Production Economics
Midterm Examination 1

These questions are from the test bank.  Some questions have multiple parts.

Short Answer Essay

1. What are three advantages an internet company has over a traditional brick and mortar store company?

2. What are three disadvantages an internet company has over a traditional brick and mortar store company?

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

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

5. Distinguish between the Structural-Conduct-Performance (SCP) Approach and the Chicago School of Thought.

6. (a) What are a firm's boundaries?

(b) What is vertically integrated?

(c) What is outsourcing?

7. What is the importance of Ronald Coase's ideas?

8. (a) What is product differentiation?

(b) List and describe three types of product differentiation.

9. (a) Firms are always searching for ways to limit competition and create market barriers. What are market barriers?

(b) What is brand proliferation?

(c) What is product specification?

10. (a) What is allocative efficiency?

(b) Which market structure is allocative efficient?

(c) Why are monopolies allocative inefficient?

11. What are the characteristics of a competitive market?

12. (a) What are the differences between a Marshallian and Hicksian demand functions?

(b) Which demand function are economists supposed to use in welfare analysis?

13. (a) What is market power?

(b) What is supply side substitution?

(c) What is demand side substitution?

14. (a) You know the demand function for electricity is P(Q) = 100 - 0.5 Q and the total cost is TC(q) = 20q.

(b) Please graph demand and marginal revenue functions.

(c) What are the average cost and marginal cost functions? Please graph them.

(d) What is monopoly price, market quantity, and profits?

(e) What is the competitive firm's price, market quantity, and profits?

(f) What is the deadweight loss of having this monopoly in the market?

15. Please derive the Lerner Index, if you know the following:

(i) price elasticity of demand, e = - (dQ / dP)(P / Q)

(ii) A firm with monopoly power has the profit function, p(Q) = P(Q)Q - C(Q)

(a) What is the Lerner Index for a purely competitive market?

(b) Which products give a monopolist more power, elastic or inelastic?

16. Please draw a marginal cost function and long-run average cost function for a firm. What is the minimum efficient scale (MES)?

(a) What is S(q) > 1? Explain in words and show on the graph.

(b) What is S(q) = 1? Explain in words and show on the graph.

(c) What is S(q) < 1? Explain in words and show on the graph.

17. (a) If a firm has a long-run average cost function that is strictly constant returns to scale, how many firms will be in the market? Explain in words and show with two graphs: a firm's AC(q) and a market.

(b) If a firm has a long-run average cost function that is strictly diseconomies of scale, how many firms will be in the market? Explain in words and show with two graphs: a firm's AC(q) and a market.

(c) If a firm has a long-run average cost function that is strictly economies of scale, how many firms will be in the market? Explain in words and show with two graphs: a firm's AC(q) and a market.

(d) If a firm has a long-run average cost function that has a "U-shaped" AC(q), how many firms will be in the market? Explain in words and show with two graphs: a firm's AC(q) and a market.

18. What is economies of scope? Please use the cost function, C(q1, q2) in your discussion.

19. What is volumetric returns to scale? Using the formulas for a tank, the volume is V=pr2h and the surface area is 2pr2+2prh, show what happens to per unit costs as the tank gets bigger. The height is h and the radius is r.

20. We have two companies enter into a relationship. A soda company and a bottler.

The bottler has a cost: CB = TVB + F

The soda company's profit is: V = R - TVB -TVP

(a) What is the total rent (profits) if both companies enter into a relationship?

(b) What is the total rent, if both companies terminate their relationship? The soda company pays T to find a new bottler on short notice, while the bottling company sells its machines for salvage (S).

(c) What must be true about F, S, and T for there to be no benefit of a long-term relationship?

(d) What is the holdup problem?

21. 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,       Large Ad.
Budget        Budget
Pepsi Small Ad. Budget
 
 
 

Large Ad. Budget

Game theory

(a) What is the dominant strategy?

(b) What is the Nash equilibrium?

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

22. You have the game below:

(a) What is the dominant strategy?

(b) What are the Nash equilibria, if any?

(c) Which is the preferred Nash equilibrium?

  C1 C2 C3 C4
R1 5, 4 7, 3 2, 1 5, 5
R2 6, 9 10, 10 7, 9 4, 3
R3 7, 12 5, 10 15, 11 3, 3
R4 12, 12 6,13 0, 5 2, 4

23. You have the market inverse demand function, P(Q) = 200 - 2Q, where Q = q1 + q2. Two firms are in the market, they are Cournot competitors, and each firm's cost function is C(qi) = 20 qi. This market has entry barriers and no new firms can enter the market.

(a) Please find and graph the best-response functions.

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

(c) Do firm's have an incentive to collude?

(d) What happens if firms collude?

(e) Is this market efficient?

24. You have an oligopoly market with a profit function, pi = P(q1 + q2)qi - C(qi). 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?

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

Bertrand 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?

 

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