Download Esame di Microeconomia avanzata (16 aprile 2004)

Economics, Organization, and Management
Examination Set (February 17th, 2014)
(Paolo Bertoletti)
Time: 90 minutes.
I)
Consider the problem of providing an input to a firm division, and suppose that only
the slope of the (linear) marginal benefit of such an input is known to the planning
division, which overestimates it. Assuming that the (linear) marginal cost is
perfectly known to be almost constant, discuss graphically which is the best
instrument to be used (either a quantity constraint or a price signal).
The situation is described in the following Figure.
MR*
MR
B
P
MC
D
C
E
A
Q
Q*
QP
The welfare loss induce by the use of the price signal P is equal to the area CDE, while on
the contrary the use of Q as a quantity constraint creates a welfare loss given by the larger
area ABC. Accordingly, the price signal should be preferred.
II)
Consider the business problem of introducing a new product for which N essential
input need to be used, starting from a launch date that is has to be chosen. Suppose
that the expected Revenue is given by the following formula:
R[Min{y1, …, yN}, Max{t1, …, tN}],
where R(y, t) increases wrt its first argument and decreases wrt its second argument,
and yi is the amount of input i that will be ready at date ti. Explain why this is an
example of a problem with design attributes.
yi = y and ti = t, i = 1, …, N, and this is the first element which defines a problem with design
attributes: a lot is known a priori about the optimal solution. The second element, which is the fact
that the most serious mistakes come from lack of fitness among variable, is also present. In
particular, it is pretty obvious that choices of yi < Min{y1, …, yi-1, yi+1, …, yN} and/or ti > Min{t1, …,
ti-1, ti+1, …, tN} cause very large profit losses, implying large waste of input provision and early
readiness.Explain what a “hold-up problem” is.
An hold-up problem is a contractual lack of commitment ability that opens the possibility of
successive opportunistic behavior by a trade counterpart. It commonly arises in presence of specific
sunk investments, and generally implies underinvestment with respect to the efficient level. Possible
solutions, in presence of contractual incompleteness, are vertical integration or the establishing of
long-term (implicit) contracts based on reputational mechanisms.