This question paper must be returned.
Candidates are not permitted to remove any part
of it from the examination room.
SEAT NUMBER: ……….… ROOM:..……………….
FAMILY NAME:………….....………………………….
OTHER NAMES:……..…….…………………..……..
STUDENT NUMBER:…..…….………..……………..
FORMAL EXAMINATION PERIOD: SESSION 2, NOVEMBER 2019
Unit Code: ECON309
Unit Name: Industrial Organisation
Duration of Exam
(including reading time if applicable): 120 minutes (plus 10 minutes reading time)
Total No. of Questions: 20 multiple choice; one compulsory short answer; two compulsory short answer (of four choices)
Total No. of Pages
(including this cover sheet): 16
GENERAL INSTRUCTIONS TO STUDENTS:
• Students are required to follow directions given by the Final Examination Supervisor and must refrain from communicating in any way with another student once they have entered
the final examination venue.
• Students may not write or mark the exam materials in any way during reading time.
• Students may only access authorised materials during this examination. A list of authorised material is available on this cover sheet.
• All watches must be removed and placed at the top of the exam desk and must remain there for the duration of the exam. All alarms, notifications and alerts must be switched off.
• Students are not permitted to leave the exam room during the first hour (excluding reading time) and during the last 15 minutes of the examination.
• If it is alleged you have
eached these rules at any time during the examination, the matter may be reported to a University Discipline Committee for determination.
EXAMINATION INSTRUCTIONS:
1. Write your family name, first name, and student number on the exam paper (above), multiple-choice
answer sheet and exam booklet provided.
2. The total exam is worth 60 marks and counts towards 60% of your final grade.
3. The exam is divided into three sections:
Section 1: 20 multiple-choice questions (30 marks total)
Section 2: one compulsory short-answer question with multiple parts (10 marks total)
Section 3: choose two of the four short-answer questions with multiple parts (20 marks total)
4. Answer all 20 multiple-choice questions on the multiple-choice answer sheet provided. Each multiple-
choice question is worth 1.5 marks. Unanswered or inco
ect answers are given a mark of zero.
5. Answer all short-answer questions (section 2 and section 3) in the exam booklet provided.
6. Appendix A ‘Useful results and formulae’ is provided on pages 11-12.
7. Appendix B ‘Illustrations of results’ is provided on page 13.
8. Blank working pages are provided on pages 14-16.
AIDS AND MATERIALS PERMITTED/NOT PERMITTED:
Dictionaries: Translation dictionaries permitted
Calculators: Non-programmable calculators permitted
Other: Closed book – No notes or textbooks permitted
2
Section 1: Answer Each Question on the Multiple-Choice Answer Sheet Provided (30 marks)
1. Assume a one-period two-player game given as follows:
Which of the following statements is co
ect?
a. There are no pure strategy Nash equili
ia.
. There is one pure strategy Nash equili
ium.
c. There are two pure strategy Nash equili
ia.
d. There are four pure strategy Nash equili
ia.
2. Assume two firms compete in prices for a homogenous product where demand is given P = 50 – Q. If the marginal
cost of Firm 1 is 20 and the marginal cost of Firm 2 is 25, which of the following statements is co
ect?
a. In equili
ium, Firm 1 will serve the entire market.
. In equili
ium, Firm 2 will serve the entire market.
c. In equili
ium, both firms will share the market equally.
d. In equili
ium, neither firm will serve the market.
3. Suppose two firms sell differentiated products and compete in prices. Assume that the two firms are located at
each end of Main Street (which is one mile in length) and that 1000 consumers are uniformly distributed along the
street. Also assume consumers face (there and back) travel costs of t = 4 per mile, and each firm has marginal costs
of c = 10 and no fixed costs. If firms simultaneously set prices, in equili
ium these are given as follows:
a. p1 = p2 = 4
. p1 = p2 = 10
c. p1 = p2 = 14
d. p1 = p2 = 20
4. Refer to the information in Question 3. If Firm 1 set its price first, followed by Firm 2, what is the profit of each firm?
a. π1 = 2250, π 2 = 1850
. π1 = 2250, π 2 = 3125
c. π1 = 2750, π 2 = 1850
d. π1 = 2750, π 2 = 3125
5. A buyer values a good at $200 and an incumbent monopolist has costs of $60. A potential entrant has uniformly
distributed costs over [0, 120] and competes in Bertrand competition with the incumbent if she enters the market.
Without a long-term contract between the incumbent and consumer, how much profit does the incumbent make?
a. $15
. $30
c. $50
d. $70
3
6. Based on the information in Question 5, how much extra profit does the incumbent make by writing a long-term
contract in period 1 for delivery in period 2 that specifies a price of $130 and a
each of contract fee of $100.
a. $5.00
. $7.50
c. $10.00
d. $12.50
7. The figure below relates to an entry game in which the incumbent firm is either high or low cost. The potential
entrant doesn’t know whether the incumbent firm is high or low cost but observes the price set by the incumbent
efore making their entry decision. Payoffs are given as follows:
If the entrant observes a low price, what is the minimum probability that the incumbent is low cost such that the
entrant will choose not to enter?
a. 25%
. 33.3%
c. 50%
d. 75%
8. With respect to the model outlined in Question 7, which of the following statements is true?
a. A high-cost incumbent firm can deter entry by pretending to be low-cost firm.
. A low-cost incumbent firm can deter entry by pretending to be a high-cost firm.
c. Neither a. nor b. is true.
d. Both a. and b. are true.
9. All else equal, if the probability of continuation between periods is small in an infinitely repeated collusion
game, which of the following statements is co
ect?
a. Collusion will be easier to maintain.
. Collusion will be harder to maintain.
c. Collusion will not be affected.
d. Collusion could be easier or harder to maintain.
10. Which of the following market features will not be helpful in maintaining collusion?
a. Relatively inelastic demand.
. Small number of firms.
c. Similar production costs.
d. Significant product differentiation.
4
11. Effective antitrust policy against collusion can function either through increasing the probability of detection or
increasing the fine if detected. Given the costs involved in monitoring, investigating, and prosecuting cartels are likely
to be high, optimal policy against cartel formation would likely preference?
a. Small fines with small investment in detection
. Small fines with large investment in detection.
c. Large fines with small investment in detection.
d. Large fines with large investment in detection.
12. Assuming the probability of cartel detection is q = 0.2 with accompanying fine F = 40, it can be shown the
(probability-adjusted) discount factor ρ must satisfy the following condition in order for the cartel to be sustained
*
XXXXXXXXXX )( )
π πρ ρ
π π π π
−
= +
− − − −
D M
D N D N
qF
q q
where the profits to each firm in the cartel are πM = 180, the profits from deviating are πD = 200, and the profits
from reverting to the Nash equili
ium are given πN = 160.
Compared to a situation with no monitoring of cartel activity, how much has the minimum (probability-adjusted)
discount factor ρ been increased as a result of anti-cartel policy?
a. 0.325
. 0.350
c. 0.375
d. 0.400
13. The Dorfman-Steiner condition states for a profit-maximising monopolist, the advertising-to-sales ratio is equal
to the ratio of the elasticity of demand with respect to______ relative to the elasticity of demand with respect to
______.
a. advertising, price.
. price, advertising.
c. advertising, income.
d. income, advertising.
14. ‘Shop’ goods are relatively ______that are purchased______, and ‘convenience’ goods are relatively ______
that are purchased ______.
a. expensive, frequently, inexpensive, infrequently.
. inexpensive, frequently, expensive, infrequently.
c. expensive, infrequently, inexpensive, frequently.
d. inexpensive, infrequently, expensive, frequently.
15. For a monopolist who innovates, the ‘replacement effect’ can be defined as
a. Replacing their management and employees.
. Changing the scope of their business.
c. Replacing old