Question 11. A business is more likely to vertically integrate and produce an input internally if Specialized investments are important and the contracting environment is simple Specialized investments are important and the contracting environment is complex Specialized investments are not important and the contracting environment is simple Specialized investments are not important and the contracting environment is complex3 points Question 21. A problem with using a “revenue sharing” plan to compensate employees is that the plan Does not provide incentives for employees to work hard Will be costly if revenues are low Does not provide incentives for workers to minimize costs Will have high administrative costs3 points Question 31. Assume the compensation of a manager is given by the equation W = S + b?, where ? is the profit of the business. Then, an increase in the bonus rate (b) and a decrease in the base salary (S) will create Stronger incentives and more risk for the manager Weaker incentives and more risk for the manager Stronger incentives and less risk for the manager Weaker incentives and less risk for the manager3 points Question 41. The return from an investment is uncertain and there is a 25% chance that it will be 100,000 dollars, a 50% chance that it will be 50,000 dollars, and a 25% chance that it will be 20,000 dollars. The expected return from the investment is 45,000 dollars 50,000 dollars 55,000 dollars 75,000 dollars3 points Question 51. In a Second-Price, Sealed-Bid auction with independent private values, the optimal strategy is to Make a bid above your valuation of the item Make a bid below your valuation of the item Make a bid equal to your valuation of the item Not make a bid3 points Question 61. A few years back, Disney switched from a “fee-per-ride” pricing strategy to a “fee-per-day” pricing strategy. The “fee-per-day” pricing strategy is a form of Two-part pricing Peak-load pricing Transfer pricing Randomized pricing3 points Question 71. A movie theater will generally charge a lower price to students because Students buy less popcorn than the general public Students buy more popcorn than the general public Students have a less elastic demand for movies than the general public Students have a more elastic demand for movies than the general public3 points Question 81. There are three businesses in an industry, with sales of 20 million, 10 million, and 10 million, respectively. The HHI index for this industry is 2250 3500 3750 50003 points Question 91. If a monopoly has a marginal cost of MC = 20 and the price elasticity of demand is E = ?3, the optimal price for the monopoly is 25 30 50 753 points Question 101. In regression analysis, the fraction of the total variation in the dependent variable explained by the regression is called the P-value R-square t-statistic F-statistic********************************** ADVANCED ECONOMIC ANALYSIS Exam II Part II Analytical/Essay questions You must show and explain your work 1. [20 Points] Monopoly You are the manager of a business in a monopoly market with the following inverse demand function p = 30 ? 110q In addition, assume your production technology is described by the total cost function C(q) = 500 + 10q a) Determine the optimal quantity to produce (qM), the price you should charge for your product (pM), and compute the profit of your business. b) Provide an intuitive explanation of market power. What is market power? How do we measure the market power of a business? Compute the market power of your business. c) What determines the market power of a business? Explain. 2. [10 points] Game Theory Firm 1 and Firm 2 compete in an industry and must decide whether to introduce an upgrade to their existing products. The nature of the strategic interaction is described by the game box, where (Y) means â€œupgradeâ€ and (N) means â€œdo not upgradeâ€. The upgrade is costly and may or may not be a good business decision. a) Assume Firm 1 and Firm 2 move simultaneously. Derive the NASH equilibrium of this game. b) Assume Firm 1 and Firm 2 move sequentially. In particular, Firm 1 makes the initial move and decides whether to introduce the upgrade. Then, Firm 2 observes the decision of Firm 1 and decides whether to introduce the upgrade. Determine the subgame perfect NASH equilibrium of this game. 0 , 0 2 , 11 , 3 3 , 2Y NYNFirm 2Firm 1 2 3. [10 Points] Pricing Strategies A business can produce its product in different versions: Version A has a basic design and a lower cost and Version B has an upgraded design and a higher cost of production. The business knows there are different types of customers, â€œHighâ€ demand (H) and â€œLowâ€ demand (L), but cannot separate the different types of customers. The number of customers of each type and the maximum each type is willing to pay for the different versions of the product are illustrated in the table. In addition, the table gives the marginal cost of production for each version of the product. Number Type Version A Version B 50 H 30 45100 L 20 25Marginal Cost 10 20 a) Assume the business offers the product in Version A only. Determine the optimal price (???) and compute the profit of the business. b) Assume the business offers the product in Version A and Version B. Determine the optimal prices (??? and ???) and compute the profit of the business. 4. [10 Points] Imperfect Competition For each of the following terms, provide an intuitive explanation and discuss its economic implications. a) Product Differentiation: What is it? How does it affect competition? b) Network Market: What is it? What is the nature of the equilibrium in a network market? Why has Windows been able to maintain a monopoly position in the market for operating systems? 5. [20 Points] Economics of Information a) Provide an intuitive explanation of the Principal-Agent problem and discuss any mechanisms used to mitigate the problem. You should use the business owner-manager problem as an illustration. b) Provide and intuitive explanation of the Adverse Selection problem and discuss its implications. You should use the health insurance industry as an illustration. Extra Credit [5 points]: Assume the demand for the product of a monopoly is given by the function q =100p?3/2. If the cost function of the monopoly is C(q) = 10q, the optimal price for the monopoly is a) 20 b) 25 c) 30 d) 35
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