MBA (BE) II Sem.

– May 2021

Business Economics--Course 424801203

Paper Name: Firms, Markets and Public Policy

Time : 3+1 hours Maximum Marks : 70

Instructions: Attempt any four questions. All questions carry equal marks.

1. A monopolist faces the following inverse demand curve: P = (36-2Q)z ; where P is price,
Q is her total output, and z is the quality of product she sells. Quality z can take only one of
two values. The monopolist can choose to sell a low- quality product for which z = 1 or a
high- quality product for which z = 2. Marginal cost is independent of quality and is zero.
Fixed cost depends on the product design and increases with the quality chosen. FC = 65z 2.

(a) What are the monopolist’s profits if she maximizes profits and chooses a low- quality
design?
(b) What are the monopolist’s profits if she maximizes profits and chooses a high- quality
design?
(c) What type of quality should the monopolist invest in?
(d) Explain the difference between horizontal and vertical product differentiation.

2. “In a prisoners’ dilemma, behaviour that is best for the group is not what is best for
individual players.” In the context of the above:

(a) Explain the concept of Nash Equilibrium.

(b) Provide an example of a prisoners’ dilemma from the economy.

(c) What is the pure-strategy NE of the original prisoners’ dilemma game?

(d) Explain why this is called a dilemma.

OR

2. Two cola companies, Cola A and Cola B, must decide their advertising plans for next
season. Each has two options: “normal” advertising level or a special campaign with an
endorsement by a film star Sakshay Kumar. The companies must simultaneously decide
which strategy to choose.

Net profits, as a function of their choices, are as follows. If both firms choose “normal”
advertising levels, then Cola A makes 40 and Cola B makes 30. If Cola A goes for “normal”
and Cola B signs Kumar, then Cola A gets 10 and Cola B gets 25. If Cola A signs Kumar and
Cola B does not, then Cola A gets 60 and Cola B gets 20. Finally, if both companies sign
Kumar then Cola A loses 30 and Cola B loses 20. All of these values are common knowledge
to the players. The players’ goal is to maximize net profit.

(a) Depict the above situation as a matrix game.

(b) Are there any dominant strategies in this game? Comment.
(c) What are the best responses for each player?
(d) What is the Nash equilibrium of this game?

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 (e) What assumptions did you need to make to answer the questions given above?

3. Granting more valuable patents increases the incentives for R&D, which in the long run
results in a higher rate of technical progress. But it also increases market power, resulting in a
lower degree of economic efficiency.
(a) In the context of the above statement, explain the different dimensions of a patent.
(b) In the context of the above statement and the current COVID 19 pandemic situation,
explain the term “Vaccine Nationalism.”

4. The market shares for three hypothetical industries A, B and C for a particular year are
given below.

Industry
Firm Industry B Industry C
A

1 40 20 10

2 20 20 10

3 10 20 10

4 10 20 10

5 10 5 10

6 10 5 10

7 5 10

8 5 10

9 10

10 10

(a) Calculate CR4, CR8 and HHI for each industry and explain your results.
(b) Suppose firms 4, 5, and 6 merge in industry A and in industry C respectively.
Recalculate CR4, CR8 and HHI for each industry and explain the results.
(c) Draw the concentration curves for these industries in both scenarios.

5. Use the ‘Hotelling Model’ to show how competition affects the location of firms in
geographic as well as product characteristic space.

6. “Collusive pricing is more likely to be an equilibrium the greater the frequency with which
firms interact and the greater the probability of continuation and growth of the industry.”
Explain.

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