Date June 25, 2018

COURSE Business and Industrial Economics [Professor P. Garrone]

ACADEMIC YEAR 2017-‘18

NAME AND SURNAME ___________________________________________________

ID NUMBER ____________________________________________________________

Fill the above heading with your Name, Surname and Id Number

Exam policy
During the BIE exams, students
- Have to arrive on time and must leave their personal belongings (bags, backpacks,
etc.) near to the lecturers’ desk; have to bring their ID card and be ready to show it
- Must switch off their PC, mobile phones, smartphones and tablets. They cannot use
or touch them, but they can use a pocket calculator.
- Have to write in a readable way and have to hand in the text and all the copies of
their essay before leaving the exam room
The following conducts are forbidden
- (i) To communicate in any form with fellow students or others in class or outside; (ii)
To use the phone or any other communication device; (iii) To copy parts of the essay;
(iv) To browse notes, textbooks, slides, or Internet documents;
- Plagiarism is regularly checked on a sample of essays.
- Students who cheat and break the rules are «Rejected», i.e. they can’t take any more
the exam during the current Academic Year
Further information
- Multiple-choice questions: one and only one answer is correct, and brings positive
points; other answers give rise to neither negative nor positive points, exactly like
unanswered questions; correct answers for at least 6 questions out of 10 are a pre-
condition to pass the exam.
- You have 1 hour and 30 minutes to complete the exam.
- The evaluations will be published by July 3rd, 2018.

Please do not overwrite the table.

Multiple-choice questions (10 points)

Please tick the letter of the most correct answer

1. Which of the following examples is NOT a case of direct network effects:

a) Messaging system
b) Telephone
c) Second language spoken (the first language is own mother tongue)
d) Operating systems of smartphones
2. Car makers exhibit the concentration vectors 𝑆𝑆𝐴𝐴 in country A and 𝑆𝑆𝐵𝐵 in country B
𝑆𝑆𝐴𝐴 = [0.40, 0.20, 0.20, 0.10, 0.10]

𝑆𝑆𝐵𝐵 = [0.30, 0.30, 0.30, 0.10]

The Herfindahl – Hirschman Indexes (HHI) are

a) 𝐇𝐇𝐇𝐇𝐇𝐇𝐀𝐀 = 2,600 and 𝐇𝐇𝐇𝐇𝐇𝐇𝐁𝐁 = 2,800

b) 𝐻𝐻𝐻𝐻𝐻𝐻𝐴𝐴 = 2,500 and 𝐻𝐻𝐻𝐻𝐻𝐻𝐵𝐵 = 2,300
c) 𝐻𝐻𝐻𝐻𝐻𝐻𝐴𝐴 = 2,400 and 𝐻𝐻𝐻𝐻𝐻𝐻𝐵𝐵 = 3,000
d) 𝐻𝐻𝐻𝐻𝐻𝐻𝐴𝐴 = 2,300 and 𝐻𝐻𝐻𝐻𝐻𝐻𝐵𝐵 = 2,500

3. Some managers and workers of non-profit organizations experience intrinsic motivations towards
their job.

a. They do not have the skills necessary to work in a for-profit organization.

b. They experience a state of fulfilment when the quality of their service is high.
c. They are not interested in the economic performances of the organization.
d. They are not interested in their own utility, only in the utility of customers/beneficiaries.

4. The only one cinema (movie theatre) located in your neighbourhood is offering special prices to
young residents (Y, younger than 25 years and residing in the neighbourhood), 𝑝𝑝𝑌𝑌 [Euro − ticket] .
The marginal cost of service for Y is the same as the marginal costs for others (O). The cinema has
found out that on average Y’s demand for the service is more elastic than O’s demand, 𝜖𝜖 𝑌𝑌 > 𝜖𝜖 𝑂𝑂 .
Now the cinema wants to set the most profitable prices for Y and O.

a) This is a case of price discrimination by self-selection

b) This is a case of perfect price discrimination
(𝒑𝒑𝒀𝒀 −𝒄𝒄) 𝟏𝟏 (𝒑𝒑𝑶𝑶 −𝒄𝒄) 𝟏𝟏
c) The price for Y is lower than the price for O, i.e. 𝒀𝒀 = 𝒀𝒀 and =
𝒑𝒑 𝝐𝝐 𝒑𝒑𝑶𝑶 𝝐𝝐𝑶𝑶
𝑝𝑝𝑌𝑌 1 𝑝𝑝𝑂𝑂 1
d) The price for Y is higher than the price for O, i.e. = 𝜖𝜖𝑌𝑌 and 𝑐𝑐 = 𝜖𝜖𝑂𝑂
𝑐𝑐

5. According to the patronage theory, the managers of State-owned enterprises

a. They are not particularly keen to enhance their managerial reputation for the aim of their
career.
b. Are likely to be corrupted.
c. May be forced to pursue the interest of politicians, i.e. to serve the politician’s voters and
supporters more than the enterprise customers.
d. Are generally not aligned to the objectives of the society, i.e. they pursue their own private
interest.
6. A firm operates the last stage of the supply chain as a monopolist, i.e. operates a “bottleneck”, and
is vertically integrated in the competitive upstream stage. It

a. Can be easily driven out of the market by the upstream rivals that have a “deep pocket”.
b. Is able to put the upstream rivals at a disadvantage by foreclosing the access to customers.
c. Can treat the upstream rivals with price discrimination yet not through quality discrimination.
d. Is more allocatively efficient than a monopolist that is not vertically integrated.

7. Innovations aimed at improving the efficiency in the use of natural resources may exhibit a
rebound effect. This means that an enhancement of resources efficiency

a. Causes a less than proportional resource saving or even a greater resource consumption.
b. Causes an increase in the resource consumption.
c. Does not cause any resource saving.
d. Improves the economic resources efficiency and worsens the technical resources efficiency.

8. The national environmental authority regulates the air quality. It sets a threshold for the
concentration of particulate matter in the gases and fumes that residential heating systems release
in the air. It punishes the rule breakers with a very high fine. The policy is

a) a ban on the most harmful technologies

b) an emission tax
c) a performance standard
d) a technology standard

9. What are the main drawbacks of measuring the innovation capability of a business enterprise
through R&D inputs, e.g. the number of R&D employees, R&D expenditures or R&D intensity?

a. There are other innovation sources, e.g. learning by doing. Second, while R&D inputs are
certain, innovation outputs are uncertain.
b. Data are very difficult to find. Second, while R&D inputs are certain, innovation outputs are
uncertain.
c. They are not suitable for describing innovation in industries that follow a Schumpeter Mark II
innovation pattern. Second, data are very difficult to find.
d. They are not suitable for describing innovation in industries that follow a Schumpeter Mark II
innovation pattern. Second, there are other innovation sources, e.g. learning by doing.

10. The Uppsala model of internationalization (Scandinavian School) assumes that firms:
a. Are born global.
b. Start the process of internationalization by setting up manufacturing plants overseas.
c. Take a staged approach to internationalization. BONUS
d. Start the process of internationalization by setting up joint ventures overseas.
Structured Question (10 points)

Keys / Development hints (further discussion points are possible and welcome provided that they
are correct)

a. What is the first-best scenario in a natural monopoly? (max 8 lines overall)

Answers should address the following points (See Slides on Natural monopoly regulation)

- An uncostrained regulator takes as an objective function W, social welfare, and sets output
(and price) that maximizes it:
- Achieved the competitive equilibrium and best allocative efficiency: p = MC

Figure

- Profit from first-best scenario: vπ=0, π=-F. This is unsustainable to business, necessity of a
compromise.

b. Illustrate how the first-best tariff with a subsidy from the public budget should be set in order to
make the first-best scenario economically sustainable. (max 8 lines overall)

Answers should address the following points (See Slides on Natural monopoly regulation)

- The regulator analyses the regulated firm’s costs and sets the unitary rate in tariff to cover marginal
costs (T = MC) and establishes a subsidy from the public budget to cover fixed costs (S=F)
- The break-even constraint – along with the first best W – is now fulfilled .

R = T∙Q+ S ≡ TC = MC∙Q+F, π=0

c. Explain which problems may arise from the use of subsidies from the public budget. (max 8 lines
overall)

Answers should address the following points (See Slides on Natural monopoly regulation)

(A) Subsidies cause productive inefficiency similar to State-owned enterprise (see lectures)

- Patronage, influence from politics toward inefficient spending

- Soft budget constraint, no incentive to reduce costs (similar to management discretion)

(B) Subsidies rely on public budget, i.e. on taxes

- Poor transparency: Differently from customers paying the access fee, taxpayers do not
oversee the whole budgeting and money use process

- Possible inequality? All citizens are charged the service costs, whether they use it or not