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(Solved) UNIVERSITY OF KENT EC547/2016 FACULTY OF SOCIAL SCIENCES LEVEL 7 EXAMINATION SCHOOL OF ECONOMICS INDUSTRIAL ECONOMICS Wednesday 25 May 2016:30 am -...


In Section A question 2, in the EC547 document. Im not sure what to do with the fixed costs, are they relevant? I am also struggling with the lerner index part of the question, i know how to use it with numbers, but in this question i am struggling and do not understand how to answer it.


I have the equilibrium output as:

q1= (a-2c1+c2)/3b

q2= (a-2c2+c1)/3b


is this correct? i didnt do anything with fixed costs, not sure if this is right.


Would appreciate it if you could provide help. Thank you.

UNIVERSITY OF KENT
EC547/2016
FACULTY OF SOCIAL SCIENCES
LEVEL 7 EXAMINATION
SCHOOL OF ECONOMICS
INDUSTRIAL ECONOMICS
Wednesday 25 May 2016: 9.30 am – 11.30 am
(Exam is 2 hours long) Answer ONE out of two questions from SECTION A and ONE question from
SECTION B. Both SECTIONS carry equal marks. Approved calculators may be
used. Turn over 2
SECTION A
EITHER:
1. Consider a Linear City model. Two firms, firm 1 and firm 2, produce a good.
Firms are located on a street L miles long: firm 1 is located at one end of the
street (at address x = 0) and firm 2 is located at the opposite end of the
street (at address x = L). Both firms have zero fixed costs and a constant
marginal cost c. The two firms compete for customers by setting prices p1
and p2 simultaneously. There are N consumers that are uniformly distributed
along the street. All consumers have the same willingness to pay, V, for the
good produced by firms. Each consumer incurs a cost of travelling, t, per
mile of distance between him and a shop. (i) Find the demand of firm 1 and firm 2 by identifying the address of the
marginal consumer.
(15%) (ii) Derive the equation for each firm’s best response function. How does
the best response of, let us say, firm 1 change with the price of the rival
firm? Explain what it tells us.
(20%) (iii) Calculate the equilibrium prices of each firm. How do the equilibrium
prices change with the length of the street? How do the equilibrium
prices change with transportation cost t? Comment on your answers.
(30%) (iv) Find the equilibrium address of the marginal consumer and the
equilibrium demand that each firm faces. What market share does each
firm have?
(25%)
(v) Define the Herfindahl-Hirschman Index (HHI). At the equilibrium,
calculate HHI for the industry described in this Linear City model and
interpret it by clarifying what 1/HHI means.
(10%) Turn over 3
OR
2. Consider the following game. Firm 1 and firm 2 simultaneously decide how
much of a good to produce. Firms are competing in a homogeneous product
market. The demand faced by firms is P(q1,q2) = a – q1 – q2, where q1
and q2 are the output levels of firms 1 and 2 respectively and a is a positive
parameter. Firms 1 and 2 have constant marginal costs of c1 and c2,
respectively with a > c1 > c2. The fixed costs of firms 1 and 2 are F1 and F2,
respectively with F1 > F2.
(i) Derive the equation for each firm’s best response function. Sketch the
best response functions and mark all relevant vertical and horizontal
intercepts.
(25%)
(ii) Find the equilibrium output level of each firm and compare them. Explain
the difference in the equilibrium output levels.
(25%)
(iii) How does the equilibrium output level of firm 1 change with its own
marginal cost? How does the equilibrium output level of firm 1 change
with its rival’s marginal cost? Explain your answer.
(15%)
(iv) Define the Lerner Index (LI) and explain what it measures. At the
equilibrium, calculate the LI for firms 1 and 2 in the model and compare
them.
(15%)
(v) Define social welfare for the industry described in this model. Calculate
the equilibrium social welfare for values a = 100, c1 = 15 and c2 = 5.
(20%) Turn over 4
SECTION B
Answer ONE of the following questions. 1. Discuss different strategies that can be used by firms to gain or maintain
market power. Which of these strategies fall in the category of anticompetitive
strategies? Explain possible private and social consequences from using the
anticompetitive strategies. 2. Specify and discuss the differences between Cournot and Bertrand duopoly
competition in the case of both homogeneous and differentiated goods. 3. Discuss the private and social consequences of mergers. What are the basic
theoretical findings on the profitability of mergers? Use relevant concepts and
models to show whether mergers are socially desirable.
4. ‘Firms need monopoly power in order to have incentives to innovate’.
Discuss. 5. Is there a link between market concentration and advertising intensity?
Explain your answer. END

 


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