Production Economics
Final Examination

Short Answer Essay

1. Why would a traditional company adopt e-commerce?

2. What is cannibalization, in terms of a traditional company adopting e-commerce?

3. Firms are always devising methods to limit competition and erect market barriers. Identify the market barriers.

What is brand proliferation?

What is product specification?

4. What is market power?

What is supply-side substitution?

What is demand-side substitution?

5. Distinguish between economies of scale and economies of scope.

6. Distinguish between profit maximization and revenue maximization.

7. What is x-inefficiency and where would you find it?

8. Identify economies of scope by using the cost function, C(q ₁, q ₂) in your discussion.

9. You have the game below, where two firms, have an advertising war.

• Assumptions.
  1. Two firms: Coca-Cola & Pepsi
  2. No collusion
  3. If both firms have the same advertising budget, then each firm has 1/2 the market
     • Both firms earn the same profit.
     • If one firm has a larger advertising budget
       • Has more than 1/2 the market.
       • Earns more profit.
  4. The payoffs in the cells are profits.

		Coca-Cola
		Small Ad, Budget           Large Ad. Budget
Pepsi	Small Ad. Budget       Large Ad. Budget

(a) What is the dominant strategy?

(b) What is the Nash equilibrium?

(c) What is the best strategy, if both could collude?

10. You have the game below:

(a) Identify if any player has a dominant strategy.

(b) Identify the Nash equilibriums if any.

(c) Appraise the preferred Nash equilibrium.

11. You have the market inverse demand function, P(Q) = 200 - 2Q, where Q = q ₁ + q ₂. Two firms are in the market. They are Cournot competitors, and each firm's cost function is C(q _i) = 20 q _i. This market has entry barriers and no new firms can enter the market.

(a) Identify the best-response functions.

(b) Identify the market price, a firm's profit, and each firm's quantity.

(c) Appraise whether the firms have an incentive to collude.

(d) Evaluate the impact on a market if the firms collude.

(e) Judge whether this market efficient.

12. You have an oligopoly market with a profit function, p _i = P(q ₁ + q ₂)q _i - C(q _i). Please derive the Lerner Index for the oligopoly. The price elasticity of demand is, e = - (dQ / dP)(P / Q)

(a) What happens to the Lerner Index if a monopoly dominates the market?

(b) What happens to the Lerner Index if a market becomes competitive?

13. You have a Bertrand model with two firms. Firm 1 has the demand function below. Firm 2 has a similar demand function.

Assume each firm has the same marginal cost (MC), where MC = c.

(a) Why did Bertrand criticized the Cournot Model?

(b) What are the four potential outcomes?  Which outcome is the Nash equilibrium?

(c) What happens if each firm has a different cost function?

(d) What happens if each firm has fixed cost?

14. Define each the following using at least one sentence.

(a) What is a dominant firm with a competitive fringe?

(b) What is X-Inefficiency?

(c) Why does a monopoly invest into research and development?

15. You have the demand function for the market, P(Q) = 100 - Q. A pure monopoly has a marginal cost function, MC = 15, while a monopoly that suffers from x-inefficiency has a marginal cost function, MC _X = 30.

(a) What is the price and quantity for both the pure monopoly and a monopoly that suffers from X-inefficiency?

(b) Which monopoly has a higher social welfare?

16. You have the demand function for the market, P(Q) = 100 - Q. A pure monopoly has a marginal cost function, MC = 15, while a monopoly that invests into research and development has a marginal cost function, MC _R = 6.

(a) What is the price and quantity for both the pure monopoly and a monopoly that invests into research and development?

(b) Which monopoly has a higher social welfare?

17. Appraise the economics of first-degree price discrimination. Please graph and explain with a demand function and marginal cost function.

(a) Judge whether a monopolist reduces social welfare in this case.

(b) What is the Pacman approach for price discrimination?

(c) What did Coase say about this?

18.  What is the second-degree price discrimination? Please show and explain using two demand functions and one marginal cost function.

(a) Where does the monopolist's profits come from?

19. What is the third-degree price discrimination? Please show and explain using two demand functions and one marginal cost function.

20. Distinguish between second-degree and third-degree price discrimination.

21. Using a demand, marginal revenue, and marginal cost functions, please explain what happens if a monopoly offers a better quality good.

(a) What is the gain in a monopolist's profits?

(b) What is the gain in consumers' surplus?

22. Why do some firms simultaneously sell a high-quality product and a low-quality product?

(a) Please use two indifference curves for customers who demand high quality and consumers who demand low quality.

(b) Does this explain why companies do not offer an average quality product?

23. A market has five firms with the market shares: 30%, 25%, 20%, 15%, and 10%.

(a) Please calculate the concentration ratio.

(b) Please calculate the Herfindahl Index.

24. Please draw a demand, marginal revenue, average total cost, and marginal costs functions for a monopolistically competitive firm.

(a) Is this market structure allocative efficient?

(b) Is this market structure productive efficient?

25. (a) What is average cost pricing? Please show and explain with a demand, long-run average cost, marginal revenue, and marginal cost functions.

(b) Judge whether average cost pricing is allocative efficient.

26. (a) What is Ramsey pricing? Please show and explain with a demand, long-run average cost, marginal revenue, and marginal cost functions.

(b) Judge whether average cost pricing is allocative efficient.

(c) Which problem does this price regulation fix relative to marginal cost pricing?