Industrial Economics practice exam including own answer elaborations (30L201-B-6)
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Course
Industrial Economics (30L201B6)
Institution
Tilburg University (UVT)
This is a practice exam for the Industrial Economics course that is taught at Tilburg University. I made the elaborate answers myself and all come to the correct end answer, but please note that because they do not come from the teacher, you cannot derive any rights from this if it is not exactly t...
For questions 1, 2, 3 and 4, consider a market where a homogenous good is produced. Inverse
demand is represented by P = 140–2Q. The fixed cost is zero for every firm.
1. Suppose the market has one producer that acts as a monopolist. Marginal cost is equal
to 20. How many units of output does the monopolist produce if it is able to practice
perfect price discrimination?
A. 15
B. 30
C. 45
D. 60
2. Suppose the market is characterized by Cournot competition and there are two firms.
Both firms have constant marginal costs of 20. Suppose the two firms decide to form a
cartel and agree on maximizing joint profits and producing the same quantity.
What is the critical discount factor that is needed to sustain collusion?
A. 0.5
B. 0.529
C. 0.889
D. 0.9
3. Consider again the information given in Question 2. The table below presents two
scenarios in which the two firms have di↵erent discount factors.
Scenario Discount Factor of Firm 1 Discount Factor of Firm 2
I 0.46 0.62
II 0.6 0.6
Under which of the two scenarios is collusion in this market sustainable?
A. Only Scenario I
B. Only Scenario II
C. Both Scenarios I and II
D. Neither of the two scenarios
4. Suppose the market is characterized by Bertrand competition and there are two firms.
Both firms have no fixed costs. Firm 1 has constant marginal costs of M C1 = 20 and
Firm 2 has constant marginal costs of M C2 = 30.
What is the consumer surplus in this market?
A. 1841.41
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, B. 3025
C. 3306.25
D. 3600
5. A monopolist sells its product to two types of customers: Type A and Type B. You are
given the following information:
Inverse demand of Type A customers: P = 550 2Q
Inverse demand of Type B customers: P = 1050 0.5Q
Marginal cost of the monopolist: M C = 150
Suppose that selection by indicators is not possible. What is the profit-maximizing total
quantity?
A. 1050
B. 900
C. 1000
D. 1250
6. Consider a perfectly competitive firm with short-run total costs of C(q) = 4q 3 20q 2 +
20q + 40. Under which price does the firm shut down (stop to produce in the short
run)?
A. 5
B. 0
C. 2
D. 2
7. A market consists of eight firms that compete by setting quantities. For each firm, the
fixed cost is 10. The equilibrium market price is 720 euros, whereas the equilibrium
market quantity is 400. The price elasticity of market demand at the equilibrium is
0.75. What is the marginal cost of the firm whose market share is 25%?
A. 480
B. 360
C. 540
D. 420
8. In the market for headphones, there are two types of headphones: noise-canceling and
regular. There is a monopolist that produces both headphones at equal and constant
marginal costs of 30. The firm has no fixed costs.
There are also two types of consumers: Type A and Type B. There are 1000 consumers
of each type. Type A customers are willing to pay at most 400 for a noise-canceling
headphone and 150 for a regular headphone. Type B customers are willing to pay at
most 80 for a noise canceling headphone and 50 for a regular headphone. Consumers
always buy at most one headphone and buy the headphone that maximizes their surplus
(willingness to pay – price paid).
Suppose that selection by indicators is not possible. Which prices will the headphone
producer set for the two types of headphones?
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, A. 400 for noise-canceling; 150 for regular.
B. 300 for noise-canceling; 150 for regular.
C. 400 for noise-canceling; larger than 150 for regular.
D. 80 for noise-canceling; larger than 150 for regular.
9. An event venue wants to determine the optimal price to charge for di↵erent shows. There
are currently two kinds of performances: Performance 1 and Performance 2. Both are
produced at a constant marginal cost of zero. The company faces four di↵erent types of
consumers whose willingness to pay are given in the table below. There is one customer
of each type in the population.
Customer Type Performance 1 Performance 2
A 5 60
B 35 65
C 40 70
D 45 70
If the venue uses pure bundling, what is the optimal price for the bundle?
A. 65
B. 110
C. 100
D. 115
10. Consider the following two statements:
I. In the neoclassical model of price discrimination in which there are two di↵erent
types of consumers, the two di↵erent types of consumers have di↵erent demand
functions because they value the product di↵erently.
II. In the model of naivete based price discrimination discussed in a lecture, naive
consumers demand more due to a mistake, and not due to their actual preferences.
Which of the following claims about these two statements is correct?
A. Statements (i) and (ii) are both correct
B. Statement (i) is correct and statement (ii) is wrong
C. Statement (i) is wrong and statement (ii) is correct
D. Statements (i) and (ii) are both wrong
11. Two ice cream stands are located along a small beach with a length of 100 meters.
Both stands sell identical ice cream cones. Assume that marginal cost is equal to zero.
The ice cream vendors locate L1 and L2 meters from the left-hand corner of the beach,
respectively. 100 sunbathers are located uniformly along the beach, one in every meter.
Carrying ice cream distance d at an outside temperature of t costs td3 because ice cream
melts more the higher the temperature t and the further one must walk. Assume that
firms choose their prices simultaneously. Let P1 be the price charged by Vendor 1 and
P2 the price charged by Vendor 2.
If t = 0, what are the equilibrium prices?
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, A. P 1 = P 2 = 10
B. P1 = P2 = 20
C. P1 = P2 = 30
D. P1 = P2 = 0
12. Two ice cream stands are located along a small beach with a length of 100 meters.
Both stands sell identical ice cream cones. Assume that all production costs are sunk.
The ice cream vendors locate L1 and L2 meters from the left-hand corner of the beach,
respectively. 100 sunbathers are located uniformly along the beach, one in every meter.
Carrying ice cream distance d at an outside temperature of t costs td2 because ice cream
melts more the higher the temperature t and the further one must walk. Assume that
firms choose their prices simultaneously. Assume that t = 0.001.
If L1 = 40 and L2 = 70, how many ice cream cones does each firm sell at the equilibrium?
Hint: You need to find the equilibrium prices first. (Numbers are rounded to the closest
integer.)
A. Firm 1 sells 48 cones, whereas firm 2 sells 52 cones
B. Firm 1 sells 52 cones, whereas firm 2 sells 48 cones
C. Firm 1 sells 50 cones, whereas firm 2 sells 54 cones
D. Firm 1 sells 54 cones, whereas firm 2 sells 50 cones
For questions 13) and 14), consider a market in which three firms are currently active, while
a fourth firm is contemplating entry. Market demand is Q = 10 P and all firms operate
with constant marginal cost c = 1. The current price is P = 4. Firm 4 (the potential
entrant) has to pay an entry cost of F to enter the market. It anticipates that if it enters,
the price will drop to P 0 and the four firms will share the market equally.
13. Which of the following statements is correct?
A. If P 0 = 3 and F = 4, Firm 4 will enter.
B. If P 0 = 3 and F = 3, Firm 4 will stay out.
C. Firm 4’s payo↵ from entering is (P 0 c)(10 P 0 )/3.
D. If P 0 = 3, entry by Firm 4 reduces the joint profits of the three incumbents
by 15/2.
14. Which of the following statements is wrong?
A. The welfare change caused by Firm 4’s entry is (P P 0 )(P 0 c+(P P 0 )/2) F .
B. If P 0 = 2 and F = 5, entry by Firm 4 is efficient.
C. If P 0 = 2 and F = 3, Firm 4 stays out even though its entry would increase
welfare.
D. If P 0 = 3 and F = 3, Firm 4 enters even though its entry reduces welfare.
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