Industrial Economics

1. Does the production function Q = l + k exhibit increasing return to

scale, constant return to scale or decreasing return to scale? Prove your

answer, give definitions of the notions and comment on the result [15

MARKS]

ANSWER:

If output increases more than proportionally/proportionally/less than

proportionally then we speak of increasing/constant/decreasing return to

scale.

IRS/DRS/CRS respectively correspond to , >,1

2. Consider the constant-elasticity demand function Q = AP−ε

where A,ε>0. [15 MARKS]

a. Solve for the inverse demand function p(Q)

b. Calculate the demand price elasticity

c. For what values of ε is the demand elastic? For what values of ε is the

demand inelastic?

ANSWER:

3. Solve the following game, comment on your result by explaining the

notions you use.[15 MARKS]

A strategy is dominant if, regardless of what any other players do, the strategy

earns a player a larger payoff than any other. Hence, a strategy is dominant if it

is always better than any other strategy, for any profile of other players' actions.

Depending on whether "better" is defined with weak or strict inequalities, the

strategy is termed strictly dominant or weakly dominant. If one strategy is

dominant, than all others are dominated. For example, in the prisoner's

dilemma, each player has a dominant strategy.

4. Compare and contrast the basic components of the Solow and the

Romer model [15 MARKS]

ANSWER: Solow model technology is exogenous

Romer model: technology is endogenous and determined within the

model

5. Compare and contrast the “Schumpeter hypothesis” and the

“replacement effect”. Discuss whether they are inconsistent with each

other [15 MARKS]

- The first one concentrates on the capacity of to invest in R&D: large

firms tend to have greater capacity in terms of

High fixed cost: only large firm able to bear •

Diversification of risk within large (conglomerate) firm •

Market power is necessary to recover R&D costs with large...