You have 120 minutes to complete this examination. The exami…

Yоu hаve 120 minutes tо cоmplete this exаminаtion. The examination will be graded out of a possible 50 points. The maximum points awarded to each question are indicated in parentheses beside the question number. The answers should be written clearly and legibly on blank pieces of paper and also write down your name and U-ID clearly. Good luck! 1. (4 points) Consider the following industries: pharmaceutical, cement, perfumes, and computer storage devices. How would you expect them to be ordered by advertising intensity according to the Dorfman-Steiner formula? Explain Why?    2. (4 points) Consider the structure of geographically isolated markets in the US (small towns) in the following businesses: doctors. It can be shown that the minimum town size that justifies the entry of a second doctor is approximately 3.96 times the required size for the first doctor to enter. How can the number be interpreted?   3. (4 points) “Tourists traipsing along a half-mile stretch of 23rd Street in New York pass five Starbucks outlets. In Tokyo, 7-Eleven boasts 15 stores within a similar distance of Shinjuku station." Does it make any sense for stores to be clustered in this way? Explain why.    4. (4 points) “For some industries, imposing barriers to entry by government may be welfare improving." What particular industry characteristics might make this statement valid? Can you list an industry as an example?   5. (10 pts) Your company sells expensive, branded fountain pens. There are 100,000 people aware of your pens. These willingness-to-pay numbers are uniformly distributed between $0 and $500. So, your demand curve is given by Q=100000*(1-p/500). Your marginal cost per pen is $100. Well-versed in economics, you are pricing your pens at $300 each, and selling 40,000 pens, generating a contribution of $8 million. You, as a brand manager, are considering running a major promotional campaign. Two possible advertising campaigns are available: “Build Value” and “Expand Reach.” You have to choose one of them or none. The “Build Value” campaign will not reach any new customers, but will increase the existing customers’ willingness-to-pay by 20%, and this campaign cost 2 million to run. The “Expand Reach” campaign will expand the set of potential consumers by 20%, from 100000 to 120000. This campaign cost 1 million to run. a. (4 pts) If your choice were between running the "Build Value" campaign and running no campaign at all, would you choose to run the "Build Value" campaign? Explain. b. (4 pts) If your choice were between running the "Expand Reach" campaign and running no campaign at all, would you choose to run the "Expand Reach" campaign? Explain. c. (2 pts) What choice would you make in this situation: Run the "Build Value" campaign, run the "Expand Reach" campaign, or run neither? Explain.   6. (14 pts) Maytag wants to prevent Whirlpool from entering its market. The following payoff table shows the profit each firm would earn in each of the four possible decision combinations: Maytag Low High Whirlpool Stay out A $0,  $35 B $0,  $50 Enter C –$10,  $20 D $30,  $30 Payoffs in millions of dollars of profits a. (2 pts) If Maytag and Whirlpool make their decisions simultaneously, Whirlpool is likely to _______________ (stay out, enter) and Maytag is likely to price ____________ (low, high). b. (2 pts) Suppose Maytag says to Whirlpool, “If you enter, I will price low until you decide to exit.” Discuss whether this threat is credible or not and explain why.   Suppose Maytag makes the first move and expands its productive capacity before Whirlpool makes its entry decision, which results in the following payoff table: Maytag Low High Whirlpool Stay out A $0,  $30 B $0,  $40 Enter C –$12,  $16 D $14,  $14 Payoffs in millions of dollars of profits c. (6 pts) Construct the game tree for this capacity expansion decision. Let Maytag make the first decision to expand capacity or not to expand capacity.  Then let Whirlpool make its entry decision.  Finally, let Maytag choose its price.  Show the likely outcome on the game tree (find the equilibrium outcome of the game). d. (4 pts) Based on your game tree in part c, Maytag ___________ (still cannot, can now) deter Whirlpool from entering if the investment in new productive capacity is _________________ .   7. (10 points) Consider an industry with three identical competitors who simultaneously set output levels (Cournot model). Market inverse demand is given by