Principles of Economics for Scientists

Summary

| Summary of the 2 parts (2015-2016) on ShareLaTeX

Course

Part 1

Microeconomics

Part 2

Information and Innovation

Examen

15/1/2016

All questions about Part II (Question 3-6) came from the document with possible exam questions as posted on Toledo.

1. Monopolist vs perfect competition. Calculate equilibria. Q = 300 - 3P. MC = 15
2. (Utility) U(D,F) = DF. D being days on holiday domestically. F being days on holiday in a foreign country. Eric has a budget of 8000. Price of D is 160. Price of F 200. Calculate optimal utility. How many D vs F?
   1. Price of D becomes 250. Budget is x. Calculate D and F in function of x.
      • What budget x should Eric have to have the same utility as before?
      • Calculate D and F with that budget.
   2. Using your previous answers, discuss the effect of income and substitution.
3. (NPV and PDV) Start a playground in an old industrial building costs 200000, lifetime benefits are 700000. However, there’s a 20 percent chance that the city board decides to change the purpose of the place where the industrial building is located on. Interest rate of 10%.
   • What’s the net present value?
   • What’s the net present value today, if you wait a year when the decision about the location is made by the city.
4. Two firms compete (a la Cournot) in the cement market. Demand for cement is given by Q = 450 − 2 P. Firm 1’s marginal cost is constant at 50, firm 2’s at 40. A technological innovation allows firms to reduce marginal cost by 6.
   1. How much would each firm be willing to pay for the innovation if it were the only competitor to acquire it?
   2. Suppose the innovation costs 600. Consider a “metagame” where firms first simultaneously decide whether to acquire the innovation and then compete a la Cournot with whatever marginal cost results from the first stage.
      • What is the equilibrium of the 2x2 game played by firms at the technology choice stage?
5. The Bertrand model of price competition suggests that, under a given set of conditions, firms make zero economic profits even if there are only two firms. However, there are many instances of industries with a small number of competitors where firms appear to earn more than zero economic profits.
   • Give an example of an industry dominated by a couple of firms where profits are significant.
   • Explain why the predictions of the Bertrand model are not borne out.
6. Suppose that Ericsson and Nokia are the two primary competitors in the market for 4G handsets. Each firm must decide between two possible price levels: $100 and $90. Production cost is $40 per handset. Firm demand is as follows: if both firms price at 100, then Nokia sells 500 and Ericsson 800; if both firms price at 90, then sales are 800 and 900, respectively; if Nokia prices at 100 and Ericsson at 90, then Nokia’s sales drop to 400, whereas Ericsson’s increase to 1100; finally, if Nokia prices at 90 and Ericsson at 100 then Nokia sells 900 and Ericsson 700.
   • Suppose firms choose prices simultaneously. Describe the game and solve it.
   • Suppose that Ericsson has a limited capacity of 800k units per quarter. Moreover, all of the demand unfulfilled by Ericsson is transferred to Nokia. How would the analysis change?
   • Suppose you work for Nokia. Your Chief Intelligence Officer (CIO) is unsure whether Ericsson is capacity constrained or not. How much would you value this piece of info?

Under construction.