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~~MN3028 ZB d0

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON

MN3028 ZB

BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diplomas in Economics and Social Sciences and Access Route

Managerial Economics

Thursday, 16 May 2013 : 10.00am to 1.00pm

Candidates should answer SIX of the following TEN questions: FOUR from Section A (12.5
marks each) and TWO from Section B (25 marks each). Candidates are strongly advised to
divide their time accordingly.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.

PLEASE TURN OVER

University of London 2013
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SECTION A
Answer four questions from this section.

1.

Consider the following variation of the trust game: Player A decides whether to choose IN (trust) or
OUT (dont trust). If A chooses OUT, the game ends and each player receives \$5. If A chooses IN
then Player B can decide whether to roll a die or not (not rolling is defecting). If A chooses IN and B
chooses DONT ROLL, A receives \$0 and B receives \$14. If A chooses IN and B chooses ROLL, B
receives \$10 and the payoff to A is decided by chance: with probability 5/6, A receives \$12, and with
probability 1/6, A receives \$0.
(a)

Draw the game tree.

(b)

Find the subgame perfect equilibrium assuming the players are risk neutral.

2.

Firm A and Firm B are duopolists. Firm A has constant marginal cost of 5 and annual fixed cost of 6.
Firm B has constant marginal cost of 3 and annual fixed cost of 6. Annual demand is given by
Q = 15 p/2. Find the Cournot-Nash equilibrium and the corresponding annual profits.

3.

Prey Ltd is worth v to its current owners who will sell if they get an offer of at least v. Predator Ltd
does not know v but it knows that v can be \$2m, \$3m, \$4m or \$6m and considers these four outcomes
equally likely. Whatever the value of v, everyone knows that Prey Ltd is worth v + \$3m to Predator
Ltd. What is the expected profit maximizing take-it-or-leave-it offer Predator Ltd. should make?

4.

A monopoly has constant marginal cost, c, and zero fixed cost. Demand is given by Q = a p.
(a)

Find the optimal output level.

(b)

Now suppose the marginal cost can be reduced to c d by making an investment. What is the
maximum the monopoly should be willing to pay for this cost reduction?

University of London 2013

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SECTION B
Answer two questions from this section.

5.

6.

7.

Your utility of money function is given by U(x)=x1/2 for x 0 and U(x) = x for x<0.
(a)

You roll a die and if you get a 6 you receive \$100. Calculate your expected utility.

(b)

If you pay \$x, you can give up the opportunity in (a) and instead receive \$100 if the die roll is
5 or 6. Show that the maximum x you are prepared to pay is about \$2.40.

(c)

Now suppose that you roll a die and you get \$100 as long as the die roll is not 1.
Calculate your expected utility.

(d)

If you pay \$y, you can give up the opportunity in (c) and instead receive \$100 for sure.
What is the maximum y you are prepared to pay?

Dilnic, a labour managed monopoly, has production function Q = KL. Unit prices of capital and labour
are r and w respectively.
(a)

(b)

Find Dilnics cost function.

(c)

Demand for Dilnics product is given by Q = 100 p. Assuming Dilnic wants to maximise profit
per worker, find the optimal output level.

Amos owns a very large hotel which has enough rooms to meet all potential demand. He provides
rooms for business travellers and students. The marginal cost of providing a room is 10. Demand from
business travellers is given by qb = 210 p and demand from students is given by qs = 360 4p.
(a)

Suppose Amos can charge different room prices to business travellers and students. What are the
profit maximizing prices?

(b)

Now suppose Amos has to charge the same price to both groups of customers. What is the profit
maximizing price?

(c)

Amos decides that he wants to offer his guests breakfast. The room price is pr and the price for
breakfast is pm. Assume that the cost of breakfast is zero. The proportion s of guests who buy
breakfast is given by s = 1 0.1pm. Guests do not take into account the price of breakfast when
booking a room. Assuming Amos has to charge the same prices to both groups of customers,
find the profit maximizing pm and pr.

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8.

(a)

Explain what is meant by the winners curse.

(b)

Prove that the dominant strategy in a second price sealed bid auction with private valuations is to
bid your true valuation.

(c)

Derive a Nash equilibrium in bidding strategies for a private valuation first price sealed bid
auction where n bidders have independently uniformly distributed valuations.

9.

Explain the labour supply model. Explain why the labour supply curve can be backward bending.
Use diagrams to illustrate your arguments.

10.

Explain why within firms there is more variability in productivity than in wages.

END OF PAPER

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