Economics
404
Spring 2016
Industrial Organization and Data Science
Midterm Exam
Multiple Choice (2 points each)
1. If a consumer has a downward sloping demand curve it means
a.
they exhibit diminishing marginal utility and their preferences are exogenous.
b.
they exhibit constant marginal utility and their preferences are exogenous.
c.
they exhibit increasing marginal utility and their preferences are exogenous.
d.
not enough information to say.
2. Changes in revenue on the intensive margin refer to
a.
changes in revenue from the optimal markup rule.
b.
changes in revenue from consumers with low willingness to pay for a good.
c.
changes in revenue from additional units sold.
d.
changes in revenue from units already being sold.
3. If a firm lowers the price of a good they were selling and earn more revenue then
a.
extensive margin gains were greater than intensive margin losses.
b.
intensive margin gains were greater than extensive margin losses.
c.
extensive margin losses were greater than intensive margin gains.
d.
intensive margin gains were greater than extensive margin gains.
4. Any elasticity (own price, cross price, income, etc…) describes the
a.
percentage change in a quantity demanded over time.
b.
percentage change in the slope of the demand curve.
c.
percentage change in a quantity demanded for a percentage change in something else.
d.
percentage change in price for a percentage change in something else.
5. Suppose you can segment the market into types, and type A consumers have more inelastic demand than
type B, which group should face a higher markup?
a.
Type A
b.
Type B
c.
Same markup
d.
Not enough information to tell
6. In a competitive market, an individual firm’s demand curve is
a.
less elastic than the market demand curve.
b.
the same as the market demand curve.
c.
more elastic than the market demand curve.
d.
not enough information to say.
Economics
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Spring 2016
7. Mixed bundling refers to
a.
firms offer multiple bundles
b.
firms charging a price based upon the number of goods you choose from a menu.
c.
firms charging one price for everything.
d.
firms segmenting the market by consumer types.
8. In the standard Cournot game, if Firm A increases quantity, how does Firm B respond:
a.
Firm B raises its quantity
b.
Firm B lowers its quantity
c.
Firm B does not change its quantity
d.
Not enough information to answer
Consider the R output from a regression log(quantity) on the given variables
Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept)
10.12520
0.01580 640.68
<2e-16 ***
log(price)
-2.34447
0.02292 -102.29
<2e-16 ***
feat
1.48028
0.02719
54.45
<2e-16 ***
brand=minute maid 0.69440
0.01167
59.49
<2e-16 ***
brand= tropicana 1.29026
0.01470
87.78
<2e-16 ***
log(price)*feat -0.87757
0.03741 -23.46
<2e-16 ***
9. Use the coefficient estimates to determine the elasticity when an item is being featured?
a.
-2.34
b.
-0.86
c.
-3.22
d.
-4.08
10. Based on the coefficient estimates for Minute Maid and Tropicana, if all brands had the same price
a.
We expect Tropicana to sell more
b.
We expect Minute Maid to sell more
c.
We expect the omitted group (store brand) to sell more
d.
We do not expect statistically significant differences
Short Answer (3 points each)
Your answers should be one sentence unless otherwise stated.
1. What does the Myerson Satterthwaite theorem tell us about the limits of bargaining when there is
hidden information about valuations?
2. In a standard Hotelling model, what happens to prices when transportation costs increase?
Economics
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Spring 2016
3. What type of value-based pricing/price discrimination requires more verification effort from firms:
direct or indirect? In one sentence, why?
4. Offering more than one quality levels of a good (e.g., through good, better, best or offering both one
or two day shipping versus just one day shipping) can lead to increased profits. What is the principle
risk firms run offering multiple quality levels, though?
5. We’ve made the argument that firms can price discrimination intertemporally. Would this be more
or less likely to increase profits if customers were homogeneous (all customers the same)?
6. When a firm is pricing two goods that are substitutes, how are the optimal prices different than if
they were only pricing a single good? In one sentence, why?
Amazon Prime bundles streaming video & fast shipping together and these cannot be bought separately.
7. What type of bundle is this? (one or two words)
8. Although it seems strange to bundle very different things together, pricing theory gives us reasons
why it can make sense. In this case what type of correlation between value for fast shipping and
value for streaming video would be an argument for this bundling strategy?
Think about happy hours and the location of bars in the context of a Hotelling line. Assume there are
bars in downtown Seattle and also out in the suburbs. Assume that everyone lives in the suburbs but
works in downtown Seattle and has to commute. After work traffic is awful so that transportation costs
are high.
9. All else equal, which bars should larger discounts during happy hours (drink/food discounts during
time periods after work): those out in the burbs or those in downtown Seattle? In one sentence,
why?
Economics
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Spring 2016
10. In one sentence, what about the distribution of consumer location after work makes this so?
Longer answer (10 points each)
1.
Say that you had a hypothesis that people who entered your store only once a month were more
price elastic (e.g., more negative elasticity, further from -1) than those who visited more frequently.
Assume your dataset has a variable called "often" which is a dummy variable which equals one if the
customer ID shows up in the data more than once per month.
a. (3) How would you estimate a regression in R to test this hypothesis? (formula & R code)
b. (3) Suppose your hypothesis is correct, occasional shoppers are more price elastic. Which group
would want to offer coupons to, frequent or occasional shoppers?
c.
(4) Now assume you found the opposite (once a month shoppers were price inelastic). Why would
quantity discounts be an attractive way to appeal to the more price sensitive frequent shoppers?
2. Airline mergers have decreased the number of airlines in the U.S. recently. Assume airlines compete
Cournot.
a. (2) What would Cournot predict for airline ticket prices due to these mergers?
Now think of airlines offering a differentiated product: coach seats and business class seats.
b. (2) Assume that coach/economy airline ticket prices changes due to mergers as in your answer for
(a), but business class ticket prices have not. How does it impact the likelihood of "high type"
consumers to purchase business class seats? In one sentence, why?
c.
(2) How about "low types" to purchase coach class seats? In one sentence, why?
d. (4) What would be the regression to run in R to verify if (b) is correct if you have the airline's
purchase data? (Please write our R code and define LHS & RHS variables.)
Economics
404
Spring 2016
3. Assume that there are two types of consumers for your product: high demand (type H) and low demand
(type L). Specifically, for a given level of quality, type H consumers are always willing to pay more. There are
two qualities for which you can produce a good, bad (B) and good (G). It costs $3 to make a B good and $5 to
make a G good. Consumers will only buy one good (type B or G). The following chart lists valuations for each
good for each type of consumer:
G
B
H
10
6
L
5
4
Assume that consumer type is not observable, that first degree price discrimination is impossible, and there
are 20 low type and 10 high type consumers.
a. (3) What is the optimal price and profits if you only sell the type G good?
b. (4) What are the optimal prices and profits if you sell both goods?
c.
(3) Assume you can degrade the value to the low value customer by $1 to both the high and low
value customer. Assume you save $2 on production costs by doing this. Assume that you price
optimally in that case, are you willing to service/sell to both markets now?
4. Cities around the country are raising minimum wage. A recent Planet Money podcast discussed a situation
in California where half of a shopping mall was in a city that raised minimum wage, and half was in a city that
did not. The podcast interviewed a pretzel stand owner. One of her stands was in the high wage city, one
was in the low wage city. One employee is required to operate the stand, additional employees are not
needed, but you cannot go below one (obviously).
a. (2) Assuming the stand stays open the same working hours, since one employee is required to have the
stand open, should we consider the one employee operating the stand a marginal cost or a fixed cost for
the purpose of pricing?
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Spring 2016
b. (3) Based on what you know of optimal pricing, should the increase in minimum wage impact the price of
pretzels at the stand where wages went up? If so, how? If not, why not?
c.
(3) The owner is free to move her stand to the low-wage side of the mall. Provide one reason she should
consider moving and one reason about why it may be a bad idea.
d. (2) Suppose there is a high-demand time period and low-demand period (e.g. later in the evening). What
reaction might the owner take in terms of when to keep the stand open?
5. Consider the plot of log(price) vs. log(quantity) of orange juice sales. Each color represents a different
brand (green: store brand; red: minute maid; yellow: tropicana).
a. (2) Suppose we estimate a simple regression of log(price)=alpha+ beta*log(quantity). What is the
interpretation of beta? (one word)
Economics
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Spring 2016
b. (2) Now draw the approximate regression line on the graph and label it with an (b).
c.
(2) Now suppose we run a regression can where we add in a dummy variable for each brand so
that each brand has its own intercept. Write down the formula and R code for this regression:
d. (2) Now draw your regression lines from (b) on the graph. Do all these lines have the same
slope?
e. (2) How do the slopes in (b) and (d) compare to each other? What is the cause of the bias in the
regression from (b)?