired
3. Distorted the labor market, restricting the pool of potential candidates
4. All other statements are FALSE

3. Provide an example of a signal that employees can use to signal their In answering this question, try to be original, specific, and synthetic (2 lines maximum) [0.5 points]

4. Fill in the blank with a suitable word [0.5 points]

To be valuable a signal should be

5. Suppose there are two types of English teachers in the labor market: half are high-skilled (a_H), and the other half are low-skilled (a_L). English teachers know their type, but firms do not. Assume that the labor market for English teachers is perfectly competitive. A high-skilled English teacher’s expected productivity is a_H = 9,000, while a low-skilled English teacher’s expected productivity is a_L = 3,500. Suppose that firm Alpha intends to hire English teachers to improve its employees’ English. Alpha considers having a training certificate from Cambridge University a credible signal of being a high-skilled English teacher. Then, the firm will offer a wage of w_H = 10,000 to all the English teachers with the certificate and w_L = 3,000 to the English teachers without the certificate. The cost (counting tuition fees and effort invested) of obtaining the certificate for high- skilled teachers is c_H = 2,000, while the cost for low-skilled teachers is c_L = 3,000. Who has incentives to get the certificate? [1.5 points]

1. Only high-skilled teachers
2. Only low-skilled teachers
3. None of the teachers
4. Both high-skilled and low-skilled teachers

EXERCISE

Consider a duopoly regime with two firms (firm 1 and firm 2) facing the demand curve curve Q = 90 − 1/2 P, where Q = q1 + q. Both firms have the following cost function Ci(qi) = 15qi, i=1,2.

Find the Cournot equilibrium (quantities, prices, profits)
Find the von Stackelberg equilibrium (quantities, prices, profits)
If you were firm 2 (the follower in case of ), which competition regime would you prefer?
Calculate the total consumer surplus, total producer surplus and the total welfare in the market in each of the two cases above (under Cournot and von Stackelberg). If you were the policymaker, which solution would you prefer?

02 - 2022

MULTIPLE-CHOICE QUESTIONS [10 points]

You do not need to provide explanations for your answers. However, if something is not clear in the text and you want to add a note to an answer (e.g., an assumption, a clarification, an explanation), please write it in the paper sheets that you will upload as a unique .pdf file.

Which of the following statements is TRUE? According to the theory of public goods
1. The probability of free riding is independent on the number of participants
2. Two agents are willing to buy a public good independently from each other reservation price since they share the use of the good
3. Non-profit organizations may satisfy the demand for public goods that is left unsatisfied by governments (g., rural health care programs)
4. All the other statements are FALSE

Consider a market with ten firms: two with a market share of 30%, two with a market share of 10%, two with a market share of 5%, and four with a market share of 2.5%. The two firms with a market share of 10% decide to merge. As a reaction, one of the firms with a market share of 30% merges with one of firms with a market share of 2.5%. Which of the following statements on concentration ratio (C_K) or Herfindahl index (HI), before and after the mergers, are TRUE?

Of note, more than one statement can be true

1. C₃ after the mergers is lower than C₄ before the mergers
2. C₄ after the mergers is higher than C₅ before the mergers
3. C₅ before the mergers is higher than C₃ before the mergers
4. HI is equal to 0.243 before the mergers and 0.208 after the mergers

If two firms (1 and 2) produce a homogeneous good with the same technology and compete à la Cournot, then
1. They choose the quantity to produce; the choice of each firm is simultaneous and independent; in equilibrium, profits of firm 1 are usually lower than its profit in a von Stackelberg competition
2. They choose the quantity to produce; the choice of each firm is independent, but one firm (the leader) chooses before the other (the follower); in equilibrium, leader’s profits are higher than follower’s profits
3. They choose the price at which they sell the good; the choice of each firm is simultaneous and independent; in equilibrium, firms’ profits are usually higher than those in a Bertrand competition
4. None of the other statement is correct

In platforms business, it usually occurs that
1. Cross-side and same-side network externalities are negative
2. Cross-side network externalities are negative, while same-side network externalities are positive
3. Cross-side network externalities are negative, while same-side network externalities may be positive if, for instance, there is competition among the participants of the same group
4. Cross-side network externalities are positive, while same-side network externalities may be negative if, for instance, there is competition among the participants of the same group

According to industrial economists, which of the following is NOT a typical obstacle to innovation?
1. The existence of managerial firms, where ownership and control are separated
2. Uncertainty about consumers’ preferences
3. Information asymmetries in financial markets
4. All the other statements are TRUE

Which of the following statements is TRUE? Entrepreneurial ventures have difficulties in attracting external financing because they usually
1. Have a more flexible organisational structure than established firms
2. Have difficulties in proving their commitment to develop their entrepreneurial idea
3. Do not signal their quality in the product-market; indeed, they profit from their innovations by licensing their patents
4. All the other statements are FALSE

Which of the following statements are FALSE?

Of note, more than one statement can be false

1. In principal-agent relations, designing incentive contracts for the principal reduces agency problems
2. Defining property rights is a remedy to negative externalities
3. In case of a monopoly upstream and a monopoly downstream, market transactions between the two monopolists are preferable to vertical integration
4. If relational-specific investments of firm B are more important for value creation than relational- specific investments of firm A, it is more efficient that B owns A

A merger between firms active in the same “relevant market” can significantly hamper effective competition because of “unilateral effects” when
1. The merged entity enjoys larger economies of scale than its rivals and can drive its competitors out of the market by charging lower prices
2. The definition of “relevant market” is based on firms’ marketing and technological strategy
3. The merged entity combines different products/services that are weak substitutes
4. None of the other statements is TRUE

Which of the following statements is TRUE? In a highly competitive industry, potential entrants enter the industry when incumbents gain economic profits. This happens when the price is
1. Higher than the long run minimum average cost. However, the entry of new firms causes an increase in price and the exit of firms that make losses
2. Lower than the short run minimum average cost. In this case, new entrants can quickly attract customers
3. Lower than the short run marginal cost. In this case, new entrants can quickly attract customers
4. None of the other statements is TRUE

Which of the following situations encompass an externality?

Of note, more than one statement can be true

George lives in an apartment above a restaurant, and his apartment always smells like burgers and onions. He has tried unsuccessfully to get the restaurant owner to solve the problem
Mary graduated from college with a high mark, she is looking forward to including this achievement in her CV as she thinks that this will help her in finding a good job
After following a workshop on the opportunities stemming from cutting-edge technologies, three students decide to found a new venture that provides digital payment services (based on Blockchain) to online retailers
A venture capital investor decides to finance a new venture based on the recent increase in the citations of the patents of the venture

EXERCISE 1 [4.5 points]

Consider a duopoly situation with two firms (1 and 2) facing the demand curve Q(P) = 250 – 5P, where Q= q₁+q₂. The two firms employ different technologies, which means that they have different cost functions: specifically,

C₁(q₁) = 10+2q₁ and C₂(q₂) = 5+5q₂

Suppose that products are homogeneous and that the two firms (1 and 2) set their produced quantity simultaneously. Find the resulting Nash equilibrium (quantities, prices, profits) [2 points]
Suppose that products are homogeneous and that firm 1 is the follower, while firm 2 is the leader. Find the resulting Nash equilibrium (quantities, prices, profits) [2 points]
Suppose you are the CEO of firm 2 (the leader in case of b.), which competition regime would you prefer? [25 point]. Explain why [0.25 point]

EXERCISE 2 [2.5 points]

Suppose that there are two types of workers on the labor market: half are high-skill workers, and the other half are low-skill workers. For the sake of simplicity, assume that firms hire workers to participate on a specific project and this is a one-time interaction.

A high-skill worker’s productivity in the project is a_H=8,500, while a low-skill worker’s productivity is a_L=3,000. Workers know their type, but firms do not.

Assume that the labor market is perfectly competitive, so when a firm hires a worker, it pays a wage equal to the worker’s expected productivity.

Suppose that a local college offers a certificate program, whose completion has no impact on workers’ productivity. High-skill workers’ cost of obtaining the certificate (e.g., tuition fees and workers’ effort in term of time) is c_H=1,500$, while the cost of obtaining the certificate for low-skill workers is c_L=4,500$.

Suppose that firms consider having a certificate a credible signal of a worker being high-skilled. Then, the firms will offer wage w_H=8,500$ to workers who obtain it and w_L=3,000$ to those without the certificate. Which types of workers will get the certificate? [1 point]
What would be the wages if the firm revises its wage scheme by using the average expected productivity of the two types of workers? [5 point]
Using the data provided (a_H=8,500, a_L=3,000, c_H=1,500, c_L=4,500), find the level of education e_H that allows high-skilled workers to credibly signal their skills on the labor market [1 point]

EXERCISE 3 [3 points]
Consider a second-hand market for motorbikes. There are high-quality motorbikes, which buyers value at most 12,000 $, and low-quality motorbikes, which buyers value at most 8,000$. High-quality sellers accept 9,500 $, while low-quality sellers accept 4,000 $. Assume that buyers cannot observe quality before purchasing.

a.) What is the maximum fraction of low-quality motorbikes up to which sellers will still have incentives to sell high quality motorbikes? [1 point]
b.) Based on the fraction of low-quality motorbikes you computed at point a.), what is the buyers’ expected value for motorbikes? [0.5 point]
c.) Assume the fraction of low-quality motorbikes is 0.5. Explain whether the sellers have incentives to stay or exit the market by calculating the buyers’ expected value [0.5 point]. What type of equilibrium is reached?
[0.25 point]
d.) Assume the fraction of low-quality motorbikes is 0.7. Explain whether the sellers have incentives to stay or exit the market by calculating the buyers’ expected value [0.5 point]. What type of equilibrium is reached?
[0.25 point]

01 - 2022

BUSINESS AND INDUSTRIAL ECONOMICS
A.Y. 2020/2021

BIE classroom exam – January 12th, 2022

MULTIPLE-CHOICE QUESTIONS [10 points]
You do not need to provide explanations for your answers. However, if something is not clear in the text and you want to add a note to an answer (e.g., an assumption, a clarification, an explanation), please write it in the paper sheets that you will upload as a unique .pdf file.

1. How are (non-merging) competitors likely to react to a horizontal merger that impedes effective competition because of unilateral and coordinated effects? These competitors likely have incentives to

a. Decrease prices to counteract the market power of the merged entity

b. Increase prices because of both unilateral and coordinated effects
c. Increase prices because of unilateral effects and decrease them because of coordinated effects
d. Not react to the merger because the merger only affects the merging parties’ pricing strategies

2. A retailer A chooses to bear costs of training its staff to demonstrate potential customers how a new kitchen appliance works. Instead, another retailer B, which sells a homogeneous product, decides not to bear these costs. Customers, who have participated in the product demo of A, are free to choose to buy the kitchen
appliance from B, which charges lower price than A. This is a case of

a. Price discrimination since the two retailers set different prices for a homogeneous good. Because of this pricing strategy, only one firm will win the entire market
b. Signaling since retailer A has already shown customers the better quality of its products
c. Free riding problem since retailer B benefits from the actions and efforts of retailer A without bearing any cost
d. None of the other answers is correct

3. Which of the following statements is TRUE? According to industrial economists

a. The divide-and-conquer strategy prescribes that a platform owner should charge low prices to the group of participants with the lower demand elasticity to get this group on board and, thus, to attract participants from the other group
b. A Board of Directors formed only by internal members reduces principal-agent problems in managerial firms
c. There is consistent evidence that innovation negatively relates to industry concentration
d. All the other statements are FALSE

4. Consider a second-hand market for motorbikes. There are high-quality motorbikes, which buyers value at most 10,000 Euros, and low-quality motorbikes, which buyers value at most 6,000 Euros. High-quality sellers accept (at the minimum) 7,500 euros, while low-quality sellers accept (at the minimum) 5,000 euros. What should be the share of high-quality motorbikes in the market to have a pooling equilibrium?

a. 0.375
b. 0.5
c. 0.625
d. All the other answers are WRONG

5. Which of the following statements on innovation is TRUE?

a. Empirical evidence found an inverse U-shaped relation between firms’ size and innovation. Indeed, small firms have financial resources for innovation because of their cost-efficacy, while large firms suffer from core rigidities and risk of cannibalizing their current product portfolio
b. Attracting external finance for innovation is even more difficult for large established firms as their large size complicates investors’ monitoring activities
c. Assessing the impact of mergers on the market by policymakers is an example of an innovation policy

d. All the other statements are FALSE

6. The firm DISK2.0 manufactures 1 million hard disks per year specifically for Dell laptop computers. Dell has committed ex-ante to assure to DISK2.0 a rent of $10 million. The average variable cost of DISK2.0 is c =$15/unit, the yearly cost of investment to build a hard disk factory is I = $15 million, and the market price (pM) for DISK2.0 hard disks is pM = $18/unit. What is the price that Dell (pD) has committed to pay to DISK2.0?

a. pD is equal to pM since Dell is a rational agent and wants to capture all the DISK2.0’s rent
b. pD is lower than pM since relational-specific investments cause market imperfections
c. pD is equal to $40/unit
d. pD is equal to $22/unit

7. Which of the following statements on “born global firms” and internationalization is FALSE? Born global firms

a. Are smaller than traditional multinational companies, although both types of firms target international markets and perform value-adding activities in different countries
b. Are young entrepreneurial firms in terms of ownership and managerial structure
c. Have little or no experience about international markets. Thus, they initially grow their businesses into the domestic market. Once successful, these firms become increasingly
committed to internationalization
d. Pursue an internationalization expansion that does not align with the mainstream stage theory

8. Consider two firms, a manufacturer (M, upstream firm), and a retailer (R, downstream firm). Which of the following statements on vertical relations is FALSE?

a. The demand of M depends on the price that R sets and on other variables that M does not directly control (e.g., advertising, sale services)
b. The sum of the profits of the two unintegrated firms is lower than the profit of the merged entity that would result from vertical integration
c. The total profit of the two firms is higher than it would be under vertical integration because of double marginalization
d. The demand of M also depends on the degree of competition that R faces by the other firms in the downstream market

9. Which of the following statements on network industries is FALSE?

a. The value of a computer operating systems depends only on users’ ability to exchange files and interact with other compatible systems
b. Consumers may incur high switching costs if they chose to migrate from a network good with a large installed base to another one of better quality, but with a limited installed base
c. Network effects may cause market imperfections in network industries, making them unattractive for new entrants because of high entry barriers
d. As synchronisation value of a network good is directly and indirectly tied to the size of its installed base, network industries are characterized by path dependence since current performances strongly depend on past events

10. Firms 1-6 are active in industries A-F. The table reports firms’ shares of sales in each industry (a blank cell means that a firm does not operate in an industry, e.g., firm 1 does not operate in industry A). Industries A, B and C are related industries; the same holds for industries D, E, F. Which of the following statements is TRUE?
Of note, more than one statement can be true

Firm	Industry A	Industry B	Industry C	Industry D	Industry E	Industry F
1		0.01		0.005	0.975	0.01
2	0.675	0.16	0.025			0.14
3	0.1			0.7		0.2
4	0.1	0.705	0.025			0.17
5		0.125			0.225	0.65
6	0.125		0.725	0.125	0.025

a. According to the Herfindahl index (HI), industries B and C are more concentrated than industries A and F
b. According to the Herfindahl index (HI), industries E and C are more diversified than all the other industries
c. Firms 1 and 5 have a higher Gort index (D2) than firms 2 and 4
d. Firms 3 and 4 have a higher Specialisation Index (SI) than firms 2 and 5

EXERCISE 1 [7 points]
Consider a duopoly situation with two firms (1 and 2) facing the demand curve P = 15 – Q, where Q = q1 + q2.
Both firms have the same cost function: Ci(qi) = 3qi, i=1,2
a.) Compute the Cournot equilibrium (quantities, prices, profits). [1.5 points]
b.) Compute the von Stackelberg equilibrium (quantities, prices, profits). [1.5 points]
c.) Find the price, quantities, and profits under collusion. [1.5 points]
d.) If you were firm 2 (the follower), which competitive regime would you prefer? [0.5 points]
e.) Calculate the total consumer surplus, total producer surplus, and the total welfare in the market in each of the three competitive regime (i.e., Cournot, von Stackelberg, and Collusion). If you were the State, which competitive regime would you prefer? [2 points]

EXERCISE 2 [3 points]
Assume a market for car tires, where tires are homogeneous. The two firms (1 and 2) have a combined demand of Q=100-0.4P. Likewise, their marginal and average costs amount to $100. Initially, the market price is $110. Firm
1 and 2 have decided to merge. They can lower their costs of production from $100 to $85 because of economies of scale in combined operations and, being now the monopolist, charge a price of $120. Use the combined demand to evaluate the merger.
a.) Calculate the consumer surplus, producer surplus and social (total) surplus pre-merger and post-merger [2 points]
b.) Should the merger be approved? Why? [1 point]

09 - 2021

BUSINESS AND INDUSTRIAL ECONOMICS A.Y. 2020/2021

BIE classroom exam – September 9th, 2021

The definition of a “relevant market” is mainly based on:
- Companies’ marketing strategies
- The technology of production
- Demand-side substitutability
- Supply-side complementarity

Which of the following statements on firm’s boundaries is FALSE?
- The horizontal boundaries of a firm are also determined by cost considerations (e.g., economies of scale and scope)
- The vertical boundaries of a firm result from the decisions at each stage of the value chain on how to produce inputs (distribute outputs). According to the transaction cost theory, a firm has wide vertical boundaries (i.e., it is highly vertical integrated), when it requires highly-specific assets to produce inputs (distribute output) at different stages
- A vertically integrated firm, which owns essential inputs in the upstream market is always less efficient than another firm in the same industry, which relies on market transactions to obtain these inputs
- Tapered integration and franchising contracts are alternative strategies between vertical integration and market transactions

According to Vernon model,
- Internationalization is worth in the introductory phase of a product life-cycle
- Locating production in a foreign country is worth if the cost of producing abroad is lower than the cost of producing domestically, especially in the mature phase of a product life-cycle
- Internationalization is less likely in the growth phase of a product life-cycle as new firms imitate competitors’ new products
- All the other statements are WRONG

Which of the following statements on the relationship between market structure and innovation is TRUE?
- Some scholars concur that innovation rates are higher in large concentrated industries than in competitive markets as large oligopolistic firms have many resources to invest in innovation
- Some scholars agree that competition incentivizes innovation, because firms in a competitive market have abundant resources to innovate and protect their innovations. In addition, leveraging on their position in the market (price-makers), they can set the price of the products, thus being able to repay their innovation investments
- The public benefits of innovation are always lower than the private benefits, independently of the market structure
- High competition among firms triggered by process innovation characterizes industries at the early stage of their life

In the market, there are four large firms engaging in a collusive agreement. It follows that:
- If the firms play the trigger strategy and the discount factor of future profits is δ, each firm has incentive to deviate from the collusive agreement if δ > 0.75
- If the firms play the trigger strategy and the discount factor of future profits is δ, each firm has incentive to deviate from the collusive agreement if δ < 0.25
- A firm has less incentive to deviate from the collusive agreement if demand sharply increases
- All the other statements are WRONG

Fairphone is a high-grow start-up producing innovative smartphones, which it sells at reasonable prices. Fairphone is located in the Netherlands; it produces and assembles all the components of its smartphones in-house, except for their unbreakable screens. These screens are a crucial source of competitive advantage over competitors, whose screens usually crash when the phones fall. Fairphone’s supplier of screens is Dolpha Technology. Dolpha Technology is a medium-size firm (more than 100 employees). It is highly specialized (the production of smartphone screens accounts for 90% of its revenues) and located (headquarter and production plants) in China. Basing on the description above, we conclude that Fairphone has an incentive to continue to buy the screens from Dolpha Technology. However, there might be risks of opportunistic behaviours because:
- Geographical proximity between Fairphone and Dolpha Technology favours monitoring
- If Fairphone cannot rely on other suppliers, Dolpha Technology might have incentive to renege the terms of its supply contract with Fairphone
- Specialization, which generates economies of scale, makes Dolpha Technology an efficient producer, which has an incentive to behave opportunistically independently from the downstream market structure
- All the other statements are CORRECT

Which of the following statements on managerial firms is TRUE?
- Managers and owners have necessarily conflicting goals, managers are more informed than owners on how to run the firm, and managers are risk-neutral, while owners are risk-averse
- Because of their risk attitude, managers tend to undertake diversification moves. Indeed, diversification implies high uncertainty and risks; this especially occurs when managerial firms enter unrelated industries where they lack industry-specific knowledge
- In line with managerial theories, empirical evidence shows that managerial firms always perform better (i.e., gain higher profits) than owner-controlled firms. Indeed, owner-controlled firms suffer from information asymmetries as owners have less firm- and industry-specific knowledge than managers
- All the other statements are FALSE.

Which of the following statements is TRUE? In platform businesses,
- Key technological challenges deal with designing the interface through which participants interact
- The exchange of products requires the ownership of these products by the firm running the platform
- Platform owners can leverage only on their private knowledge; therefore they have no incentive to facilitate the creation of complementary innovations by third parties
- All of the other statements are TRUE

Which of the following statements is FALSE?
- Open-source software (OSS) is an example of a public good, in which individual programmers’ willingness to signal their talent to employers does not mitigate free-riding problems.
- The production process of a chemical firm pollutes the land that a farm uses to grow its crops. A solution to this negative production externality is that the farm owns the land and sells pollution rights to the chemical firm
- Firms’ R&D investments generate knowledge spillovers, which benefit other firms in the industry. Therefore, firms have incentives to sign R&D agreements with other firms to alleviate free-riding problems in R&D investments
- Public goods, information asymmetries, externalities, and natural monopolies are among the causes of market failures

Firms 1-6 are active in industries A-F. The table reports firms’ shares of sales in each industry (a blank cell means that a firm does not operate in an industry, e.g., firm 1 does not operate in industry D). Industries A, B and C are related industries; the same holds for industries D, E, F. Which of the following statements is FALSE?
- Of note, more than one statement can be false

Firm	Industry A	Industry B	Industry C	Industry D	Industry E	Industry F
1	0.65	0.125	0.225
2	0.14	0.16	0.025			0.675
3	0.2			0.7		0.1
4		0.705	0.025	0.17		0.1
5	0.01	0.01		0.005	0.975
6			0.725	0.125	0.025	0.125

Basing on the Herfindahl index (HI), the industries D and F are more concentrated than industries A and C
Firms 2 and 4 have a higher Gort index (D2) than firms 1 and 5
According to the Rumelt approach, firms 1 and 2 are related-business firms. Instead, firm 6 is a dominant-business firm
Basing on the Herfindahl index, industry E is the most concentrated one as firm 5 dominates it. Basing on the Specialization index (SI), firm 5 is the most diversified firm
Reference: Module D (slides 46-49), Module E (slides 34-35)

EXERCISE 1 [4 points]

A coal-fired power plant jointly produces electricity and air pollution. Air pollution adversely affects a nearby farm producing agricultural products. Assume that pe = 20 is the price of electricity, pf = 10 is the price of the agricultural products (both firms are price-takers), Ce (e, x) = e^2 + (x^2 – 8x) is the cost for the coal-power plant of producing electricity (e) jointly with x units of pollution (pollution is a production externality), and Cf (f, x) = f^2 + fx is the cost for the farm of producing f units of agricultural products when the coal-fired plant emits x units of pollution.

) Suppose there are no property rights on air pollution and thus there is no market for pollution (the price of pollution is 0). Calculate the produced amount of electricity (e*), agricultural products (f*), pollution (x*) and the profits (π*), separately for the two firms. [1 point]
) Suppose that the two firms merge to internalize the negative externality. Calculate the produced amount of electricity (e*), agricultural products (f*), pollution (x*) and the overall profit of the merged firm (π*). [1 point]
) Suppose that property rights on the air are created and assigned to the farmer who can now sell pollution rights at price px. Calculate the optimal amount of electricity (e*), the optimal number of agricultural products (f*), the traded property rights (x*) and the profits (π*) for the two firms. [1.5 points]
) Suppose the property rights on air would have, instead, been assigned to the coal-fired power plant. Would the results you found in point c.) of the exercise be different? [0.25 points] Explain your reasoning. [0.25 points]

EXERCISE 2 [3.5 points]

Consider a duopoly situation with two firms (1 and 2) facing the demand curve P = 70 – 5Q, where Q = q1 + q2. The firms’ cost functions are C1(q1) = 20 + 10q1 for firm 1, and C2(q2) = 10 + 12q2 for firm 2. Please, round off all calculations to the second decimal and round up where necessary.

) Suppose that products are homogeneous and that the two firms (1 and 2) set their quantity level at the same time. Find the resulting Nash’s equilibrium (quantities, prices, profits). [1.5 points]
) Suppose that products are homogeneous and that firm 1 sets its quantity before firm 2. Find the resulting Nash’s equilibrium (quantities, prices, profits). [1.5 points]
) Suppose you are the CEO of firm 2 (the follower in case of b.), which competition regime would you choose? [0.25 points] Explain why. [0.25 points]

07 - 2021

BUSINESS AND INDUSTRIAL ECONOMICS A.Y. 2020/2021

BIE classroom exam – July 20th, 2021

MULTIPLE-CHOICE QUESTIONS [10 points]

A merger between two firms that are direct rivals (i.e., are active in the same “relevant market”) can significantly impede effective competition because of “unilateral effects” when:

The merged entity enjoys larger economies of scale than its rivals and can drive its competitors out of the market by charging lower prices.
The merged entity has an incentive to increase prices because of the loss of competition between the two merging firms.
The merged entity can easily orchestrate collusion in the market.
The merged entity combines different products/services that are weak demand substitutes.

Which of the following statements on critical mass is TRUE?

Critical mass is independent of the price charged by a firm for launching a network good because the firm leverages on network effects to attract further users.
Although a firm, offering a network good, might not incur in high fixed costs, it needs to attain critical mass to survive.
If the number of users buying the network good of firm A has overcome the critical mass, firm B has just to introduce a new network good at a lower price to win the competition with A.
All the other statements are false.

Firms 1-6 are active in 6 industries (A-F). The table reports firms’ shares of sales in each industry. Which of the following statements is TRUE?

Firm	Industry A	Industry B	Industry C	Industry D	Industry E	Industry F
1	0.65	0.075	0.2	0.05	0.015	0.01
2	0.1	0.175	0.2	0.15	0.075	0.3
3	0.1	0.15	0.2	0.15	0.2	0.2
4	0.075	0.1	0.1	0.25	0.25	0.225
5	0.05	0.25	0.1	0.1	0.31	0.19
6	0.025	0.25	0.2	0.3	0.15	0.075

It is possible that more than one statement is correct.

Based on concentration index (C3) and Herfindahl index (HI), industry E is more concentrated than industry F and industry C.
Based on concentration index (C4) and Herfindahl index (HI), industry F is less concentrated than industry D and industry C.
Specialization Indexes (SI) of firms 2 and 5 are equal to 0.3 and 0.31, respectively; Gort Indexes (D2) of firms 2 and 5 are equal to 0.7 and 0.69, respectively.
Gort index (D2) of firms 3 and 4 are equal to 30 and 24, respectively; Berry index (DB) of firms 3 and 4 are equal to 0.83 and 0.80, respectively.
Firms 1-6 are active in industries A, B and C. The table reports firms’ shares of sales in each industry. Which of the following statements is TRUE?
According to Arrow’s view, firms in industry A have more incentives to innovate than those in the other industries.
According to Arrow’s view, firms in industry B have more incentives to innovate than those in the other industries.
According to Schumpeter’s view (Mark II), firms in industry A have more incentives to innovate than those in the other industries.
According to Schumpeter’s view (Mark II), firms in industry C have more incentives to innovate than those in the other industries.

Consider two firms, a manufacturer (M, upstream firm), and a retailer (R, downstream firm), both are monopolists in their markets. Double marginalization occurs when M and R:
Operate separately, both firms mark up the price below their own marginal costs, and the market price of the good is higher than in the case of integrated firm.
Operate separately, both firms mark up the price above their own marginal costs. However, the market price of the good is lower than in the case of integrated firm because the integrated firm can leverage on its monopolistic position.
Integrate and the market price of the good is higher than in the case in which the two firms operate separately.
None of the answers is correct.

Which of the following statements on (tacit and explicit) collusion is TRUE? The sustainability of collusion between two competing firms (A and B) is:
1. More likely if a manager of firm A sits in the board of directors of firm B.
2. More likely when firms A and B receive unusually large orders at large time intervals.
3. More likely when the industry is not concentrated as collusion solves coordination problems among many firms.
4. None of the statements is true.
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, but they know that the share of high-quality bikes on the market is 0.80. We conclude that:
1. Both kinds of bikes are sold on the market.
2. Only low-quality bikes are sold on the market.
3. Only high-quality bikes are sold on the market.
4. Information asymmetries do not play any role in this market, because buyers’ evaluation is always higher that the amount of money, which sellers are willing to accept (namely, 800>700 and 400>300).
Which of the following statements is FALSE?
1. In presence of high uncertainty, new entrants usually engage in predatory pricing because they can leverage on incumbents’ information asymmetries.
2. In setting their pricing strategy, platform businesses usually charge high access fees to attract and retain the most quality- and price-sensitive users.
3. A monopolistic incumbent can strategically set price just at the level that leaves out potential entrants. By fixing this limit price, the incumbent sells an output that is higher than the monopoly output.
4. All the other statements are false.

Read the section reported below from the article “Genetic testing threatens the insurance industry”, appeared in The Economist, on August 5th, 2017.

“If a genetic test could tell whether you are at increased risk of getting cancer or Alzheimer’s, would you take it? As such tests become more accessible, more and more people are saying “yes”. The insurance industry faces a few headaches as a result.
Once used only for medical reasons, basic predictive genetic tests can now be ordered online for a few hundred dollars. One company, 23andMe, in California, has collected some 4,000 litres of sputum since 2007, enlightening 2m people eon their ancestry, health risks and what they may pass on to off-springs. In April it received regulatory approval to screen for risk factors connected to ten diseases and genetic conditions, including late-onset Alzheimer’s and Parkinson’s. The ruling could open the flood gates for others to sell direct to consumers.

“Information is power”, argue many who take such tests. But insurers fear that without equal access to such information, they will lose out to savvy customers. Consumer groups, on the other hand, fear that if insurance company did have access to such information, people with “bad” genes might find themselves unfairly excluded from cover. Either way, the scientific advances could well disrupt insurance significantly. […]”

With reference to the previous section, if predictive tests become common, we can state that:

If non-disclosure rules on the results of predictive tests exist, insurance firms are reluctant to offer insurance policies because an ex-ante information asymmetry exists which, in turn, causes an adverse selection problem.
If disclosure rules on the results of predictive tests exist, insurance firms are reluctant to offer insurance policies because an ex-ante information asymmetry exists which, in turn, causes an adverse selection problem.
If disclosure rules on the results of predictive tests exist, insurance firms are reluctant to offer insurance policies because a hidden information problem exists which, in turn, causes a moral hazard problem.
If non-disclosure rules on the results of predictive tests exist, insurance firms are reluctant to offer insurance policies because an ex-ante information asymmetry exists which, in turn, causes a moral hazard problem.
The economic term for the costs of enforcing a contract or of searching for a product is:

Ex-ante transaction costs.
Opportunity costs.
Ex-post transaction costs.
None of the answers is correct.

EXERCISE 1 [5 points]

Two firms (1 and 2) compete on prices. Their demand functions are Q1= 60 – P1 + P2 and
Q2 = 60 + P1- P2, where P1 and P2 are the prices charged by each firm, respectively, and Q1 and Q2 are the resulting demands. Assume that marginal costs (MC) are zero for both firms.

) Suppose that the two firms’ products are not perfect substitutes and that firms set their prices at the same time. Find the resulting Nash equilibrium (quantities, prices, profits). [2 points]
) According to the results of point (a.) of the exercise, does a Bertrand’s paradox emerge? Explain why. [0.5 points]
) Suppose now that products are homogeneous and that firm 1 sets its price before firm 2. Find the resulting Nash equilibrium (quantities, prices, profits). [2 points]
) Suppose you are the CEO of one of the two firms and that the two firms can compete in three possible ways : 1) both firms set price at the same time; 2) you set price first; 3) your competitor sets price first. Based only on the results you find in part (c.) of the exercise, which of the three options (1, 2, 3) would you prefer? Explain why. [0.5 points]

EXSERCISE 2 [3 points]

Suppose that there are two types of workers on the labor market: half are high-skill workers and the other half are low-skill workers. For the sake of simplicity, assume that firms hire workers to participate on a specific project and this is a one-time interaction.

A high-skill worker’s productivity in the project is aH = 8,000, while a low-skill worker’s productivity is aL = 3,000. Workers know their type, but firms do not.

Assume that the labor market is perfectly competitive, so when a firm hires a worker, it pays wages equal to the worker’s expected productivity.

Suppose that a local college offers a certificate program, whose completion has no impact on workers’ productivity. High-skill workers’ cost of obtaining the certificate (counting both tuition fees and effort invested) is cH = 1,500, while the cost of obtaining the certificate for low-skill workers is cL = 4,500.

Suppose that firms consider having a certificate a credible signal of a worker being high-skilled. Then, the firms will offer wage wH = 8,000 to all workers who obtain it and wL = 3,000 to all workers without certificate. Which types of workers will get the certificate? [1 points]
What type of equilibrium is achieved? [25 points]. Is the outcome efficient for the firm? [0.25 points]
Whatwouldbethewagesifthefirmrevisethecompensationschemebyusingtheaverageexpected productivity of the two types of workers? [5 points]
Using the data provided (aH = 8,000, aL = 3,000, cH = 1,500 , cL = 4,500), find the level of education eH that allows high-skilled workers to credibly signal their skills on the labor market. [1 points]

06 - 2021

MULTIPLE-CHOICE QUESTIONS [10 points]

You do not need to provide explanations for your answers. However, if you want to add a note to an answer (e.g., an assumption, a clarification, an explanation), please write it in the paper sheets that you will upload as a unique .pdf file.

1. The analysis of market shares is less informative of the possible impact of a merger on competition in a market where:
  1. Firms sell differentiated products, compared to a market where firms sell homogenous
  2. There are barriers to entry, compared to a market where there are no barriers to
  3. Firms have similar market shares, compared to a market where firms have very different market
  4. The market is static, compared to a highly innovative
1. Which of the following statements on competition among firms is FALSE?
  1. Entry of new firms in an industry can be temporally deterred by incumbents because of the ownership of a patent, which is essential for developing the product. This is a strategic entry barrier that incumbents use to set price higher than their marginal costs in the short run.
  2. If firms undertake a predatory pricing strategy, they set the price higher than their marginal costs in the short run to deter entry of new firms and earn extra profits in the long
  3. Collusion among firms is more likely when an industry is less concentrated and there are many new
  4. All the other answers are
1. Which of the following statements on network goods is TRUE? The costs of switching from one network good A to another network good B:
  1. Decreases when a user spends just limited time in learning how to use
  2. Decreases with the strength of indirect network
  3. Decreases as the price of A
  4. All the other answers are
1. Fill in the blanks with the economic theory, which is the most suitable to explain the case.
  1. In startups, members of the entrepreneurial team and employees likely share the same space and, thus, monitoring is This case can be explained by (0.25 points).
1. Firms usually choose market transactions over vertical integration when asset specificity is This case can be explained by (0.25 points)
1. Two firms, I and J, engage in a transaction using a certain asset. Firm I has greater incentive than firm J to undertake relational-specific investments on the asset to maximize the surplus of transaction if it owns the asset. This case can be explained by (0.25 points)
1. Affiliations of a biotech startup with prestigious universities and venture capitalists are particularly useful when the startup is going through an initial public offering (IPO). This case can be explained by
(0.25 points).
1. Firm A and B are active in six industries. The table reports firms A and B’s shares of sales in each industry j (pij, with j = 1,…,6). Which of the following statements is TRUE?
It is possible that more than one answer is correct.

Industry
pij (A)
pij (B)
1
0.80
0.05
2
0.10
0.15
3
0.025
0.10
4
0.025
0.10
5
0.025
0.25
6
0.025
0.35
1. According to Rumelt’s approach, firm A is an unrelated-business firm, while firm B is a related- business
2. According to Rumelt’s approach, firm A is a dominant-business firm, while firm B is an unrelated- business
3. Berry’s indexes (DB) for firm A and firm B are 0.65 and 0.23, respectively.
4. Berry’s indexes (DB) for firm A and firm B are 0.35 and 77, respectively.
1. Which of the following statements on internationalization and foreign direct investment (FDI) is FALSE?
  1. A Chinese firm producing furniture acquires an Italian retail firm to sell its products on the Italian This is a case of greenfield FDI.
  2. A firm internationalizes by exporting its products This is a case of FDI.
  3. The Scandinavian School argues that internationalization occurs Firms enter foreign markets by establishing firstly production subsidiaries and, then, developing sales subsidiaries.
  4. All the other answers are
1. Which of the following statements on the free riding problem is TRUE?
  1. The free-riding problem is not a case of market
  2. The free riding problem is more likely when agents involved in the private provision of a public good can easily
  3. All firms producing cornflakes do some advertising to cornflakes without reference to any brand name; this practice increases the market demand for cornflakes. In this market, there is no free riding
  4. All the other answers are false.
1. A coal-fired power plant jointly produces electricity and air Air pollution adversely affects a nearby farm producing an agricultural product. Assume that: pe = 10 is the price of the electricity, pf = 8 is the price of the agricultural product (both firms are price-takers), ce (e, x) = e² + (x² – 5x) is the cost for the coal-power plant of producing electricity e jointly with x units of pollution (pollution is a production externality), and cf (f, x) = f² + fx is the cost for the farm of producing f units of agricultural products when the coal-fired plant emits x units of pollution. The two firms merge to internalize the production externality, calculate the produced amount of electricity (e*), agricultural product (f*), and pollution (x*).
2. e*= 10; f*=11/3, x*=2/3.
3. e*= 5; f*=2/3; x*=11/3.
4. e*= 10; f*=2/3; x*=11/3.
5. None of the other answer is correct.
1. Which of the following statements on the relevance of policymakers’ intervention is FALSE?
  1. In highly competitive industries, the establishment of intellectual property rights (IPRs) by policymakers actually causes negative effects on innovation. Indeed, obtaining IPRs increases the costs of innovating firms, which, thus, are forced to increase their prices; this has negative repercussions on their survival.
  2. Policymakers can directly provide public goods, thus solving the free riding problem, which hampers the private provision of public goods.
  3. In highly competitive industries, policymakers can stimulate innovation by providing non-financial support to firms engaging in innovation and by setting up institutional entry
  4. All the other answers are
1. Assume that two firms produce homogeneous goods using the same technology. In a Cournot competition, firms
  1. Choose the quantities they produce. The choice of each firm is simultaneous and independent. In equilibrium, firms’ profits are normally higher than profits in a Bertrand
  2. Choose the quantities they produce. The choice of each firm is simultaneous and independent. In equilibrium, firms’ profits are normally lower than profits in a Bertrand
  3. Choose the quantities they produce. The choice of each firm is independent, but one firm (the leader) chooses before the other one (the follower). In equilibrium, leader’s profits are higher than follower’s
  4. Choose the price at which they sell their goods. The choice of each firm is simultaneous and In equilibrium, firms’ profits are normally higher than profits in a Bertrand competition.

EXERCISE 1 [7 points]

Consider a duopoly situation with two firms (firm 1 and firm 2) facing the demand curve Q = 53 – P, where Q = q1 + q2. Both firms have the following cost function Ci(qi) = 5qi, i=1,2.

a.) Find the Cournot equilibrium (quantities, prices, profits). [1.5 points]

b.) Find the von Stackelberg equilibrium (quantities, prices, profits). [1.5 points] c.) Find the price, quantities, and profits under collusion. [1.5 points]

d.) If you were firm 2 (the follower in case of b), which competition regime would you choose? [0.5 points]

e.) Calculate the total consumer surplus, total producer surplus, and the total welfare in the market in each of the three cases above (under Cournot, von Stackelberg, and collusion). If you were the policymaker, which solution would you prefer? [2 points]

EXERCISE 2 [3 points]

Suppose that two thirds of drivers drive carefully and get into a car accident with probability 0.1. The remaining one third is not as careful and faces the probability of a car accident of 0.8. Assume every driver has the same income of $825 per year. Having a car accident results into damages of $350. Drivers are risk-averse and have utility function U = √𝑤, where w is the income per year. There is a risk-neutral insurance firm in the city.

a.) For now, assume that information is perfect and symmetric. What happens if the firm offers full insurance at actuarially fair rates (such that the premium for each dollar insured is equal to the expected payment by the insurance firm)? What will be the total premium for each type of drivers? [0.75 points]

Which type of drivers will choose to buy the insurance? [0.75 points]

b.) Now assume: each driver knows her/his type, but this information is not available to the insurance firm. If all drivers decide to purchase the insurance, at what total premium would the insurance firm break-even (have zero profit)? [0.5 point]

c.) Suppose the insurance firm does charge the premium you calculated in part (b), which type of drivers will decide to buy the insurance? [0.5 point]

d.) What type of problems the insurance company may face according to the results you find in part (c) of the exercise? [0.5 point]

07 - 2020

06 - 2019

07 - 2019

Rakets

07 - 2024

BIE exam 2° call 12th July 2024 [G-O]

1.Suppose a yardstick competition regulation for 4 different utilities active in electricity distribution which serve 4 different local monopolies that have different unobservable characteristics in terms of orography which the regulator is not able to take into consideration. Company A and B have an average cost of 5,000 each, Company C has an average cost of 4,800, Company D has an average cost of 5,200.

(1 punto)

Yardstick price should be set at the highest observable level, i.e. 5,200; and it works well in the scenario above depicted
Yardstick price should be set at the average observable level, i.e. 5,000; but it does not work well in the scenario above depicted
Yardstick price should be set at the lowest observable level, i.e. 4,800; but it does not work well in the scenario above depicted
None of the other options is fully correct

2.Four friends meet at the pub. After having some pints of beer, for some strange reasons their discourse verges to arguments on Business and Industrial Economics. Frank says: “Oligopoly always results in less allocative efficiency than perfect competition.” Marco says: “Oligopoly may lead to the same level of allocative efficiency of perfect competition.” Giorgia says: “Monopoly may maximize social welfare”. Carlotta says: “Monopoly never maximizes social welfare”. Who are the two least drunk guys in your view? (i.e. identify the two guys who are not saying a wrong statement)

(1 punto)

Frank and Carlotta
Frank and Giorgia
Marco and Carlotta
Marco and Giorgia

3.Suppose two software (Word and Excel) and 4 consumers: Alan has a willingness to pay (wtp) of 50 for Word and 30 for Excel. Bob has wtp of 30 for Word and 50 for Excel. Claude has a wtp of 60 for Word and 5 for Excel. Donald has a wtp of 5 for Word and 60 for Excel. No costs are contemplated. Identify the correct answer (i.e. identify pricing policy that maximizes profits):

(1 punto)

Without bundling: the best prices are p-Word = p-Excel = 60; with bundling: the best prices are p-Bundling = 65; p-Word = p-Excel = 60
Without bundling: the best prices are p-Word = p-Excel = 50; with bundling: the best prices are p-Bundling = 80; p-Word = p-Excel = 60
Without bundling: the best prices are p-Word = p-Excel = 60; with bundling: the best prices are p-Bundling = 50; p-Word = p-Excel = 30
Without bundling: the best prices are p-Word = p-Excel = 50; with bundling: the best prices are p-Bundling = 80; p-Word = p-Excel = 50

4.Which of the following is evidence of the existence of barriers to entry?

(1 punto)

a price different from the average cost in the short run
the presence of indirect costs in entry decisions
a price different from the average cost in the long run
the presence of opportunity costs in entry decisions

5.Grounding on the model by Farrell and Saloner (1986), gauge which is the truest among the following statements about the DVD vs. DIVX case:

(1 punto)

Vaporware by DVD had no effects on the sales of DIVX, because at the moment it occurred, DIVX had not yet reached the critical mass of the product
Vaporware by DIVX had no effect on the sales of DVD, because at the moment it occurred, DIVX had already reached the critical mass of the product
Vaporware by DIVX had negative effects on the sales of DVD, because at the moment it occurred, DVD had not yet reached the technological absorbing barrier
Vaporware by DIVX had positive effect on the sales of DVD, because at the moment it occurred, DVD had not yet reached the technological absorbing barrier

6.How does the entry of a new user impact the value of a “two-way” network composed by n users?

(1 punto)

Each new user adds n^2 new potential links, but this entry does not affect greatly the value of the network, especially if the network is already large
Each new user adds 2 new potential links, producing a positive externality on existing users.
Each new user adds n^2 new potential links, producing a positive externality on existing users
Each new user adds 2n new potential links, producing a positive externality on existing users

7.There are two cities: Gimarra and Fenile. Electricity service distribution in both areas is a natural monopoly. The two monopolies and the two areas are identical in every aspect (e.g. n° consumers) except for two crucial factors: 1) consumers of Fenile are much more price-sensitive than those of Gimarra, which conversely are very reluctant to change their consumption patterns even in the presence of high electricity prices; 2) fixed costs of providing the service in Gimarra are much higher than those needed in Fenile. On the basis of this information, from a theoretical point of view, which strategy the regulator should pursue in the two different geographical contexts:

(1 punto)

It can’t be said
In Fenile the regulator should pursue a 1st best solution, while in Gimarra also a 2nd best solution would be ok
In Gimarra the regulator should pursue a 1st best solution, while in Fenile also a 2nd best solution would be ok
In both areas the regulator should try to implement a 1st best solution

8.If at the market equilibrium the marginal social cost of producing a good is higher than the marginal private cost:

(1 punto)

The good produces a positive externality
The price charged for the good is too high
Not enough of the product is being produced
The good produces a negative externality

9.In the Internet browser war in the early 90s, which was the primary reason Microsoft (MS) wanted to acquire Netscape?

(1 punto)

It believed in the commercial exploitation of Internet in the years to come, and needed a strong browser to be prepared for it
Intel posed that merger as a necessary condition in order to make MS operating system compatible with its microprocessors
It wanted to acquire new digital competences
It feared the commoditization of its operating system

10.Firm Anacott is currently a monopolist in the industry for batteries, facing the following inverse demand curve: P = 186 – 6Q with no fixed costs and constant marginal costs equal to 6. Firm Steel is a potential new player considering the possibility to enter the industry, with the same marginal costs as Anacott and fixed costs equal to 100. If Steel were to enter, Anacott and Steel would compete à la Cournot. Suppose Anacott has the opportunity to prevent a key supplier from providing key raw materials to Steel, by paying the supplier in the form of a procurement contract that is particularly advantageous for the supplier itself (and less so for Anacott). In that case, Steel would be forced to stay out of the industry. Disregarding all other factors (e.g. time, future profitability of the industry, etc.), at most how much would Anacott be willing to lose in the ad-hoc procurement contract with the supplier with respect to the current contract?

(1 punto)

600
It is impossible to answer without knowing the details of the current contract
450
750

11.General question

After briefly explaining the principles underlying a good diversification decision, highlight which of those principles is most closely related to the resource-based view of the firm, and why. Note: be specific in using concepts learnt in the BIE course. Generic answers will be severely penalized (especially if they resemble the output of ChatGPT or similar AI tools).

12.Structured question

1) Suppose a monopoly in a retail market with a demand curve given by q = 12 – 4p, no fixed costs and use of only 1 input for each unit of output. 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 1.

a) Indicate quantity and price settled by the monopolist in the wholesale market.
b) Indicate quantity and price settled by the monopolist in the retail market.

2) Suppose that the two firms want to merge, and their dimensions require an ex-ante communication to the Antitrust. Should the Antitrust consent or not to the merge? Explain (using only words) why yes or not.

3) Suppose now that a regulator imposes a 1st best solution in the wholesale market.

a) Indicate quantity and price settled by the regulated wholesaler in the wholesale market.
b) Indicate profits obtained by the monopolist in the retail market.

4) Suppose that after 25 years from now the wholesale market has become perfectly competitive and the retail market has become a “contestable” market.

a) Explain what is a contestable market.
b) Indicate quantity and price settled by the monopolist in the retail market.

5) After 50 years from now and a complete different market structure (i.e. the previous wholesale and retail markets have completely disappeared due to intense innovation), we have a brand new market where there is an incumbent monopolistic firm and a potential entrant (new firm); where both (neutral-to-risk) firms have the possibility to buy on an exclusive basis a patented radical innovation from an R&D lab. Show formally, exactly as we did in class, why from a theoretical point of view, the new firm has typically more economic incentives to buy this radical innovation.

06 - 2024

BIE exam 1° call 21st June 2024 [G-O] 1.Suppose the following situation: fruit farmers pay beekeepers for their honeybees’ pollination services since honeybees provide an external benefit to fruit farmers. However, remember that fruits also provide an external benefit to the beekeepers because their honeybees need fruits. From what written above, what can you conclude? (1 punto)

Honeybees’ external benefit to fruit farmers is larger
Fruits’ external benefit to beekeepers is larger
The external benefits are probably the same size
It is impossible to determine which external benefit is larger given this information

2.Which of the following is NOT a case of moral hazard successfully avoided? (1 punto)

You decide not to hire a certain instructor when you hear from a friend about another instructor who charges less for similar work
Before carrying out a repair on your house, you hire an inspector whose only job is to diagnose the necessary work. Then, you hire a contractor to perform only that work
You decide not to hire a certain mechanic when you hear from a friend that the mechanic cheats his customers. You choose another mechanic certified by a third-party consumer protection organization
Before buying headphones, you check online reviews that say they tend to stop working after a few months. Thus, you decide to buy other headphones with much better reviews

3.Which of the following concentration indices is larger? (1 punto)

Concentration indices depend on the industry, thus it cannot be said a priori which concentration index is larger.
The concentration ratio C2 in an industry with 3 identical firms
The Herfindahl index in an industry with 2 identical firms
The entropy index in an industry with 2 identical firms

All the three other options are incorrect
This market should exist from a social welfare point of view but it is not necessarily a natural monopoly
This market should exist from a social welfare point of view and it is a natural monopoly
This market should not exist from a social welfare point of view

5.Consider a monopolist with demand: Q = 120 – 2p and marginal cost: MC= 40, with no fixed costs. What is the deadweight loss arising from the optimal solution of the monopolist? (1 punto)

0
200
100
All the three other options are incorrect

The firm passes the better-off test
The firm possesses packaging capabilities
The firm passes the attractiveness test
The firm possesses dynamic capabilities

7.According to the classification of transactions (Williamson, 1986), transactions will be governed by unified governance (i.e. hierarchy) only when: (1 punto)

Relationship-specific investments are low and frequency of transactions is high
Relationship-specific investments are high and frequency of transactions is low
Both relationship-specific investments and frequency of transactions are high
Relationship-specific investments are high, unregardless of the frequency of transactions which can be low or high

The insurance company will decide to fix p = 15,000$; neither low-risk nor high-risk patients will buy the new health insurance
The insurance company will decide to fix p = 6,000$; only high-risk patients will buy the new health insurance
The insurance company will decide to fix p = 6,000$; both low-risk and high-risk patients will buy the new health insurance
The insurance company will decide to fix p = 15,000$; only low-risk patients will buy the new health insurance

WTP = 4 in case the good is public, WTP = 2 in case the good is private; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private good
WTP will be equal to 4 in both cases; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private good
WTP = 2 in case the good is public, WTP = 4 in case the good is private; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private good
WTP = 4 in case the good is public, WTP = 2 in case the good is private; the quantity demanded will be 2 in the case of a public good and 1 in the case of a private good

10.Assume a firm is practicing “price discrimination by self-selection” by creating a few versions for its main product. A customer’s willingness to pay for the product: (1 punto)

is revealed by customer’s observable characteristics
depends on the prices for the same version set by the firm’s rivals
depends on the volume of purchases made by the customer
is revealed by customer’s choice of the version

11.General Question Using only the concepts and arguments seen in the BIE course (others would be evaluated negatively), after briefly explaining what firm-specific advantages are (including their application and their theoretical underpinnings), state what new kinds of firm-specific advantages are likely to be engendered by artificial intelligence. 12.Structured question There are 10,000 people in the population, each of whom is willing to pay 10 for at most 1 unit of a given good (i.e. each individual is interested in buying just 1 unit of the good, not 2, and for that unit is willing to pay 10). There are 2 identical firms providing the good. Currently, both firms have a constant marginal cost of 5, and they do not bear any fixed costs. 1) The two firms compete à la Bertrand. What is the equilibrium price and what are the firms’ profits? In case of repeated interactions (and “no game changer”), and both firms adopting a grim-trigger strategy (i.e. “I collude until you collude, if you cheat once, I will fix the minimum price possible forever”), determine the probability “p” that makes collusion sustainable. Starting from the Bertrand equilibrium above identified, suppose now that one firm can adopt a new technology that lowers its marginal cost to 3. 2) Is this a drastic innovation? (Just on the basis of economic reasoning, i.e. no calculus is needed), explain why yes or no. 3) What is the equilibrium price in the market now and how much would this firm be willing to pay for this new technology? 4) Should this innovation be prosecuted by Antitrust? Explain why yes or no. Suppose that this new technology is available to both firms (which are always competing à la Bertrand). The cost to a firm of purchasing this technology is 10,000. Firms simultaneously decide whether to adopt the new technology or not. 5) Express the game in a normal form and determine what is (are) the Nash equilibrium (equilibria) of this game.

09 - 2023

BUSINESS AND INDUSTRIAL ECONOMICS [G-O] Final exam

September 7th 2023

NAME AND SURNAME ________________________________________________________________

Multiple choice questions

1) As the degree of product differentiation increases among the products sold in a monopolistically competitive industry, which of the following occurs?

a) The cost of production falls.

b) The amount of marketing expenditures decreases for each firm.

c) The demand curve for each seller’s product becomes more horizontal.

d) Each seller’s demand becomes more inelastic.

2) Suppose that Ann and Bob have the following unit labor requirements for producing steel and bauxite. Ann takes 3 hours to produce 1 unit of steel and 2 hours to produce (i.e. mine) 1 unit of bauxite. Bob takes 8 hours to produce 1 unit of steel and 1 hour to produce 1 unit of bauxite. Then:

a) Bob has a comparative advantage in bauxite.

b) Ann has a comparative advantage in steel.

c) Ann has an absolute advantage in steel and Bob has an absolute advantage in bauxite.

d) All the other options are correct.

3) A chemical factory and a prestigious fishing club share a lake. Producing chemicals creates water pollution that harms the fish, while it lowers the costs of the chemical factory which is profit- oriented and fully disinterested on environmental issues. Initially the lake is owned by no one. Keeping in mind the Coase theorem, suppose transactions costs are low and the chemical factory is given ownership of the lake. Compared to the situation with no property rights, the quantity of chemicals produced is likely to:

a) increase.

b) decrease.

c) change but the direction of the change is hard to predict.

d) stay exactly the same.

4) Free-riding:

a) is more likely to occur for goods which are excludable and non-rival.

b) is more likely to occur for goods which are excludable and rival.

c) is more likely to occur for goods which are non-excludable and non-rival.

d) is not related to the dimensions of “excludability” and “rivalry in consumption”.

5) Suppose an Antitrust is strictly following the Williamson’s Welfare trade-off model (American Economic Review, 1968) logic. Then, gauge the following statements:

a) A merger between firms can be approved by Antitrust even if the post-merger price of the focal product will increase.

b) A merger between firms will surely not be approved by Antitrust if the post-merger price of the focal product will increase.

c) A merger between firms will surely be approved by Antitrust if some gains in productive efficiency are present.

d) None of the other statements is correct.

6) Consider the following game depicting the process of standard setting in high-definition television (HDTV) where the US and Japan must decide whether to invest a high or a low value into HDTV research. If both countries choose a low effort then payoffs are (4,3) for US and Japan, respectively; if the US chooses a low level and Japan a high level, then payoffs are (2,4); if by contrast, the US chooses a high level and Japan a low one, then payoffs are (3,2). Finally if both countries choose a high level, then payoffs are (1,1). What are the Nash equilibria of the game in two different scenarios: a) players choose simultaneously their strategies; b) the US has the option of committing to a strategy ahead of Japan’s decision.

a) Both in scenarios a) and b), the only Nash equilibrium is for US playing “high” and for Japan playing “low”.
b) In scenario a), the only Nash equilibrium is for US playing “low” and for Japan playing “high”; in scenario b, the only Nash equilibrium is for US playing “high” and for Japan playing “low”. .
c) Both in scenarios a) and b), the only Nash equilibrium is for US playing “low” and for Japan playing “high”.
d) In scenario a), the only Nash equilibrium is for US playing “high” and for Japan playing “low”; in scenario b, the only Nash equilibrium is for US playing “low” and for Japan playing “high”.

7) Taking the electricity industry in most EU countries today as a reference, we can say that competition:

a) has been introduced in the generation and sale retail stages of the supply chain, while transmission and distribution networks are subject to some forms of price controls and other forms of regulation, as the cost characteristics of the latter activities still approximate those of a natural monopoly.
b) has been introduced in the generation and transmission stages of the supply chain, while distribution and sale retail stages are subject to some forms of price controls and other forms of regulation, as the cost characteristics of the latter activities still approximate those of a natural monopoly.
c) has been introduced in the generation and distribution stages of the supply chain, while transmission and sale retail stages are subject to some forms of price controls and other forms of regulation, as the cost characteristics of the latter activities still approximate those of a natural monopoly.
d) has been introduced in the distribution and sale retail stages of the supply chain, while generation and transmission stages are subject to some forms of price controls and other forms of regulation, as the cost characteristics of the latter activities still approximate those of a natural monopoly.

8) According to the resource-based view, a resource that is valuable, rare and well-organized, but not inimitable, can lead to:

a) sustainable competitive advantage.

b) temporary competitive advantage.

c) imitative competitive advantage.

d) no form of competitive advantage.

9) Which of the following statements about the principal-agent problem is false:

a) It is the risk that a principal who hires an agent to perform a task may find that the task is done poorly, and the principal does not know if the agent is responsible for the poor result.
b) It may be reduced in the case of a company if its managers are given bonuses that relate to the company’s profits.
c) It may be reduced in the case of a company if the board of directors without incurring into additional costs has the possibility to better monitor management’s operations.
d) It is the risk that a principal incurs in the selection of a bad agent (i.e. adverse selection) in performing a task that is in the principal’s interest.

10) Suppose that demand in a market is given by: P = 90 – Q and all firms have constant marginal cost of MC = $70. Market is competitive so all firms charge a price equal to $70.

Let one firm have innovation that lowers cost to MC = $40.

Evaluate the following statements:

a) The new quantity produced in the market will be less than before, since the innovation is a drastic innovation which leads the innovator to act as an unconstrained monopolist.
b) The new quantity produced in the market will be more than before, since the innovation is a drastic innovation which leads the innovator to act as an unconstrained monopolist.
c) The new quantity produced in the market will be less than before, since the innovation is not a drastic innovation and the innovator cannot act as an unconstrained monopolist.
d) The new quantity produced in the market will be more than before, since the innovation is not a drastic innovation and the innovator cannot act as an unconstrained monopolist.

General question

Building on the evolutionary view, using only the concepts and arguments seen in the BIE course (others will be evaluated negatively), write a short and homogeneous essay on how generative AI tools like ChatGPT may affect firms.

Structured question(s)

1) Suppose a monopoly is facing the following demand curve: P = 10 – Q. Suppose that it doesn’t bear any fixed cost, while marginal costs are constant and equal to 2 per each unit produced.

a) Compute price and quantity obtained in monopoly and please determine (algebraically) which is the deadweight loss in terms of welfare compared to the 1st best solution from a welfare perspective. (1pt)
b) Explain what is in general Price discrimination of 1° and determine, in this specific context, the level of profit obtained by the firm that applies it. (1pt)

2) Suppose that a monopolist is considering to apply a 2° Price discrimination. In particular, it estimates that 6 consumers (i.e. the “sophisticated” ones) would be willing to pay 18 (euro) for a luxury version of the product and 16 for a basic version, while 2 consumers would be willing to pay the same 12 for either versions (i.e. the “unsophisticated”). As before there are no fixed costs, and marginal costs are constant and equal to 2 per each unit produced (independently from the type).

a) Represent the above situation in a matrix, and by respecting the participation and incentive- compatibility constraints, identify the best 2° Price discrimination strategy possible. (1pt)
b) Is versioning profitable in this case? Explain why yes or no. (1pt)

3) Comment the following statement: “The degree of monopoly power is limited by the elasticity of demand.” (2pt)

4) Explain why the concept of monopoly is important in the Cellophane fallacy of the SSNIP test (2pt).

5) Markets exhibiting network externalities may often end up into monopoly. Please illustrate and briefly comment the 4 main “takeaways” we identified in the BIE class (only those, other considerations will be ignored or negatively evaluated) regarding the VHS-Betamax standards war. (2pt)

06 - 2023

BUSINESS AND INDUSTRIAL ECONOMICS [G-O]

Final exam

June 21st 2023

NAME AND SURNAME ________________________________________________________________

STUDENT ID________________________________________________________________

Multiple choice questions

1) Consider a Bain, Sylos Labini and Modigliani model with absolute cost advantages. In industry A, the market price is 50. In industry B, the market price is 80. All other things equal, what does this imply?

a) Incumbents in industry A have higher costs than incumbents in industry B.
b) The threat of new entrants in industry B is a priori higher (before considering market price). c) Entry barriers in industry B are higher.
d) All the other options are correct.

2) Firms A and B are competing according to a Stackelberg oligopoly. The inverse demand function is P = 250 – 2Q. The total cost function for both firms is TC = 5 + 2q. What is the quantity produced by the follower?

a) 31.
b) 62.
c) 124.
d) None of the other answers is correct.

3) Please gauge the validity of the following statements:

a) In principle, the double marginalization problem should require the intervention of ex-ante regulation in order to be solved.
b) In principle, the double marginalization problem should not require any regulatory intervention in order to be solved.
c) In principle, the double marginalization problem should require the intervention of ex-post regulation (i.e. antitrust) in order to be solved.
d) Inprinciple,thedoublemarginalizationproblemshouldrequiretheinterventionofbothex- ante and ex-post (i.e. antitrust) regulation in order to be solved.

4) Consider a monopolist with demand Q = 280 – 4p and marginal cost MC = 50. There are no fixed costs. Determine the difference in social welfare between these two scenarios: a) single-price monopolist b) discrimination of 1°.

a) 300.
b) 200.
c) 400.
d) 600.

5) There are two cities: Hove and Brighton. Electricity service distribution in both areas is a natural monopoly. The two monopolies and the two areas are identical in every aspect (e.g. n° consumers) except for two crucial factors: 1) consumers of Hove are much more price-sensitive than those of Brighton, which conversely are very reluctant to change their consumption patterns even in the presence of high electricity prices; 2) fixed costs of providing the service in Hove are much higher than those needed in Brighton. On the basis of this information, from a theoretical point of view, which strategy the regulator should pursue in the two different geographical contexts, among the following options:

In both areas the regulator should try to implement a 1st best solution.
In Brighton the regulator should pursue a 1st best solution, while in Hove also a 2nd best solution would be ok.
In both areas the regulator should try to implement a 2nd best solution.
In Hove the regulator should pursue a 1st best solution, while in Brighton also a 2nd best solution would be ok.

6) AI is a software for performing machine learning analyses. The company is able to find an exogenous characteristic (student vs. professional analyst) that is able to segment the markets in the two corresponding sub-markets. From one side, Students exhibit an inverse demand function given by the following expression: Ps = 4 – Qs. On the other side, professional Analysts exhibit an inverse demand function given by the following expression: Pa = 14 – Qa. The total cost function for producing and distributing the software is given by: TC = 2 + 2Qi where i = s, a. Which is the maximum amount of profits achievable by AI?

a) 22.5.
b) 26.
c) 34.
d) 35.

7) Which of the following statements is true?

a) When Wimbledon’s Centre Court has the legal maximum number of 15,000 spectators, watching a match there is non-rival because so many people are watching it.
b) A tennis racket is non-rival, because one person can use it today while another can use it tomorrow.
c) Motorways are excludable, because people could be charged tolls for using them.
d) National Health Service hospitals are non-excludable, because patients are not charged for using them.

8) What is a drastic innovation?

a) A synonym for radical innovation.
b) An innovation that will lead the innovator to act as an unconstrained monopolist.
c) An innovation that will lead the innovator to act as a constrained monopolist.
d) An innovation that will lead to any change in the market structure.

9) Consider the famous Fisher Body-GM case study and individuate the most correct statement among the following ones, concerning the evolution over time in the governance of their relationship:

is a software for performing machine learning analyses. The company is able to find an

a) In a first stage (beginning of 1900s), the relationship evolved from market to an hybrid form of governance (i.e. equity alliance) because of the increase in physical asset specificity of Fisher Body’s investments.
b) Inasecond(andlast)stage(1920s),therelationshipevolvedfrommarkettoanhybridform of governance (i.e. equity alliance) because of the increase in site specificity of Fisher Body’s investments.
c) In a first stage (beginning of 1900s), the relationship evolved from market to a hierarchical form of governance (i.e. acquisition) because of the increase in site specificity of Fisher Body’s investments.
d) In a second (and last) stage (1920s), the relationship evolved from a hierarchical form of governance (i.e. acquisition) towards an hybrid one (i.e. equity alliance) because of the increase in physical asset specificity of Fisher Body’s investments.

10) Imagine that labour market is perfectly competitive and high ability workers are considering to 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 aH = 200 and their cost of education (per unit of education) is cH = 20, while the expected productivity of low-ability workers is aL=100 and their cost of education (per unit of education) is cL= 5. Find the interval level of education of eH that allows high-ability workers to credibly signal their ability on the labour market.

a) 10 < 𝑒􏰷 < 40.
b) 10 < 𝑒􏰷 < 30.
c) 5 < 𝑒􏰷 < 20.
d) None of the other answers is correct.

General question (GQ)

Goldenrod is an extremely successful firm active in the production of various chemical products, such as detergents, toothpaste, and dish-washing liquids. After studying the potential of the NMN (Nicotinamide mononucleotide) molecule for anti-aging, it is evaluating the possibility to diversify into the nascent anti-aging industry. Based on this information, and drawing on the contents of the BIE course, write a critical analysis of the relevant factors that Goldenrod needs to consider before diversifying.

Structured question (SQ)

1) Consider a market where we have an incumbent (neutral-to-risk) monopolistic firm (Monopoly profit = 150) and a potential entrant (new firm); where both firms have the possibility to buy a patented innovation on an exclusive basis from an R&D lab. The probability perceived by the incumbent that the new firm will acquire the patent (and enter) is equal to 20%.

In a scenario of incremental (i.e. gradual) innovation, considering that duopoly profit for each firm would be equal to 30:

1a) what the incumbent will be willing to bid at maximum? (1 pt.)

1b) what the rival firm will be willing to bid at maximum? (1 pt.)

2) The rival firm enters into the market, and the duopoly is symmetric (i.e. firms are equal in every single aspect) where each of the firm is obtaining a profit of 30. Both firms recognize their strategic interaction, and realize that by colluding they can split equally the monopoly profit which is 150 as said 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). (2 pt.)

Now suppose that the game is repeated an indefinite length of time with probability p. 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).

2b) Is collusion possible? For which probability p? (2 pt.)

3) After some years, the 2 firms are considering merging one with the other. The global demand curve they face is p = 50 – 5q. Their actual total cost function is equal to TC = 40q. In the ex-ante merger scenario, both firms are at the Bertrand equilibrium, while the ex-post merger scenario will lead to: a total cost function for the merged firm equal to TC = 35q, and the possibility to set a price for the good of p = 42,5 (i.e. monopoly price).

3a) Grounding on the Williamson’s trade-off model, compute Social Welfare (made by consumer surplus + producer surplus) both in the ex-ante merger and the ex-post merger scenarios. (3 pt.)

3b) In your view, will the EU Commission approve this type of merger? Why yes or no? (1 pt.)

?? - ????

BUSINESS AND INDUSTRIAL ECONOMICS [M-Z] The exam in class will last 2 hours, and it consists of two parts: lOMoARcPSD|6240799

a) 15 multiple-choice questions. In order to pass the exam, a student must answer correctly at least 8 questions out of 15. The lecturers will automatically grade as “FAILED” exams which do not fulfill this criterion.
b) Structured question, which may consist of an exercise, a mini-case study to discuss with 3 or 4 short questions, or a set of specific queries to address.

Here below it follows some examples of questions you may aspect to find in both parts (based on previous exam).

a) Multiple choice questions

1) In a market for used cars, potential buyers are willing to pay lemons (i.e. “bad” cars) 1000$ and plums (i.e. “good” cars) 2000$. Potential sellers are willing to sell lemons for 800$ and plums for 1800$. Buyers cannot tell whether any given car is a lemon. But buyers know that ten percent (10%) of all cars are lemons and ninety percent (90%) of the cars are plums. Relying on this knowledge, they will base their decision of purchase on the expected value of a car in the market. Which of the following statements is true? (Short) Calculation-space:

All of the cars will be sold.
No cars will be sold.
Only lemons will be sold.
Only good cars will be sold.

2) The software house you are working for as Marketing Responsible has created 2 different versions of the new release of his econometric software: Hansel-basic 2.0 and Hansel-advanced 2.0. These 2 versions are thought for two different typologies of potential users (“beginners” and “experts”). A careful market analysis your department has conducted so far highlights the below reported willingness to pay of each typology of users for each different version of the software. You also estimate that 40% is the percentage of potential expert users in the consumers’ population of interest while the remaining 60% can be deemed as beginners.

Version	Expert users	Beginners
Advanced	110	70
Basic	70	40
% of Potential users	40	60

On the basis of this information, please indicate which pricing policy you would recommend to the CEO, among those indicated below:

a) p ADVANCED = 110; p BASIC = 40.
b) p ADVANCED = 80; p BASIC = 40.
c) p ADVANCED = 110; p BASIC = 70.
d) To not sell Hansel-basic 2.0 and to sell only Hansel-advanced 2.0 at p = 70.

3) Suppose two neighbours share a park. One neighbour, Luca, leaves trash in the park. This bothers the other neighbour, Filippo. Considering the Coase’s theorem, the optimal level of trash in the park can be achieved if:

Luca has the right to leave trash and Filippo cannot do anything about it.
Luca is fined by the government.
The government assigns to both of them the right to leave trash and allow a market system that makes them to exchange their trash in order to reach the optimal level in the park.
Luca has the right to leave trash and Filippo can pay him to limit his dumping.

4) The municipal council of Faraway city is going to decide whether or not to open competition in the local business of electricity service delivery. At this scope it has commissioned to the famous consultancy firm A&G a study aiming at investigating whether the service could be considered a local natural monopoly or not. You are enrolled in the work group that will conduct the analysis. Which move do you consider the most appropriate in order to accomplish the requested task.

a) We should conduct a survey on how similar municipalities with analogous geographical characteristics behave in this respect. If all of them still consider the service a natural monopoly, you could reasonably argue that the service should be considered a natural monopoly also in the Faraway municipality.
b) We should conduct an empirical analysis on similar municipalities with analogous geographical characteristics in order to estimate the total cost one firm would bear in order to deliver the service. If the average cost curve of this firm is always decreasing with respect to the quantity delivered, the service should be considered a natural monopoly in the Faraway municipality; while if the average cost curve of this firm starts increasing for given quantities, this means that the service cannot be considered a natural monopoly in the Faraway municipality.
c) We should conduct an empirical analysis on similar municipalities with analogous geographical characteristics in order to estimate the total cost one firm would bear in order to deliver the service. In parallel, we should conduct another analysis in order to estimate the demand curve for electricity in the city of Faraway. If the demand curve intersects the average cost curve sufficiently close to the minimum efficient scale (MES), we can reasonably conclude that the service could be considered a natural monopoly in the Faraway municipality.
d) We should conduct an empirical analysis on similar municipalities with analogous geographical characteristics in order to estimate the total cost one firm would bear in order to deliver the service. If total costs always increase with respect to quantity we can exclude the presence of a natural monopoly in the electricity service delivery of Faraway city.

5) Which of the following statements is false?

a) According to the contractual approach, the firm is a nexus of relationships.
b) The resource-based view of the firm is well suited to explain the reasons underlying a single firm’s success, while the neoclassical theory can be effectively applied to make sense of market dynamics.
c) As the name suggests, the resource-based view of the firm focuses on the bundle of resources and capabilities possessed by the firm, while the neoclassical theory is primarily about markets. Thus, when adopting the resource-based view, the external environment has little relevance.
d) All of the above are true.

6) Suppose that all of the assumptions of the Bain, Sylos Labini & Modigliani model hold. Industry A and industry B are very similar in every relevant characteristic. However, there is one important difference: in industry A, the difference between the price and average cost of incumbents is 10. Instead, in industry B, the difference between the price and average cost of incumbents is 50. Then:

a) Industry A is characterized by higher barriers to entry.
b) Industry B is characterized by higher barriers to entry.
c) The relative height of entry barriers is indeterminable and irrelevant, as the only thing that matters for entry in this case is the cost advantage of incumbents.
d) The relative height of entry barriers is relevant, but indeterminable based on the lOMoARcPSD|6240799

b) Structured question (two examples offered, one alternative to the other)

1) A market demand is characterized by a demand function: Q=1-2P In the market there’s only one firm. The marginal cost it faces for production is constant and equal to c. The monopolist is facing potential entry from a new firm having the same marginal cost but an additional fixed cost of entry F = 0.05. For the sake of simplicity assume c = 0, and that the total cost function of the incumbent firm is equal to zero (TC = 0). If the incumbent accepts the entry passively, then Cournot competition is played. However, the monopolist can adopt an aggressive behaviour and threaten to produce the output of perfect competition (P=MC) so that the new entrant will make losses if it enters into the market. If the new entrant does not enter, the incumbent behaves as a monopolist.

Using extensive form (game tree) representation, describe this entry game as a two-stage game where in the first stage the new entrant decides whether to enter or not, and in the second stage the incumbent firm decides whether to be aggressive or not in case of entry.
Is the threat of aggressive behaviour by the monopolist credible?
Determine the subgame perfect Nash equilibrium.

2) Using the Farrell and Saloner’s (1985) model discuss why in a network market with two competing firms trying to establish their own network product, love for variety and strenght of network externalities are key ingredients for the emergence of a winner-takes-all market configuration. Also explain on theoretical terms why, ceteris paribus, this typology of markets is characterized by a first-mover advantage, and (briefly) cite one real case study where the first mover(s) won and another case study where this first mover advantage was countervailed and led to the affirmation of a fast follower(s). Describe the identified cases.

06 - 2021

BUSINESS AND INDUSTRIAL ECONOMICS [G-O] Final exam June 29th 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 = (4q2)/2θ. Which is the optimal quantity level that the least efficient firm will produce?

a) (1/2)p. b) (1/4)p. 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.
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 cows2 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). c) c=6inscenario(1)andc=4inscenario(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. 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.

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.
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.
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.

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. 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. 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 =4q2 + 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?

02 - 2021

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. 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.
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.

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.

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. 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.
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.
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.

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. d) All the three letters of the OLI framework are impacted equally.

10) Patents are:

a) an endogenous appropriability instrument that may originate knowledge spillovers.
b) an exogenous appropriability instrument that inhibits the arising of knowledge spillovers.
c) an endogenous appropriability instrument that inhibits the arising of knowledge spillovers.
d) an exogenous appropriability instrument that may originate knowledge spillovers.

Structured question 1a) Briefly identify the factors that may facilitate collusion among firms. 1b) What is a predatory price and which characteristics raise the possibility for Antitrust to prove it? 2) Imagine two symmetric firms as the only firms operating in the same large market repeatedly for an indefinite amount of time. Consumers are extremely responsive to price, so even a slightly higher price than the rival brings the profit of a firm equal to zero. Both firms are considering the possibility of colluding on a monopolistic price (and share equally profits). If one firm cheats from this collusive agreement, it will gain the whole monopoly profit but only for the time being, since both firms adopt a “grim” strategy, i.e. they collude until no one cheats, if one firm starts cheating the opponent will cheat (compete) forever. If p is the probability of repetition of the game, find the p that ensures collusion in a game where monopoly profits are equal to 60, duopoly profits are equal to 20. 3a) Suppose that the two firms decide to merge. Is this merge likely to pass the Antitrust’ s scrutiny? 3b) More generally, in a nutshell, which criteria the Antitrust will consider in order to approve or deny an M&A operation? After some years, the public authority wants to better understand if the market at stake can be considered a natural monopoly or not. The appointed consultancy company estimates that the demand curve is equal to p = 12 – 2*Q and the total cost function of a representative firm is given by: TC(qi) = 1 + qi2 4a) Is this a natural monopoly? Explain why yes or no. 4b) What is the basic formula of a price-cap regulation?

01 - 2021

BUSINESS AND INDUSTRIAL ECONOMICS [G-O] Final exam

January 15th 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.
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.

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.

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.
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(qi) = 4 + qi2. 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.

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.
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.
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.
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.
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.
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.

09 - 2020

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.
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.
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.
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.

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.
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.
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 (Psteel = 10 and Pfish= 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).
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.
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.
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.

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?

07 - 2020

BUSINESS AND INDUSTRIAL ECONOMICS [G-O] Final exam July 20th 2020 NAME AND SURNAME (personal code) ________________________________________________________________ Multiple choice questions 1) Two firms compete in a Stackelberg duopoly facing the following demand function: P = 10,100 – 500Q. Both the leader and the follower have the following total cost function: TC = 100Qi. The quantity produced by the leader is:

a) Two times the quantity of the follower. b) Three times the quantity of the follower. c) Four times the quantity of the follower. d) All the three other options are incorrect.

2) All of the following couples of concepts are linked by common theoretical foundations or significant similarities, apart from one. Which one is it?

a) Bounded rationality and routines. b) Ownership advantage and factor of competitive advantage. c) Path-dependence and alignment of incentives. d) Transaction cost evasion and internalization advantage.

3) In June 2022 three firms are active in the production of “clever sunglasses” which will be soon launched in the market; each firm is producing and planning to launch a different version. At first glance, they appear as normal sunglasses (and they can be used in that way) but once “switched on”, they become “smart” and allow the user to access multimedia content (software, movies, videos, etc.). The cleversunglasses are constituted by an operating system and by applications which are clickable with simple “eyes movements”. The three firms have adopted three different operating systems, which are not technically compatible: the software written for the operating system A cannot be read by operating systems B and C, and vice versa. However, once a software is produced for A, the costs of conversion to the other operating systems is null. Finally, it is worth noting that the price at which the cleversunglasses will be commercialized will be fairly high relatively to normal sunglasses, but on the other hand the three companies are going to launch the three versions at a similar price. Note also that the main software producers have declared to be eager (i.e. to wish) to adopt a multi-homing strategy. On the basis of this information, please gauge the soundness of the following propositions:

a) Because of the presence of indirect network externalities, it is very likely that the value of the market will significantly increase in the near future; and it is also very likely that the market will soon evolve towards a “winner takes all” equilibrium.
b) Notwithstanding the presence of indirect network externalities, it is not sure that the value of the market will significantly increase in the near future; nevertheless if this were the case, it is very likely that the market will soon evolve towards a “winner takes all” equilibrium.
c) Notwithstanding the presence of indirect network externalities, it is not sure that the value of the market will significantly increase in the near future; in any case, it is not necessarily true that the market will soon evolve towards a “winner takes all” equilibrium.
d) Because of the presence of indirect network externalities, it is very likely that the value of the market will significantly increase in the near future; in any case, it is not necessarily true that the market will soon evolve towards a “winner takes all” equilibrium.

4) Consider a monopolist with demand: Q = 120 – 2p and marginal cost: MC= 40. Suppose that the monopolist can perfectly price discriminating consumers. The social welfare will be equal to:

a) 0.
b) 400.
c) -200.
d) All the three other options are incorrect.

5) The estimated demand function for a given prospected service is given by: Q = 4 – p. In the market there is only one firm in the condition to deliver this service. The total cost function of this firm is given by the following expression: TC(Q) = 4 + Q2. Based on the economics reasoning, and on the comparison between the average cost curve and the demand curve, please gauge the following statements:

a) This market should not exist from a social welfare point of view. BONUS
b) This market should exist from a social welfare point of view and it is a natural monopoly.
c) This market should exist from a social welfare point of view but it is not necessarily a natural monopoly.
d) This market should not exist from a social welfare point of view unless it is organized as a natural monopoly.

6) Different divisions within a firm frequently compete for a common resource. Suppose that divisions 1 and 2 of a given firm share a common facility F. Let qi be the service level used by division i (i = 1, 2). The division i’s benefit in terms of divisional earnings (i.e. divisional profits) is given by the following expression: –0.25 (qi)^2 – 0.1(q1+ q2). Please gauge the following statements:

a) the equilibrium levels of qi if the various divisions act separately is q1 = q2 = 1.8, while the optimal level from an overall firm point of view is q1 = q2 = 1.6, given the presence of negative externalities between the two divisions.
b) the equilibrium levels of qi if the various divisions act separately is q1 = q2 = 1.8, while the optimal level from an overall firm point of view is q1 = q2 = 1.4, given the presence of positive externalities between the two divisions.
c) the equilibrium levels of qi if the various divisions act separately is q1 = q2 = 1.6, while the optimal level from an overall firm point of view is q1 = q2 = 1.8, given the presence of negative externalities between the two divisions.
d) the equilibrium levels of qi if the various divisions act separately is the same as the optimal one from an overall firm point of view with q1 = q2 = 1.5, since there are no externalities between the two divisions.

7) The “replacement effect” (Arrow, 1962) is the only fundamental concept behind which one of the following statements:

a) Monopoly has more resources than perfect competition to devote to innovative activities.
b) Perfect competition exerts greater incentives than monopoly in spurring innovative activities.
c) The relationship between intensity of competition and innovation is U-shaped.
d) The relationship between intensity of competition and innovation is inverted U-shaped.

8) An insurance company aims at introducing a new health insurance in the market. The insurance company believes that with probability 50% prospective consumers are high-risk patients, with probability 50% low-risk patients. For a high-risk patient the health insurance is worth 10,000$, whereas for a low-risk patient, the value is 2,000$. For the insurance company, the cost of providing insurance is 11,000$ for a high-risk patient and 0$ for a low-risk patient. Based on these numbers, the insurance company is considering two possible prices for the new health insurance: 5,700$ or 15,000$. Considering the only (Bayesian)-Nash equilibrium of the sequential game, tell which will be the price charged for the health insurance (p) and who will buy the new health insurance:

a) p = 5,700$; only low-risk patients will buy the new health insurance.
b) p = 5,700$; both low-risk and high-risk patients will buy the new health insurance.
c) p = 15,000$; neither low-risk nor high-risk patients will buy the new health insurance.
d) p = 15,000$; only low-risk patients will buy the new health insurance.

9) According to the classification of transactions (Williamson, 1986), transactions will be governed by the market only when:

a) Both relationship-specific investments and frequency of transactions are low.
b) Relationship-specific investments are high and frequency of transactions is low.
c) Relationship-specific investments are low, unregardless of the frequency of transactions which can be low or high.
d) Relationship-specific investments are low and frequency of transactions is high.

10) Please evaluate the following statements about innovation policy, selecting the most appropriate:

a) One of the major advantage of selective policy measures (i.e. grants) is to enable the policy maker to indulge in “cherry picking”.
b) One of the major advantage of selective policy measures (i.e. grants) stems from the fact that they are neutral to the market, so by definition, they do not entail the possibility to introduce errors or distortions in the market.
c) One of the major advantage of automatic subsidies (i.e. tax credits) is that they do not complicate the tax system.
d) All the three other options are incorrect.

Structured question Firm Dalì is a major player in the market for laptops. In order to exploit its capabilities in design and microelectronics in other markets, it is considering the possibility to diversify into the smartphone business, which is currently under the monopoly of Picasso. With the laptop business, Dalì manages to earn a pay-off of 200. From the smartphone business, Dalì would derive a pay-off of 100 augmented by a further 50 thanks to synergies. Analogously, thanks to the same synergies, diversification into the smartphone business would increase the pay-off from the laptop business by 50. Diversification costs (i.e. plants, equipment, etc.) are conceptualized as a negative pay-off of 170. Picasso, as a monopolist, is currently enjoying a pay-off equal to 600. In case of entry by Dalì, an accommodating response would assign Picasso a pay-off equal to 300, leaving Dalì’s pay-offs exactly as described above. Conversely, an aggressive response by Picasso would imply that Picasso earns a pay-off of 200, and Dalì’s pay-off in the smartphone market is reduced by 100 with respect to the baseline described above. Note: assume that pay-offs constitute a valid synthesis of all the complexities involved (e.g. discounted future profits). 1) Assuming that Picasso will respond in an accommodating way, explain the logic behind Porter’s three tests, then apply them to evaluate this diversification decision. 2) Describe this game using the extensive form (i.e. tree form). What is the subgame-perfect Nash equilibrium? (Note: you can do it on Word in any shape you want, provided that the logic of the tree model is preserved). 3) Is the outcome of your analysis in point 1) consistent with the subgame-perfect Nash equilibrium? Why, or why not? 4) Suppose that Picasso has the possibility to make an ex-ante investment equal to C in preparation for the price war. This investment would anticipate some of the costs of the aggressive response. Thus, it lowers the pay-offs for Picasso by C in all scenarios (including monopoly), except for the aggressive response scenario. Assuming that Picasso can choose C as it wishes as long as it is an integer (i.e. no decimals involved), determine Picasso’s optimal strategy.

07 - 2019

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)?

a) K=2;w=1.
b) K=-1/2;w=1.
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.
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.

3) A patent can be conceived as:

a) An institutional barrier to entry.
b) An ownership advantage.
c) Both of the above.
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.
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.
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.

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:

1. a) q ≥ 3/4.
2. b) q≥1/4.
3. c) q≥1/2.
4. 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: pe = 24 the price of electricity, pf = 20 the price of the agricultural product of the farm (both firms are price-taker), ce(e,x) = e2 + (x – 8)2 the cost for the coal-power plant of producing electricity e jointly with x units of pollution, and cf(f,x) = f2 + 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.
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.
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.
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 = q2 + 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.

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.
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 A	FIRM B
		CHEAT	COLLUDE
	CHEAT	3.3	8.3
	COLLUDE	2.8	5.5

a) p > 1/5.
b) p > 2/5.
c) p > 3/5.
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.

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) Pm=$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.
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:
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.

	CONSUMER 2
CONSUMER 1		NEW	OLD
	NEW	3,3	1,2
	OLD	2,1	4,4

06 - 2019

BUSINESS AND INDUSTRIAL ECONOMICS [M-Z] Final exam June 21st 2019 SURNAME – NAME (Matricola no.)____________________________________________________________ Multiple choice questions 1) Two identical firms are specialized in developing information systems for domotics (i.e. “digital home”). In parallel, they are projecting a rather sophisticated multi-platform software for the complete home automation. This software will allow residential users to manage remotely home appliances (e.g. ovens, washing machines, dish washers). Both firms want to launch their software in the market. But at the present stage the two software are incompatible. Both firms are gauging the opportunity to stipulate a partnership and launch into the market only a single software, where one firm would act as the leader and the other as the follower. In case one firm would act as the follower, it should bear a cost of 5 Million Euros in absorbing costs, but no licensing fees paid. Note that if the partnership effectively took place, this alliance would be positively seen by home-appliances producers that would not be undecided on which platform endorse in designing appliances able to communicate with the new software. Also consumers would suffer from less uncertainty. For these reasons, global revenues in case of partnership for the 2 firms would be equal to 10 Million Euros (5 Million to firm 1 + 5 Million to firm 2). If the partnership could not be stipulated, this scenario would depress the market, and in this case, global revenues for the 2 firms would be equal to 4 Million Euros (2 Million to firm 1 + 2 Million to firm 2). On the basis of this information, and supposing that there are no other costs than the absorbing ones aforementioned, please structure the question in a normal form (lead- follow) game, and indicate which is the correct answer: Game: omissis

a) Firms will stipulate a partnership and this outcome is Pareto-efficient.
b) Firms will stipulate a partnership and this outcome is not Pareto-efficient.
c) Firms will not stipulate a partnership and this outcome is Pareto-efficient.
d) Firms will not stipulate a partnership and this outcome is not Pareto-efficient.

2) Suppose that Italy and France have the outputs per worker in producing bikes and cars as reported below:

Ouput Per worker	Country
	Italy	France
Bikes	200	300
Car	1	2

a) Italy has a comparative advantage in producing Bikes.
b) Italy has a comparative advantage in producing Cars.
c) Italy has an absolute advantage in producing Bikes.
d) Italy has an absolute advantage in producing Cars.

3) Consider a second-hand market for motorbikes. There are high-quality motorbikes, which buyers value at most 5000 Euros, and low-quality motorbikes, which buyers value at most 3000 Euros. High- quality sellers will accept 4000 Euros, while low-quality sellers will accept 2500 Euros. Assume: 1) buyers cannot observe quality before purchasing; 2) quality is exogenous; 3) buyers would be willing to pay the expected value of a motorbike; 4) everybody knows that the share of high-quality motorbikes in the market is 0.60. Hence:

a) The market for high-quality motorbikes will be crowded out. b) Both kinds of motorbikes will be sold in the market, as buyers’ expected valuation is greater than 4000 Euros. c) The information asymmetry does not play any role here. In fact, both kinds of motorbikes will be traded because buyers’ valuation is always higher than the amount of money sellers are willing to accept (5000>4000 and 3000>2500, respectively). d) There is a problem of hidden action, which can be solved by offering buyers a proper incentive contract.

4) A steel mill jointly produces steel and pollution. Nearby there is also a fishery firm. Both firms are price takers (Psteel = 8 and Pfish= 10). 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 f^2, where f is the quantity of fish produced.

a) The negative effect of pollution can be internalized by merging the two firms, but the merged firm will reach a global profit which is inferior with respect to the sum of profits achievable separately by the two firms.
b) The negative effect of pollution can be internalized by merging the two firms, and the merged firm will reach a global profit which is greater than the sum of profits achievable separately by the two firms. This is a Pareto efficient outcome.
c) The negative effect of pollution can be internalized by merging the two firms, and the merged firm will reach a global profit which is greater than the sum of profits achievable separately by the two firms. However, this is not a Pareto efficient outcome.
d) None of the above.

5) Econometrics is a software for performing statistical and econometric analyses. From one side, Students exhibit an inverse demand function given by the following expression: Ps = 24 – Qs. On the other side, professional Researchers exhibit an inverse demand function given by the following expression: Pr = 14 – Qr. The total cost function for producing and distributing the software is given by: TC = 2 + 4Qi where i = r, s. Please indicate: 1) which is the optimal price when the two markets are considered as a global single market; 2) which are the two optimal prices when the firm implements a price discrimination of the 3rd type. (Short) Calculation-space: omissis

a) Single market: p = 10.5; 2) Students market: p = 14; Researchers market: p = 9.
b) Single market: p = 11; 2) Students market: p = 13.5; Researchers market: p = 8.5.
c) Single market: p = 11.5; 2) Students market: p = 14; Researchers market: p = 9.
d) None of the above.

6) The ratchet effect:

a) applies to price cap regulation and refers to the low attitude of regulated firms to pursue cost-reducing investments at the end of the regulatory period.
b) applies to price cap regulation and refers to the low attitude of regulated firms to pursue quality-enhancing investments at the end of the regulatory period.
c) applies to price cap regulation and refers to the low attitude of regulated firms to pursue cost-reducing investments at the beginning of the regulatory period.
d) applies to price cap regulation and refers to the low attitude of regulated firms to pursue quality-enhancing investments at the beginning of the regulatory period.

7) 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 for 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. 300 Million Euro in 2018, while all this increase has vanished in the year 2019. On the basis of this result, 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.
c) The policy intervention has partially crowded-out private R&D expenditure.
d) None of the above.

8) Consider a monopolistically competitive firm. From the point of view of remaining firms, as firms leave the industry, we can think of this as a:

a) shift back in each individual firm’s MC curve.
b) shift up in each individual firm’s AC curve.
c) shift out in each individual firm’s demand curve.
d) shift back in each individual firm’s supply curve.

9) The tragedy of the commons may arise when resources are rival in consumption and non- excludable, and this is due to the fact that:

a) Users in deciding how much to use the common resource look at the marginal product rather than the average one, and the former decreases less rapidly than the latter as the intensity of usage increases.
b) Users in deciding how much to use the common resource look at the marginal product rather than the average one, and the former decreases more rapidly than the latter as the intensity of usage increases.
c) Users in deciding how much to use the common resource look at the average product rather than the marginal one, and the latter decreases more rapidly than the former as the intensity of usage increases.
d) Users in deciding how much to use the common resource look at the average product rather than the marginal one, and the latter decreases less rapidly than the former as the intensity of usage increases.

10) In industry Alpha there are only two firms, engaging in a Bertrand competition. They are characterized by the same total cost function: TC = 50Q. Total demand in the industry is described by the following function: Q = 190 – 3P. Which of the following is true?

Each firm is going to sell 40 units.
Both firms are going to set the same price, which is just slightly higher than 50.
Total demand in the industry is going to be 20 units.
None of the above.

11) In the Stackelberg model:

Firms choose their quantity simultaneously.
Firms choose their quantity sequentially, which implies the follower has an information advantage over the leader.
The leader is better off, because he is free to disregard the follower’s response in designing its strategy.
Ceteris paribus, total output is greater than in the Cournot model.

12) Which of the following is not a typical driver of diversification?

Economies of scope.
Synergies
Reduction in dependence.
Transfer of skills and knowledge.

13) Which of the following statements about location advantages is false?

a) Unlike ownership advantages, which are by definition heterogeneous, location advantages benefit every firm operating in that location to the same extent. b) They are an essential component of Dunning’s eclectic framework. c) They are an essential component of Verbeke’s framework. d) None of the above.

14) In Industry Epsilon, which is characterized by a constant elasticity of demand (ε) equal to 5, Cournot competition is played among four firms. Each of the four firms ends up with a 0.25 market share. Then:

a) The entropy index is equal to 0.25.
b) The Herfindahl index is equal to 0.0625.
c) 0.05 is a number that can be associated to the overall market power in the industry.
d) None of the above.

15) According to the classification of transactions (Williamson, 1986), transactions will be governed by hierarchy (i.e. unified governance) when:

a) Both relationship-specific investments and frequency of transactions are low.
b) Both relationship-specific investments and frequency of transactions are high.
c) Relationship-specific investments are high and frequency of transactions is low.
d) Relationship-specific investments are low and frequency of transactions is high.

Structured question (Write in a readable way) With reference to antitrust regulation:

a) Explain the reason why contemporaneous countercyclical movements in price are potentially a signal that firms are colluding in a given market.
b) 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, find the p that ensures collusion in the following game:

	Firm B
Firm A		Cheat	Collude
	Cheat	2,2	7,1
	Collude	1,7	6,6

c) Suppose homogenous consumers, each one characterized by a willingness to pay for (let’s say) jars & lids = 12 and cost for producing a jar = 3 and cost for producing a lid = 4. Following the ‘single monopoly theory’ put forward by the Chicago Law and Economics School, explain the reason why a monopolist in one market would have not any incentive to foreclose competitors and monopolize also the adjacent market.
d) The ‘single monopoly theory’ argument was advanced to defend Google in the EU Antitrust case on its abuse of a dominant position in the general search engine market for giving illegal advantage to its own comparison shopping service. Without entering into all other aspects of the case, express your frank view on the merits of this specific point.

Industry	pij (A)	pij (B)
1	0.80	0.05
2	0.10	0.15
3	0.025	0.10
4	0.025	0.10
5	0.025	0.25
6	0.025	0.35

Business & Industrial Economics

Schemes:

Past Exams

WithOUT solution:

With solution:

EXERCISE 1

EXERCISE 2

MULTIPLE-CHOICE QUESTIONS [10 points]

.pdf file.

STRUCTURED QUESTION MINI-CASE [5.5 points]

EXERCISE [4.5 points]

BUSINESS AND INDUSTRIAL ECONOMICSA.Y. 2020/2021

BIE classroom exam – January 12th, 2022

BUSINESS AND INDUSTRIAL ECONOMICS A.Y. 2020/2021

BIE classroom exam – September 9th, 2021

You do not need to provide explanations for your answers. However, if you want to add a note to an answer (e.g., an assumption, a clarification, an explanation), please write it in the paper sheets that you will upload as a unique .pdf file.

EXERCISE 1 [7 points]

EXERCISE 2 [3 points]

Rakets

BUSINESS AND INDUSTRIAL ECONOMICS
A.Y. 2020/2021