Exam

Question 1

What is a natural monopoly?

Answer 1

Natural monopoly the long run average costs decline, hence make the production scalable. Natural monopoly is often characterized with high fixed costs. Difficult for new entrants.

Question 2

What is a monopsony?

Answer 2

Market structure with only one buyer (instead of only one seller). High bargaining power.

Question 3

What is monopolistic competition?

Answer 3

Many buyers and sellers. Easy entry and exit of the market. Heterogenous products on the market. Short run profits no long run profits.

Question 4

What is a oligopoly?

Answer 4

Only a few sellers on the market. Major difficulty that oligopolies face is the prisoners dilemma.

Question 5

What is the Vogelsang-Finsinger mechanism?

Answer 5

Used in industries with decreasing costs. Regulate monopoly pricing. Uses AC to determine price. The firm is allowed to begin with a price they choose. After the first period they have to set price equal to AVC of the previous period. This continues until price equals MC for which the firms have to be more cost efficient.

Question 6

First degree price discrimination

Answer 6

Discriminate for each customer. Personalized price for each individual

Question 7

Second degree price discrimination

Answer 7

Connected to quantity of goods bought. The more you buy, the less you pay.

Question 8

Third degree price discrimination

Answer 8

Discriminate for groups. Ex students, elderly and so forth

Question 9

Limit & predatory pricing - differences

Answer 9

Limit pricing - exclude potential entrants from entry by scaring them by setting a price lower than the price for maximum profits.
Predatory - used to push a market participant off the market. Encure losses today for greater profits tomorrow

Question 10

Explain the cornout model

Answer 10

Game between two companies that compete in quantity.

Question 11

Explain the Bertrand model

Answer 11

A game where two firms compete in prices. With homogeneous products and no limitations on production. Results in: Pa = Pb = MC

Question 12

What is the Bertrand paradox?

Answer 12

The process of undercutting each others prices until price equals marginal costs. This leads to the paradox: two firms are enough to generate the same outcome as under perfect competition. The ”paradox” is that we usually assume that a duopoly Will not be competitive and will price above MC.

Question 13

Explain the quantity of the minimum efficient scale and how to solve it.

Answer 13

qmes is the quantity that will minimize the average total cost curve. To find this quantity we differinate and find q that makes it equal to zero. If we have to ATC we find the derivate that equals 0.

Question 14

How do we find the price, quantity and number of firms under perfect competition?

Answer 14

Perfect competition then price equals MC. If we have a demand function for the market and we have qmes we can split the marketdemand by qmes to get the number of firms.

Question 15

Explain consumer surplus, producer surplus and social welfare.

Answer 15

Perfect competition - large consumer surplus (large Q and small P). Under this satte the producer surplus Will be lower. The social welfare is also greater under perfect competition. Under monopoly the producer surplus is large and the consumer surplus is low which also indicates that social welfare is low.

Question 16

Which four (4) focuses drives ownership structure?

Answer 16

1. Amenity potential (ownership value from the ability to controllers the type of output produced)
2. Regulatory potential (limitation om ownership value due to government regulation)
3. Quality control (ownership value from the ability to control the quality of output)
4. Ownership control (ownership value from more effective monitoring of managerial performance)

Question 17

Explain the agency problem

Answer 17

Asymmetric information between managers and owners. Owners can not see the managers choice but only the outcome. Can be reduced through monitoring. Monitoring is a costly public good.

Question 18

What is a public good?

Answer 18

A public good is something that is non-exclusionary and non-rivalry. Example: street lights. Me using the street-light will not hinder you from using them. These kinds of goods will lead to lack of incentives for consumers to buy such goods since they could instead wait for someone else to buy and then benefit from the good afterwards.This problem is what is called a free rider problem, i.e. those who don’t buy could still benefit from others that do. Further will this neither lead to private producers to produce such goods since the demand will be low and for every sold the demand will decrease. Hence these kinds of goods or services are needed to be delivered by the public.

Question 19

What is a negative externality?

Answer 19

A negative externality exists when the production or consumption of a product results in a cost to a third party. Air and noise pollution are commonly cited examples of negative externalities. When negative externalities are present, private markets will overproduce because the costs of production for the firm are understated and profits are overstated.

Question 20

Explain why marginal cost pricing is problematic in industries with decreasing costs.

Answer 20

Marginal pricing sets the price equal to marginal cost, but in industries with decreasing costs the marginal cost is often lower than the average cost. Thus making the firms loose money. Instead you can implement the Vogelsang-Finsinger approach which will also incentivise firms cost reduce.

Question 21

Explain the Averch-Johnson effect

Answer 21

The Averch-Johnson: They found that when firms are subject to rate-of-return regulation, if the allowed return is greater than the required return on capital, the firm will tend to over-invest in capacity. This incentive to increase the level of capital beyond what is needed for economically efficient production involves a number of assumptions about future allowed returns and the future cost of capital.

Question 22

Explain the Stackelberg-competition model

Answer 22

First mover advantage game, a leader and a follower who competes in quantity. To find the SPNE use backwards induction. The first mover anticipated what the second mover would do given the first movers choice and then choose what gives the optimal outcome.

Question 23

List the five (5) attributes that characterizes effective and ineffective boards:

Answer 23

1. Integrity
   - Effective: board members must take pains to ensure that words and actions are in the firms long run best interest
   - Ineffective: incentive programs and compensation plans are sometimes structured to favour management before stockholders.
2. Competence
   - Effective: Board members must be educated and be trained to to be up to the task of providing value-adding oversight to managers.
   -Ineffective: celeberties and what have you might not be the best board members.
3. Independence
   - Effective: It must be clear that the board of directors represents shareholders interests.
   -Ineffective: deals and contracts between top-management and board members can compromise their independence.
4. Accountability
   -Effective: Clear lines of authority must be drawn. Both managers and board members must be held accountable.
   -Ineffective: Some boards are to large and accountability can be impossible.
5. Transparency
   -Effective: Actions must be disclosed completely for shareholders reports and for the tax officials.
   -Ineffective: Many boards allow managers to hide discrepancies through endless restructuring.

Question 24

Explain a common good:

Answer 24

A common good is non-exclusionary but it is rivalry, different from public good which is not rivalry. A problem with common good can be over consumption. Since the good is not exclusionary it means we all can have it, but it is rivalry, which means that when i get it you cant have the same one. Fish is an example of common good.

Question 25

phC>plC+B . Explain this expression and the reasoning leading up to it. (principal- agent theory)

Answer 25

ph - probability of managers putting in high effort (beneficial for the firm)
C-compensation distributed by the firm, salary, bonuses and so forth.
pl- probability of managers putting in low effort (non-beneficial for the firm)
B- benefits possible due to low effort, example: free time, hanging out with family and friends.
The expression shows that for a principal to get their agent to put in high effort, the compansation when doing so must be greater than the compensation plus the benefits of not putting in the effort.

Question 26

Explain Coase Theorem

Answer 26

According to Coase, firms exists because they are an effective means of minimizing transaction costs. According to coase resource allocation Will be efficient so long as transaction costs remain low and property rights can be freely assigned and exchange. Coase-satsen beskriver den ekonomiska effektiviteten hos en ekonomisk fördelning eller ett ekonomiskt resultat i närvaro av externa effekter. Enligt teoremet kommer förhandlingar att leda till ett Pareto-effektivt (Pareto effekt är ett resultat där ingen av parterna eller preferenserna kan göras bättre utan att samtidigt göra en annan sämre) resultat, oavsett den ursprungliga fördelningen av egendom, om det är möjligt att handla med en extern effekt och transaktionskostnaderna är tillräckligt låga. I praktiken kan hinder för förhandlingar eller dåligt definierade äganderätter förhindra Coaseanska förhandlingar.

Translated with www.DeepL.com/Translator (free version)

Question 27

Why does disintegration emerge?

Answer 27

Vertical disintegration is a response to uncertain environments, cutting-edge technology and a shifting market demand.
Vertical disintegration emerges because of continuosly uncertain markets and circumstances. Where technology is rapidly changing and ex post decisions cant be predicted ex ante. Instead of fear of the hold-up (reason for vertical integration) there is a “fear” of the constant changing technology behind production ans so forth. One major contractual problem is that there is no definite ex ante or ex post. It is continuosly shifting and therefore the contract and governance tools are hard to decide upon. The writers found three types of contracts: Modular, Iterative collaboration and Relational.