Tuesday, 7 June 2011

Unit 4 - Industrial Economics (June 2009 Unit 3 multiple choice)

1. In 2007 Nike, a US sportswear company, bid £285 million for Umbro, a British sportswear company. A possible motive for this proposed takeover was to

C. Gain economies of scale

Economies of scale can be defined as long run average costs. Horizontal integration is a situation where firms merge in the same industry and stage of production. An example of economies of scale if they merged is financial economies which makes it easier for firms to raise capital at lower costs due to decreased rates of interest. 


2. The data in the table refer to costs and revenue for a small farm producing barley.

It can be inferred that over the output range the farm is operating under conditions of 

C. Perfect competition and rising marginal costs

From the data marginal costs (change in cost / change in output) are rising by 40, 60, 80, 100 and 120, but marginal revenue (change in revenue / change in output) remains the same at 100. From perfect competition we know that AR=MR. 


3. In September 2007, the Office of Fair Trading (OFT) launched an investigation into claims that major supermarkets agreed among themselves to raise the price of milk to consumers by 3 pence per unit. The investigation was undertaken because 

A. The competition regulations may have been breached

OFT acts as the Competition Commission. The Competition Commission is an independent public body which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries, ensuring healthy competition between companies in the UK for the benefit of companies, customers and the economy. Firms colluded to increase price and this is against the aim of the Competition Commission as consumers have to pay higher prices.

4. B. Supernormal profits are achieved  if the firm conducts an allocatively efficient pricing policy

Allocatively efficient is where P=MC. The price paid for a good is equal to the cost of factors of production used to manufacture the last unit. At P=MC level output is Q4 and price is P4. At this point AR is greater than AC so supernormal profits are made.

5. UK consumers were charged £269 and US consumers the equivalent of £200 for the Apple iPhone in October 2007. The most likely reason why Apple was able to charge different prices is because

C. Different price elasticites of demand exist for the iPhone between UK and US consumers

Price discrimination occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs. This can only happen when there are differences in price elasticity of demand between markets. Due to the fact that there are less substitutes for the iPhone in the UK, the product has an inelastic demand implying that the firm can charge a higher price and as the product has an elastic demand in the US Apple can charge a lower price.

6. E. The British gas market is more competitive than the German and Italian gas markets

In Britain a lot more consumers (47%) switch compared to Italy (1%) and Germany (5%) implying that there is greater competition as there is a lot more firms to choose from and price are the lowest at 3 pence / Kwh compared to Germany and Italy with 4.3 Kwh and 4.9 Kwh respectively. I n order for prices to be low, it means cost of production is also low as it is reflected in prices.

7. In 2007, the European Competition Commission instructed Microsoft, the computer software giant, to make freeely available some of its patented technical information to rival companies such as Sun Microsystems. The most likely effect on the computer software market of this decision is to 

B. Increase contestability

The Competition Commission is an independent public body which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries, ensuring healthy competition between companies in the UK for the benefit of companies, customers and the economy. A contestable market is one where there is freedom of entry and exit and where the threat of entry will determine price and output. Patents are entry  barriers enabling firms to improve quality and charge higher prices. As a result, firms are drawn to this market increasing competition. 

9. In 2007, Sony launched the PlayStation 3 games console in Britain at a price of £425. This exceeded the launch price of its major competitors, Microsoft's Xbox 360 at £265 and Nintendo's Wii at £180. The most likely explanation for these price differences is that

E. Significant product differentiation exits between the games consoles

From the information, Playstation 3 games console has a higher price compared to the others due to product differentiation leading to brand loyalty. And as a result of this a high price can be set and profit can still be gained implying that there is an inelastic demand. An example of product differentiation might include improved packaging of the product.

10. Nail bars operate in a monopolostically competitive market. Which of the following will be true for such a firm in long-run equilibrium?

A. Not allocatively efficient, Low barriers to entry, Differentiated product

Barriers to entry and exit such as production costs are low and as a result of this normal profits are made in the long run as supernormal profits are competed away. Not allocatively efficient as price does not equal marginal costs.