Date September 9, 2021

COURSE Business and Industrial Economics [Professor P. Garrone]

ACADEMIC YEAR 2020-‘21

NAME AND SURNAME ___________________________________________________

PERSON CODE ____________________________________________________________

Fill the above heading with your Name, Surname and Person Code

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 80 minutes to complete the exam.

Please do not overwrite the table.

Multiple-choice questions (10 points)

Please tick the letter of the correct answer

1. The concentration vectors of large food manufacturers in two Regions are as follows:
S_A = [0.3, 0.2, 0.15, 0.15, 0.15, 0.05]; S_B = [0.25, 0.25, 0.25, 0.25]

a. for sure food manufacturing in Region A is more concentrated than in Region B

b. based on Herfindal-Hirschman index, food manufacturing in Region B is more concentrated than in
Region A
c. based on Herfindal-Hirschman index, food manufacturing in Region A is more concentrated than in
Region B
d. food manufacturing in Region B is more concentrated than in Region A because there are fewer
firms in B than in A

2. Consider a labor market where workers can signal their high ability (productivity) by acquiring education,
and workers are paid according to their productivity a, conditional on their education level e (years of
education). If a worker does not signal his/her ability through education, he/she is considered a low-
ability worker. The productivity of high-ability workers is aH = 10 and their unit (yearly) cost of education
is cH = 2, while the productivity of low-ability workers is aL = 2 and their unit cost of education is cL = 4.
Which of the following levels of education e* allows high-ability workers to credibly signal their ability
on the labor market?

a. e* = 1
b. e* = 3
c. e* = 5
d. e* = 10

3. Non-profit organizations are appropriate service providers

a. when consumers suffer from information asymmetries and service provision is hard to monitor
b. when consumers suffer from information asymmetries but service provision is easy to monitor
c. when consumers do not suffer from information asymmetries and service provision is easy to
monitor
d. when consumers do not suffer from information asymmetries but service provision is hard to
monitor

4. The minimum efficient size of water and wastewater services in an urban area is 500,000 customers. The
demand in your city is 800,000 customers. The provision of water and wastewater in your city

a. could be a natural monopoly because the infrastructure investment is a sunk cost

b. is a natural monopoly because the minimum efficient size is smaller than the demand level
c. is not a natural monopoly because the minimum efficient size is smaller than the demand level
d. could be a natural monopoly but we need further information and analysis to decide

Explain your answer to the previous question (Max 8 lines)

5. Firm A is deciding whether to accept to supply a customized component for the production process of
Firm B. Firm B would buy 100,000 units/year. To build a dedicated production line, Firm A should pay
30,000€/year as interests for a bank loan. Additionally, it should spend 20,000€/year to train specialized
personnel. The variable production cost is 0.3€/unit, and the price agreed with the customer is 0.9€/unit.
If the company had to sell the component to the external market, it would be able to negotiate a price
of 0.6€/unit

a. the quasi-rent is 30’000€/year. There is no risk of hold-up, since the company can sell profitably to
the external market
b. the quasi-rent is 40,000€/year. There is no risk of hold-up, since the company can sell profitably to
the external market
c. the quasi-rent is 30,000€/year. There is a risk of hold-up, as long as Firm B recognizes a higher price
than the external market
d. the quasi-rent is 40,000€/year. There is a risk of hold-up, as long as Firm B recognizes a higher price
than the external market

6. Consider a duopoly for a homogenous product with demand P = 25 – 0.5Q, where P is the market price
and Q is the aggregate industry quantity. Cost functions are symmetric and equal to TCi = qi. Firms
compete by choosing quantities and cannot observe the other player’s choice while making theirs. The
equilibrium price and quantities are

a. P = 17, Q = 16
b. P = 9, Q = 32
c. P = 10, Q = 30
d. None of the options

7. According to the free entry equilibrium model, all else equal, the number of active firms

a. increases proportionally with the size of the market

b. increases with the size of the market, yet less than proportionally
c. is larger with stronger economies of scale
d. is larger with higher price elasticity of demand

8. Firms with a large market power may have large incentives to innovate

a. if there are high structural barriers to entry

b. because they have a large profit to lose from not innovating
c. because innovation leads them out from a situation of low profit
d. because innovation is a means of escaping competition

9. Which of the following statements regarding tapered integration is correct?

a. it is an appropriate choice when an internal inefficient supplier is considered as a benchmark

b. it is not an appropriate choice to reduce supply risks
c. it is not an appropriate choice when the minimum efficient size is very large
d. it is an appropriate choice especially when external suppliers have little incentives to behave
opportunistically
10. Social welfare under perfect price discrimination

a. is the same as in uniform monopoly pricing

b. is lower than in Cournot oligopoly
c. is the same as in perfect competition
d. is lower than under second-best price regulation
Structured Question (10 points)

Please answer sub-questions in sequence in the blank pages after the text. The addition of figures, graphs
or formulas is possible. Writing must be readable.

If you find it necessary in addition to the answer you are writing in this form you can draw by hand a figure (one
or more than one figure) and refer to it in the answer. Remember to mark the sheet with your PersonCode,
name and surname.
You will have 10 minutes after you have submitted this form to upload the figure through the "Upload of a
figure" Form. The Form will give you the necessary instructions.

*******************************************************************************************

Your city and the neighbouring region are living a period of economic growth thanks to high-growth clusters of
startups that are linked to local universities and large flows of foreign direct investment. Many skilled and
unskilled workers are migrating in the city and region. The city government has given its urban planners the tasks
of designing, and developing an entirely new residential district that can be home to thousands of households,
and having it constructed.

In addition to other infrastructure services, the planners have decided to equip the buildings with the
connection to a district heating and cooling system that receives thermal energy from the local waste-to-energy
incineration plant. The system will grant the district households the delivery of thermal energy (measured in
MWh unit (1 MWh= 1,000 kWh)) in three forms, namely hot tap water, heating of rooms in the winter period,
cooling of rooms in the summer.

The city established that the service will be provided by the local energy utility, and will be regulated (in tariffs
and quality) by the city. In order to assess the feasibility of the heating and cooling service, the planners have
contracted out an evaluation report, assigning the task of analysing the service demand, costs and tariffs to your
consulting company.

In the first phase of the research you collected data, formulated the model and estimated the following
functions and parameters.

Total cost function: TC=4000000+100 Q with Q [MWh] the overall quantity of thermal energy supplied in the
new district over 1 year and TC [€] the total costs born by the utility for offering the service;

• Demand function: p=1100-0.016 Q, with Q [MWh] the overall quantity of thermal energy demanded by
the total of residents in the new district over 1 year and p[€/MWh] the unitary rate that residents are
willing to pay for using the service;
• Average thermal energy consumption for each household in 1 year: Aq=6.25[MWh/household].

Now you should elaborate a proposal of regulated tariffs for the service under two scenarios and make a
comparison between thm. Report the following results for each scenario, showing briefly how you obtained
them:

• the overall quantity of thermal energy supplied in 1 year Q [MWh],

• the number of households served N,
• the unitary usage rate t[€/MWh],
• if it is necessary, the fixed access fee for 1 year of service A [€/household],
• the utility’s yearly profit π [€] .
Use this form to give your answer.

1. Scenario 1. Second-best tariff. (maximum 10 lines)

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

2. Scenario 2. First-best two-parts tariff.

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

3. Compare the two scenarios and highlight the relative strengths and weaknesses of the two options
in maximum 10 lines.

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________
_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________

_______________________________________________________________________________________