Reference no: EM1384374

Part A:

A1. After some months of successful predation (i.e., finally eliminating its rival), Miss Young's husband can charge henceforth the monopoly prices. Choose one of the answers below and enter into the answer sheet in back. Same applies to all remaining questions.

True. After the predation eliminates rival, the husband is alone in the market therefore can charge monopoly prices.

Depends. After predation eliminates the rival, the husband cannot charge monopoly prices because even though he is alone, if other firms can enter easily, they will do so if the husband raises the prices to monopoly prices.

False. After predation eliminates the rival, the husband cannot charge monopoly prices henceforth because the consumer stops buying the product.

A2. The lemons problem does not occur in the real lemons market if neither consumers nor the producers know the quality of each lemon for sale until they both consume it.

Statement is True or Statement is False

Part B:

B1. Alpha Airlines, the only carrier currently offering flights to and from town A heard that Beta Airlines was thinking of entering the market. In an effort to deter Beta, Alpha threatens that it will respond to Betas entry with a price war. Suppose Beta believes the threat. In what way can Beta minimize the losses of such a price war other than by choosing not to enter the route to and from town A? (give me two ways she can do this)

B2. Why does an antique store offer the following add at the store front "Like my grandfather used to do to his customers I too follow this policy. Buy an item from us and we will buy it back after a year plus 10 percent more of the price you paid if you are not happy." Please provide a two line answer.

B3. Theory of the firm questions:
A contract between a franchiser and a new franchisee specifies that the latter has to buy a huge neon sign with the logo of the franchise. The neon sign is very expensive. Explain (giving two reasons) why such a requirement (neon sign as a clause in contract) may be optimal for the franchiser?

Give me a two line sentence maximum reply.

Part C:

1. Please give two reasons consistent with the findings in Joskow's study on the contracts between electric utilities and coal mine that contracts in the West coast typically have longer contract length than the in the East coast.

2. Please consider the following average housing prices, where average prices are computed as an average over counties that got considered attainment and average over counties that did not get considered under attainment status in the CAA. Prices are in hundreds of dollars.

(i) What was the approximate change in the environmentally regulated counties in their housing prices? Compute average before and average after in regulated areas.

Choice A- average in regulated areas before was 21 average after was 30. So effect was an increase by 9 hundred dollars that is 9/21 percent.

Choice B- average in regulated areas before was 22.5 average after was 28.33. So effect was an increase by 6 hundred dollars that is 6/22 percent.

(ii) Choose one and for the one you choose report your estimate of the ATE

Choice A - the environmental regulation led to an increase in housing prices. I know this because the change in regulated areas (non attainment counties) was larger than the change in unregulated areas.

Choice B - the environmental regulation led to a decrease in housing prices. I know this because the change in regulated areas (attainment areas) was larger than the change in unregulated areas (non attainment).

Choice C - the environmental regulation led to an increase in housing prices because the change in attainment areas increased as well as the change in non attainment areas.

3. Grade cards introduction has been shown to improve average grades in mandatory counties and voluntary counties. This was the paper we discussed by Jin and Leslie. However a posterior study showed that restaurants part of a franchise chain had not only different hygiene levels before the grade cards, they also changed their hygiene scores differently than non franchised restaurants.

(i) With the results in the table below (next page) can you reject the following hypothesis: Franchise restaurants benefit from reputation of other restaurants in the same franchise so they have generally higher hygiene than non chain affiliated/ non franchise restaurants before the grade cards issuance. True, this hypothesis is true / I cannot reject. False, this hypothesis is false based on the results I reject, see answer sheet.

(ii) Suppose that with the grade card issuance, reputation effects do not matter anymore and that consumers' willingness to pay for hygiene moves further to the right of the two willingness to pay lines in the graph above. With the results below can you reject the following hypothesis: "Due to the introduction of mandatory grade cards, franchise restaurants see smaller improvements in grade hygiene relative to non franchise restaurants."

Results

	estimate	(Std error) Significance?
Franchise indicator	7.5	(2.0)   yes
Franchise indicator*grade cards introduction indicator	-2.5	(0.6)   yes
Grade cards introduction indicator	6.5	(2.0)   yes
constant	75.2	(9.0)   yes
R squared	0.67

The dependent variable is hygiene score in a restaurant in a quarter