Neoclassical Model, Value Creation, Patent Races, and Profit Erosion: Exam Questions

Part A

Part A

Answer ALL of the following Questions. Please choose ONE (and only one) available answer for each one of them. Choosing more than one option is treated as a wrong answer. List your chosen option in your answer booklet(s).

1.Under the Neoclassical Model, firms exist to serve the interests of:

a.Customers.
b.Workers.
c.Society in general.
d.Shareholders.

2.If the consumers’ demand for a product is inelastic, this means that:

1. An increase in the price increases costs more than revenues.
2. An increase in the price increases revenues.
3. An increase in the price decreases revenues.
4. A decrease in the price increases profits.

3.Value Creation is defined as the difference between:

1. The consumer’s willingness-to-pay and the product’s cost.
2. The price and the product’s variable cost.
3. The price and the producer surplus.
4. The consumer’s benefit and the price.

5.Which one of the following is NOTa source of profit erosion?

1. Competition by current market participants.
2. Economies of scale.
3. Market entry by new companies.
4. Product imitation.

5.Company assets that are susceptible to erosion or poaching by competitors are:

1. Staff members.
2. Product features.
3. Brand loyalty.
4. All of the above.

6.One of the main concerns when using markets to acquire products and services is that:

1. Suppliers may be able to achieve economies of scale.
2. Incomplete contracts may lead to hold-up problems.
3. Potential suppliers may be specialized.
4. Outsourcing may increase the firm’s strategic focus.

7.Patent races are categorised into:

1. Deterministic and paternalistic.
2. Stochastic and probabilistic.
3. Deterministic and probabilistic.
4. Stochastic and non-deterministic.

8.A positive demand shock is likely to:

1. Increase prices and decrease GDP.
2. Decrease prices and GDP.
3. Increase prices and GDP.
4. Decrease prices and increase GDP.

Part B

Please pick and answer only ONE out of the two questions below. If you answer more than one question, then the question with the lowest mark will count to your score.

The previous government of Gironia, a developed country, invested £100 million three years ago to build a regional airport. The airport is now ready. Over the next thirty years that it will be operational, it is expected to generate £100 million of revenues and £25 million of operating costs (including depreciation for the assets, the cost of financing the project, etc). The current government is reconsidering the project and has found a new location for the airport. The new airport would yield £300 million of revenues, £50 million of operating costs, and it would also cost £100 million to build. If the old airport is abandoned it would have £0 value to the government.

1. Calculate the accounting profit of the new airport.
2. Calculate the economic profit of the new location.Should the government go ahead with the new project and why/why not?
3. Suppose that if the government goes ahead with the new airport project, then, after it is approved by the administration and the construction starts, the handling company claims that building costs have increased from £100 million to £200 million. Assuming that the old airport is scrapped, should the project still go ahead at this stage? What could the government have done to protect itself from this hold-up?

Triarch and Thoulos compete in the fast-fashion clothing business. The consumers’ net perceived benefit as a function of product quality (q) and price (p) in this market is described by the equation below:

1. Find the combinations of price and quality that give Triarch’s customers a net perceived benefit of 2 and represent them graphically in a Value Map.
2. Triarch sets its quality for a top equal to £12 and its price equal to £20. If Thoulos sets its price equal to £15, how much does it need to set its quality in order to generate more perceived benefit to customers than Triarch?
3. Suppose that the cost of producing a top as a function of its quality for the two companies is described by the following equations.

Write down the Triarch’s profit as a function of its own quality for tops  and of the strategic positioning of Thoulos  so that Triarch maintains cost advantage over Thoulos.

Part C

Please pick and answer only ONE out of the two questions below. If you answer more than one question, then the question with the lowest mark will count to your score.

What are the main forces that cause the erosion of profits and competitive advantage for firms in the long run?

Provide and briefly describe three of the seven main impediments to imitation.