Final Examination of Managerial Economics
Winter Term 2014
I. Short Answer Questions (60 points)
1.True and false question. Explain why.
Suppose that some supermarket estimates that the demand for its private-label cereal
is less elastic than the demand for branded cereal. Does this mean that it should set
a higher price for private-label cereal? Explain.
2. What is the difference between network effect and network externality? Does the
presence of network effects cause demand to be more or less price elastic? Explain
why?
3.Suppose that you are the manager of a cable company proving two channels. Your
potential customers include two types of households. The following table summarizes
the marginal benefit (value) of a particular type of household from watching a
particular channel.
Household/Channel
News Channel
Entertainment Channel
Type One
200
20
Type Two
110
110
Suppose that the marginal cost of the cable company providing a channel to the
household is 50. Will you provide all channels to all types of household from the
efficiency perspective? What is your optimal pricing strategy from the efficiency
perspective? [Hint: mixed bundling]
4.Draw worker's marginal benefit curve for each of the following incentive schemes.
(A) A fixed monthly wage, (B) performance quota. Both graphical and descriptive
analyses are required.
5.Airlines use reservations and yield management systems to target higher
unrestricted fares at business travelers and lower restricted fares at leisure travelers.
What kind of pricing strategy are airlines implementing? Explain why airlines
implement such kind of pricing strategy.
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6.Explain how the government uses the marginal cost pricing to regulate the price
charged by a natural monopolist. Moreover, explain why the marginal cost pricing
can result in a loss for a natural monopolist. Both graphical and descriptive analyses
are required.
7. True or false question. Explain why.
There are two sellers in the duopoly market: Luna and mercury. If market
demand increases, then each seller in the market would choose larger capacity in the
new equilibrium. Both graphical and descriptive analyses are required.
8. Explain how the government can use the heavy penalty to raise a car driver's unit of
care to the socially optimal (efficient) level. Both graphical and descriptive analyses
are required.
9. A monopoly firm currently faces the following conditions:
Price
Marginal
Revenue
Marginal
Cost
Average Average
Cost
Variable Cost
Average
Fixed Cost
100
80
70
110
30
80
Please show the current conditions in a graph containing cost and revenue curves. As
a consultant of this monopoly firm, what are you going to suggest the firm to do in
the short run?
10. Suppose that the retail sector is Monopoly. Compare
the equilibrium in the retail market with (i) a wholesale price cut of
50 cents and (ii) widespread distribution of 50-cent coupons.
11.Please show three circumstances in which the winner's curse is more severe and
bidders should bid more conservatively.
12. The wine market is an imperfect market because of asymmetric information. In
fact, potential consumers cannot distinguish high-quality wine from low-quality wine.
The marginal cost of producing low-quality wine is almost zero. Initially, suppose that
producers offer only high-quality wine. Now suppose that producers also produce a
few bottles of low quality wine. In a relevant diagram, show that the wine market has
the adverse selection problem. Moreover, in another diagram, show that the wine
market can possibly fail (market failure) if too many bottles of low-quality wine are
supplied.
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II. Discussion Questions (40 points)
1.Let b represent marginal benefit and q the amount of Sogo department store’s
investment. Suppose Sogo group also owns florist shop and shoe store which are near
Sogo department store. Suppose that the investment generates marginal benefits,
b=10-q for Sogo, b=4-0.4q for the florist, and b=1-0.2q for the shoe store.
Moreover, the marginal cost of investment is 1.
(A) Write the marginal benefit equation for Sogo group, and draw the Sogo group's
marginal benefit curve in a relevant diagram.
(B) What is the profit-maximizing quantity of Sogo’s investment?
(C) What is the economically efficient quantity of Sogo’s investment?
2. Dial-up Internet users need modems to convert digital data into analog signals and
Internet access providers (IAPs) need matching modems to convert the analog signals
back to digital data. In the mid-1990s, the dominant standard for modems was the
V.34, providing a speed of 28.8 or 36.6 kilobits per second (kbps). In Autumn 1996,
two incompatible technologies for 56 kbps modems – Rockwell’s K56Flex and U.S.
Robotics’s X2 -- were launched.
(A)Construct the following game in strategic form. End-users choose among the
three alternatives of buying K56Flex, buying X2, or remaining with the old
technology, while IAPs have the same choice. If both end-users and IAPs choose
K56Flex, each group receives a net benefit of 100, and similarly, if both groups
choose X2. If end-users or IAPs buy K56Flex or X2, while the other does not buy
the matching technology, the buyer receives a net benefit of –50. Anyone that
remains with the old technology receives 0. Identify the equilibrium/equilibria in
pure strategies.
(B)In February 1998, Rockwell and U.S. Robotics agreed on a common V.90
standard. How did this affect the game and its equilibrium/equilibria?
3.For many years, the NBA had a monopoly over basketball and, consequently,
monopsonized the market for players. This monopsony over players began to erode in
1967 with the formation of the ABA. Finally, in 1983, basketball team owners agreed
to allow free agency, which removed the restrictions against players moving between
teams. An analysis of earnings showed that a player who scored 10% more points
would have earned 2.05% more salary between 1968 and 1975, but 3.21% more
salary between 1984 and 1988.
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(A)Compare the wage rate when the demand side of the market is a monopsony with
the perfectly competitive wage.
(B)Explain the differences in player earnings between 1968-75 as compared with
1984-88.
(C)When the ABA and NBA proposed to merge, the basketball players opposed the
proposal. Explain why.
4.Suppose that Iron Music has the copyright to the latest CD of the heavy Iron band.
The market demand curve for the CD is Q=800-100P, where Q represents quantity
demanded in thousands and P represents the price in dollars. Production requires a
fixed cost of $100,000 and a constant marginal cost of $2 per unit.
(A)What price will maximize profits? At that price, how will be the sales?
(B)Calculate the Lerner Index at the profit-maximizing scale of production.
(C)Suppose that the fixed cost rises to $200,000. How would this affect the
profit-maximizing price?
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