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ECP 3703 Take-Home Final Exam I Spring 2021 St. Thomas University Dr. S. Gupta Answer questions 1, 2 and 3 (all parts) clearly and concisely. You must show all your calculations and work. No credits will be given to answers without detailed work. Answer either question 4 or 5. Challenge yourself and be creative, original and critical where applicable. The exam is open books, open notes, closed friends, colleagues, classmates and professors. You can use internet resources but a Reference list must be provided. Do Not copy and paste, write in your own words. Plagiarism tools will be used to detect similarities in exams and/or “copy/paste.” You are NOT to discuss or share the exam and/or your answers with anyone. Any deviation from this stated guideline/policy will be considered as academic dishonesty and will automatically result in an “F” grade without any exceptions. The answers must be TYPED (except for diagrams and mathematical expressions/equations if needed). Use CANVAS TURNITIN tool to submit it. No other form of submission will be accepted. You may send me a copy via email (
[email protected]) in addition. The exam must be turned in before 8:59 A.M. , Saturday, May 8, 2021 Do not submit the exam until you are sure, you can submit it only ONCE. Make sure to email me all the diagrams as well as the exam. Late submissions will not be accepted. If you need to get in touch with me for any reason, you must use your STU email for all correspondence. Good Luck and Have a Nice Summer! 1. A. The local space museum has hired you to assist in setting admission prices. As the manager, you recognize that there are two distinct demand curves for admission. One applies to people ages 15 to 64 whereas the other is for children and senior citizens. The two demand curves are: P1 = 9.6 -0.08Q1 (for adults) and P2 = 4.5 – 0.05Q2 (for children and senior citizens). The corresponding marginal revenue curves are: MR1 = 120 – 25P1 and MR2 = 90 – 40P2 Crowding is not a problem in the museum, so the marginal cost is zero. i) Find the profit maximizing prices; the number of adults and children & senior citizens visiting the museum. ii) Find the elasticity of demand for both groups of visitors. B. Describe the methods used to coordinate price fixing in two actual cases. Neither example should be the one discussed in class. C. Oligopoly theory suggests that independent firms making independent decisions will tend to change similar prices. Therefore, competition is maximized when firms charge identical prices and collusion exists when firms charge non-identical prices. Explain the validity or lack of validity of both these statements. 2. A. Consider the following game by two companies which can either compete with each other or cooperate with each other. The payoffs are in million dollars. Firm 2 CompeteCooperate Compete1 1 3 0 Firm 1 Cooperate 0 3 2. 2 i)Does either firm has a dominant strategy? If so, what are they? ii)Is there a Nash equilibrium in this oligopoly model? If so, what is it? B. On August 20, 2019, DOJ challenged the proposed acquisition of Farelogix by Sabre. What was the allegation and what is the status of the case now? On what ground the case was decided the way it was? Do you agree with it? Why or why not? C. Xerox sold both copier and toner for their copiers. While customers were not required to buy Xerox toner, most did because specified machines use toner only for that machine and non-Xerox toner in Xerox machines produces inferior copies. Evaluate the statement (with reference to relevant pricing/business strategies covered in class): “Xerox made 75% of its profits selling toner and 25% of its profits selling machines.” 3. A. If you can earn some extra credit on your final exam grade, choose if you want 2 points, or 4 points added onto your final exam grade. There is a condition: if more than 10% of the class selects 4 points, then no one gets any points. Remember that you cannot talk and collude, it is a business strategy. What will be your choice and why? Your answer should be elaborate and explained clearly. B. Two days ago Epic Games Vs. Apple Trial started. What is this case about? In your opinion, how strong is the allegation and why? You must relate your answer to relevant topics covered in class and explain clearly. C. A restaurant has three types of customers. A third of its customers, Type A, are willing to spend $5 on an appetizer but only $2 on a dessert. Another third, Type B, are willing to spend $3.50 on an appetizer and $3.50 on a dessert. The remaining third, type C, are willing to spend only $2 on an appetizer but $5 on a dessert. All three types are willing to spend $10 on the main course. It costs the restaurant a constant $2 to prepare an appetizer or a dessert, and $7 to prepare the main course. Which is optimal for the restaurant, to offer appetizers and desserts a la carte (with separate prices on the menu), or to offer them as a complete meal, tied with the main course? 4. A. Suppose all the firms in a monopolistically competitive industry were merged into one large firm. Would that new firm produce as many new brands? Would it produce only a single brand? Explain. B. You own a theater with 200 seats. The demand for seats is Q = 300 -100P. You are charging $1.50 per ticket and selling 150 seats. Your costs are fixed and do not depend on the number of people attending. Should you cut your price to fill the theater? What other pricing strategies can you use to increase your profit? C. In Gelate, Pennsylvania, the market for compact discs has evolved as follows. There are two firms that each use a marquee to post the price they charge for compact discs. Each firm buys CDs from the same supplier at a cost $5.00 per disc. The inverse market demand in their area is given by P = 10-2Q, where Q is the total output produced by two firms. i) What kind of market structure is it? ii) Solve for market equilibrium price and market output. Would your answer differ if the products were not perfect substitutes? Explain. 5. A thoughtful and analytical response must be given to following to earn your points. a) What is the topic in the course you most enjoyed and found useful? Why? b) What is the topic you least enjoyed? Why? c) What is one topic you would have liked to cover that was not covered in the course? Why? d) What economic result was the most surprising? Why?