BUSINESS AND INDUSTRIAL ECONOMICS

A.Y. 2020/2021
BIE classroom exam – July 20th, 2021

NAME _____________________________________ SURNAME ____________________________________

STUDENT ID_(matricula)___________________________________________________________________

MULTIPLE-CHOICE QUESTIONS [10 points]

You do not need to provide explanations for your answers. However, if something is not clear in the text
and you want to add a note to an answer (e.g., an assumption, a clarification, an explanation), please write
it in the paper sheets that you will upload as a unique .pdf file.

1. A merger between two firms that are direct rivals (i.e., are active in the same “relevant market”) can
significantly impede effective competition because of “unilateral effects” when:
a. The merged entity enjoys larger economies of scale than its rivals and can drive its competitors out of
the market by charging lower prices.
b. The merged entity has an incentive to increase prices because of the loss of competition between the
two merging firms.
c. The merged entity can easily orchestrate collusion in the market.
d. The merged entity combines different products/services that are weak demand substitutes.

2. Which of the following statements on critical mass is TRUE?

a. Critical mass is independent of the price charged by a firm for launching a network good because the
firm leverages on network effects to attract further users.
b. Although a firm, offering a network good, might not incur in high fixed costs, it needs to attain critical
mass to survive.
c. If the number of users buying the network good of firm A has overcome the critical mass, firm B has
just to introduce a new network good at a lower price to win the competition with A.
d. All the other statements are false.

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3. Firms 1-6 are active in 6 industries (A-F). The table reports firms’ shares of sales in each industry. Which of
the following statements is TRUE?
It is possible that more than one statement is correct.
Firm Industry A Industry B Industry C Industry D Industry E Industry F
1 0.65 0.075 0.2 0.05 0.015 0.01
2 0.1 0.175 0.2 0.15 0.075 0.3
3 0.1 0.15 0.2 0.15 0.2 0.2
4 0.075 0.1 0.1 0.25 0.25 0.225
5 0.05 0.25 0.1 0.1 0.31 0.19
6 0.025 0.25 0.2 0.3 0.15 0.075

a. Based on concentration index (C3) and Herfindahl index (HI), industry E is more concentrated than
industry F and industry C.
b. Based on concentration index (C4) and Herfindahl index (HI), industry F is less concentrated than
industry D and industry C.
c. Specialization Indexes (SI) of firms 2 and 5 are equal to 0.3 and 0.31, respectively; Gort Indexes (D2)
of firms 2 and 5 are equal to 0.7 and 0.69, respectively.
d. Gort index (D2) of firms 3 and 4 are equal to 30 and 24, respectively; Berry index (DB) of firms 3 and
4 are equal to 0.83 and 0.80, respectively.

4. Firms 1-6 are active in industries A, B and C. The table reports firms’ shares of sales in each industry. Which
of the following statements is TRUE?
Firm Industry A Industry B Industry C
1 0.650 0.075 0.200
2 0.100 0.175 0.200
3 0.100 0.150 0.200
4 0.075 0.100 0.100
5 0.050 0.250 0.100
6 0.025 0.250 0.200

a. According to Arrow’s view, firms in industry A have more incentives to innovate than those in the
other industries.
b. According to Arrow’s view, firms in industry B have more incentives to innovate than those in the
other industries.
c. According to Schumpeter’s view (Mark II), firms in industry A have more incentives to innovate than
those in the other industries.
d. According to Schumpeter’s view (Mark II), firms in industry C have more incentives to innovate than
those in the other industries.
Suggestion: for answering the question, refer to concentration as measured by Concentration Ratio(s) and
Herfindahl Index.

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5. Consider two firms, a manufacturer (M, upstream firm), and a retailer (R, downstream firm), both are
monopolists in their markets. Double marginalization occurs when M and R:
a. Operate separately, both firms mark up the price below their own marginal costs, and the market price
of the good is higher than in the case of integrated firm.
b. Operate separately, both firms mark up the price above their own marginal costs. However, the market
price of the good is lower than in the case of integrated firm because the integrated firm can leverage
on its monopolistic position.
c. Integrate and the market price of the good is higher than in the case in which the two firms operate
separately.
d. None of the answers is correct.

6. Which of the following statements on (tacit and explicit) collusion is TRUE? The sustainability of collusion
between two competing firms (A and B) is:
a. More likely if a manager of firm A sits in the board of directors of firm B.
b. More likely when firms A and B receive unusually large orders at large time intervals.
c. More likely when the industry is not concentrated as collusion solves coordination problems among
many firms.
d. None of the statements is true.

7. Consider a second-hand market for bikes. There are high-quality bikes, which buyers value at most 800 euros,
and low-quality bikes, which buyers value at most 400 euros. High-quality sellers accept at minimum 700
euros, while low-quality sellers accept at minimum 300 euros. Assume that buyers cannot observe quality
before purchasing, but they know that the share of high-quality bikes on the market is 0.80. We conclude that:
a. Both kinds of bikes are sold on the market.
b. Only low-quality bikes are sold on the market.
c. Only high-quality bikes are sold on the market.
d. Information asymmetries do not play any role in this market, because buyers’ evaluation is always
higher that the amount of money, which sellers are willing to accept (namely, 800>700 and 400>300).

8. Which of the following statements is FALSE?

a. In presence of high uncertainty, new entrants usually engage in predatory pricing because they can
leverage on incumbents’ information asymmetries.
b. In setting their pricing strategy, platform businesses usually charge high access fees to attract and
retain the most quality- and price-sensitive users.
c. A monopolistic incumbent can strategically set price just at the level that leaves out potential entrants.
By fixing this limit price, the incumbent sells an output that is higher than the monopoly output.
d. All the other statements are false.

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9. Read the section reported below from the article “Genetic testing threatens the insurance industry”, appeared
in The Economist, on August 5th, 2017.
“If a genetic test could tell whether you are at increased risk of getting cancer or Alzheimer’s, would you take
it? As such tests become more accessible, more and more people are saying “yes”. The insurance industry
faces a few headaches as a result.
Once used only for medical reasons, basic predictive genetic tests can now be ordered online for a few hundred
dollars. One company, 23andMe, in California, has collected some 4,000 litres of sputum since 2007,
enlightening 2m people eon their ancestry, health risks and what they may pass on to off-springs. In April it
received regulatory approval to screen for risk factors connected to ten diseases and genetic conditions,
including late-onset Alzheimer’s and Parkinson’s. The ruling could open the flood gates for others to sell
direct to consumers.
“Information is power”, argue many who take such tests. But insurers fear that without equal access to such
information, they will lose out to savvy customers. Consumer groups, on the other hand, fear that if insurance
company did have access to such information, people with “bad” genes might find themselves unfairly
excluded from cover. Either way, the scientific advances could well disrupt insurance significantly. […]”
With reference to the previous section, if predictive tests become common, we can state that:
a. If non-disclosure rules on the results of predictive tests exist, insurance firms are reluctant to offer
insurance policies because an ex-ante information asymmetry exists which, in turn, causes an adverse
selection problem.
b. If disclosure rules on the results of predictive tests exist, insurance firms are reluctant to offer
insurance policies because an ex-ante information asymmetry exists which, in turn, causes an adverse
selection problem.
c. If disclosure rules on the results of predictive tests exist, insurance firms are reluctant to offer
insurance policies because a hidden information problem exists which, in turn, causes a moral hazard
problem.
d. If non-disclosure rules on the results of predictive tests exist, insurance firms are reluctant to offer
insurance policies because an ex-ante information asymmetry exists which, in turn, causes a moral
hazard problem.
Suggestion: if you have doubts about the question, remember that you can add a short explanation in the paper
sheets that you will upload as a unique .pdf file.

10. The economic term for the costs of enforcing a contract or of searching for a product is:
a. Ex-ante transaction costs.
b. Opportunity costs.
c. Ex-post transaction costs.
d. None of the answers is correct.

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EXERCISE 1 [5 points]
Two firms (1 and 2) compete on prices. Their demand functions are Q1= 60 - P1 + P2 and
Q2 = 60 + P1- P2, where P1 and P2 are the prices charged by each firm, respectively, and Q1 and Q2 are the resulting
demands. Assume that marginal costs (MC) are zero for both firms.

a.) Suppose that the two firms’ products are not perfect substitutes and that firms set their prices at the same time.
Find the resulting Nash equilibrium (quantities, prices, profits). [2 points]

b.) According to the results of point (a.) of the exercise, does a Bertrand’s paradox emerge? Explain why. [0.5
points]

c.) Suppose now that products are homogeneous and that firm 1 sets its price before firm 2. Find the resulting
Nash equilibrium (quantities, prices, profits). [2 points]

d.) Suppose you are the CEO of one of the two firms and that the two firms can compete in three possible ways :
1) both firms set price at the same time; 2) you set price first; 3) your competitor sets price first. Based only
on the results you find in part (c.) of the exercise, which of the three options (1, 2, 3) would you prefer? Explain
why. [0.5 points]

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EXSERCISE 2 [3 points]
Suppose that there are two types of workers on the labor market: half are high-skill workers and the other half are
low-skill workers. For the sake of simplicity, assume that firms hire workers to participate on a specific project
and this is a one-time interaction.
A high-skill worker’s productivity in the project is aH = 8,000, while a low-skill worker’s productivity is aL =
3,000. Workers know their type, but firms do not.
Assume that the labor market is perfectly competitive, so when a firm hires a worker, it pays wages equal to the
worker’s expected productivity.
Suppose that a local college offers a certificate program, whose completion has no impact on workers’
productivity. High-skill workers’ cost of obtaining the certificate (counting both tuition fees and effort invested)
is cH = 1,500, while the cost of obtaining the certificate for low-skill workers is cL = 4,500.
a.) Suppose that firms consider having a certificate a credible signal of a worker being high-skilled. Then, the
firms will offer wage wH = 8,000 to all workers who obtain it and wL = 3,000 to all workers without certificate.
Which types of workers will get the certificate? [1 points]
b.) What type of equilibrium is achieved? [0.25 points]. Is the outcome efficient for the firm? [0.25 points]
c.) What would be the wages if the firm revise the compensation scheme by using the average expected
productivity of the two types of workers? [0.5 points]

d.) Using the data provided (aH = 8,000, aL = 3,000, cH = 1,500 , cL = 4500), find the level of education eH that
allows high-skilled workers to credibly signal their skills on the labor market. [1 points]

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EXERCISE 3 [2 points]
Assume a homogeneous good market for cellular phones. Two cellular phone producers face a market demand of
Q=120 - 0.4P. The two firms have constant marginal and average costs of $100, with an initial market price of
$100. The two firms decide to merge, thus lowering their costs from $100 to $75 due to economies of scale in
combined operations; they now lead the industry charging a price of $120.

a.) Refer to the market demand above and compute social costs and benefits of the merger. [1.5 points]
b.) Should the merger be approved? [0.5 points]

11. Do you want your submitted exam to be corrected?

a. Yes, I want
b. No, I withdraw