Tore Nilssen
24.01.05
ECON 4245 Economics of the Firm
Seminar exercises spring 2005
Set 1:
A. (exam fall 2002)
Should a producer of mobile phones, like Nokia, itself produce covers for its phones, or
should it buy them from independent suppliers? Discuss this question, putting emphasis
on the way in which the presence of contract incompleteness and relationship-specific
investments has importance.
B. (exam spring 2001)
A firm making regular use of laboratory services in its production is about to assess
whether it should own its own laboratory or buy the necessary services from an externally
owned laboratory. Discuss the issues that the firm should take into consideration in its
assessment.
Set 2:
A. (exam spring 1998)
Consider a firm facing a potential takeover by another firm. There is no asymmetry of
information about relevant costs and gains related to the takeover.
(a) What is required for the takeover to succeed?
(b) How can a firm, through its securities-voting structure, prepare for value-enhancing
takeovers to succeed?
(c) Suppose the firm has many small shareholders and that the firm has two classes of
shares: class A and class B. Only class-A shares have voting rights. Each class receives
50% of the dividend. Restricted offers are not allowed, so that an offer to buy shares in a
class must apply to all shares in the class. The market value of the firm under the current
management is 300, and the management’s private value from control is 30. A potential
acquirer has private value from control equal to 60 and has no previous shares in the firm.
(i) How large must the firm’s market value at least be, after the acquirer has gained
control, in order for the takeover to succeed?
(ii) How much will shareholders and acquirer, respectively, earn if the takeover
succeeds?
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(iii) How would the conclusions be affected if the firm had only class-A shares?
(d) Explain the reason for not allowing restricted offers for shares with voting rights. You
may want to use an example to show the consequences of allowing restricted offers.
B. (exam spring 1999)
(a) Explain the kinds of inefficiencies that may occur in an unregulated market for
corporate control.
(b) It has been claimed that the market for corporate control may lead to managers
becoming myopic, in that they prefer high profits in the short run to maximizing the longrun value of the firm. Discuss this claim.
Set 3:
(exam spring 1999/ spring 2001)
(a) What does it mean that a firm is bankrupt?
(b) Explain how insolvency may lead to (i) a bankrupt firm being closed down even
though it is socially optimal to continue, and (ii) a bankrupt firm being continued even
though it is socially optimal to close it down. Discuss what the government could do in
order to reduce these kinds of inefficiencies.
Set 4:
A. (exam fall 2002)
(a) Explain how conflicts of interest between management and owners and conflicts of
interest between owners and creditors may influence a firm’s combination of debt and
equity as sources of finance.
(b) Anderson Production (P) is a firm with no conflict if interest between management
and owners, since the firm’s owner, Brian Anderson, also is the chief executive officer.
But there is a conflict of interest between the owner and any creditors, like in (a) above.
AP sells its product in a market with one other producer, that is, this is a duopoly. Explain
the importance of imperfect competition on the product market, in combination with the
conflict of interest owner/creditor, for the use of debt as a source of finance in AP.
B. (exam fall 2002)
Consider a situation where a firm has information about itself (for example, the value of
its current business, often called assets in place, or the value of investment projects
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planned for the future) that is not available to outside investors. Explain how such
asymmetry of information may make it difficult for the firm to attract capital to finance
new projects. Discuss thereafter what the firm can do to deal with this problem.
Set 5:
(exam fall 2000)
Explain how a manager’s incentives to act in the firm’s interest may be negatively
affected by the manager’s concern for own career.
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