Chapter 3

Question 1

Isoquants

Answer 1

Show the combinations leading to a given level of output

Question 2

How do the isoquants of perfect complements & perfect substitutes look

Answer 2

Perfect complements: right-angled (90 degrees)

Perfect substitutes: straight line

Question 3

Cobb-Douglas production function

Answer 3

q= K^alpha * L^beta

Question 4

What does diminishing marginal returns mean for isoquants?

Answer 4

They are convex –> the closer to complements, the more convex

Question 5

Cost minimization

Answer 5

For a given desired output level and given input prices, we want to determine the input mix that minimizes cost.

Point of tangency between the cost line and isoquant

Question 6

Price-taking firm’s supply function

Answer 6

Given by the marginal cost function for values of price greater than the minimum average cost

Question 7

Margin/Lerner index

Answer 7

m = (p-MC)/p = 1/-e, holds only if the elasticity is constant along the demand curve

if m < 1/-e –> increase price
if m > 1/-e –> decrease price

Question 8

Markup formula to profit maximization

Answer 8

k (markup) = (p-MC)/MC

k = 1/(-e-1) –> profit maximization

Question 9

Multiproduct pricing

Answer 9

If the demand for various products are interrelated, we have to take into account how the price of one product influences the demand for other ones

Question 10

Why do most firms not manage to maximize profits? + 4 ways in which managers are disciplined

Answer 10

Recipients of the firm’s profit level (owners) are not the agents whose decisions ultimately determine the firm’s profit level (managers). In general, managers’ objectives differ from shareholders.

Internal-, labor market-, product market- & capital market discipline

Question 11

Internal discipline + agent theory

Answer 11

Shareholders can appoint a manager with a contract that induces the latter to act in the former’s interest. However, managers often know better than shareholders what is best for the company.

asymmetric information –> agency theory: a principal who wants an agent to act in the principal’s interest but possesses less information than the agent.

The optimal solution is for ownership and management to be unified

Question 12

Labour market discipline

Answer 12

Since managers do not stay with the same firm forever, they are interested in creating a reputation for being good managers

Question 13

Product market discipline

Answer 13

When product market competition is very intense, managers have to put effort in maximizing profits.

Question 14

Capital market discipline

Answer 14

If a manager does not maximize profits, then the value of the firm is lower than its potential.

Raider can acquire the firm and maximize profits to realize a capital gain

Question 15

Vertical boundaries of the firm

Answer 15

How many stages of the production process take place within the firm.

Vertical boundaries result from the balance between investment incentives and performance incentives.

Question 16

Specific asset

Answer 16

An asset might be worth a lot less if not coupled with a particular source of supply

Question 17

Hold-up problem

Answer 17

Once the buyer pays for the relationship-specific asset, the seller can charge a higher price.

Solution = vertical intergration

Question 18

Tapered integration

Answer 18

Given input is bought from an affiliated supplier and from an independent one

Question 19

Franchising

Answer 19

A system that has been used in a variety of industries which combines the benefits of vertical integration with the benefits of vertical separation.

Question 20

5 main reasons why firms are different and hold a sustained competitive advantage

Answer 20

Impediments to imitation
Causal ambiguity
Strategy
Quality of management & culture
History --> moving down the learning curve