214ECN

January 2016

Coventry University
Faculty of Business and Law

214ECN Managerial Economics

Instructions to candidates
Time allowed: 2 hours

Candidates MUST answer THREE questions.

All questions carry equal marks

You may take this question paper away at the end of the examination: please
keep it in a safe place for future reference.

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Questions

1. A monopolist book seller sells in two markets. Assume constant marginal costs and linear
demand in both markets.
(a) Assume that resale is impossible. Show, using graphs, how the monopolist determines prices
in both markets. (50 marks)

(b) Now assume resale is possible. i.e. it is possible to buy in the cheaper market at a unit cost c
and resell in the more expensive market. Explain how the monopolist will adjust to this new
scenario. (50 marks)

2. Firms A and B are Cournot duopolists producing a homogeneous good. The inverse market
demand for the product is p 200 q , where p is the market price and q is the total quantity
demanded, where q qA qB . Each firm has constant marginal and average cost c = 20.
a) Derive the total industry output, the market price, profits and consumer surplus. Illustrate your
answer with appropriate diagrams. (40 marks)
b) The two firms propose to merge to become company C with the objective of maximizing profit.
What are the company C's best price and quantity in this market? Intuitively discuss the changes in
these variables when the merger occurs. (40 marks)
c) Assume the company C changes its objective to maximize social welfare, what would be the
best price and quantity now? Discuss your answer using a diagram. (20 marks)

3.
(a) Explain the concepts of moral hazard and adverse selection. (20 marks)
(b) Discuss how moral hazard can create a problem in the insurance market. (40 marks)
(c) Discuss how adverse selection can be a problem when a firm introduces a voluntary
redundancy scheme. (40 marks)

4. Compare and contrast rate-of-return regulation and price-cap regulation as means by which an
industry may be controlled in the public interest. (100 marks)

5. Outline the role acquisitions might play in a value-driven strategy. If you were advising a
business determined to pursue an acquisition strategy, what advice would you give to help ensure
that its acquisitions successfully created value? (100 marks)

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6. Two shops A and B, compete in a local market. They need to simultaneously decide what price
to advertise in the weekly newspaper. If both shops charge a low price, they earn zero profits each.
If both shops charge a high price, they each earn profits of £60. If the two shops charge different
prices, the one charging the higher price loses £100 while the one charging the lower price makes
£100.
a. Illustrate and explain the Nash equilibrium for a one-shot version of this game. (30 marks)

b. Now suppose the game is infinitely repeated. If the interest rate is 10 percent, can you do
better than you could have in the one-shot play of the game? Explain your answer. (40 marks)

c. Discuss how "history" affects the ability of shops in this game to achieve outcomes superior to
those in the one-shot version of the game. (30 marks)

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