Question

Please explain thoroughly.

Which of the following is true about cost functions?
(a) Economies of scale exist if a firm’s average cost curve is everywhere downward sloping

(b) An example of exploiting economies of scope is a producer of shampoo also making con-
ditioner

(c) Both ‘a’ and ‘b’
(d) Neither ‘a’ nor ‘b’

Which of the following is true about price discrimination?
(a) A monopolist that price discriminates has to worry about arbitrage between high and low
types
(b) A monopolist that price discriminates has to worry about high types pretending to be low
types
(c) A monopolist that price discriminates is made worse off by a ban on price discrimination
(d) All of the above

Which of the following is true about the Cournot model?

(a) If the firms could explicitly collude, they would each produce more than in the Cournot
equilibrium
(b) Each firm would prefer to be the Stackelberg follower (i.e. choose output second)
(c) The Cournot equilibrium is where the best response functions intersect the x and y axes,
respectively
(d) In equilibrium, each firm wishes the other firm would produce less

] Consider 3 firms located along a Hotelling line of length 2. Assume the
industry is regulated so that all firms must charge the same price. You are considering entering
the industry but must choose a location to maximize your market share. The existing 3 firms are
located at 0.25, 0.50, and 0.75. Where should you locate?
(a) 0.24
(b) 0.76
(c) 0.50
(d) Locate at either 0.25 or 0.75

Which of the following is true about exclusive contracts?
(a) A seller may find it profitable to use an exclusive contract with a lone buyer to block a rival
seller from entering the market
(b) A buyer will never sign an exclusive contract with a seller to block the entry of a rival seller
(c) An example of a relationship-specific investment is a home builder buying a bag of generic
door knobs from Home Depot
(d) All of the above

Answer 1

1) Option (C) Both are correct. Economies of scope is the one in which company expands its business and economies of scale benefits the cost curve.

2) Option (C) Monopolist will suffer when there is ban on price discrimination as he/she cannot extract more on the monopoly.

3) Option (D) Each firm will believe that the other firm will be producing less.

4) Option (D) Locate at either 0.25 or 0.75 because locating at the 0.5 does not make sense as it is already occupied by one player and cannot capture other two's market share also.

5) Option (A) It is to block the rival buyer/seller