The intended learning outcomes of the assignment are:
Completion of this assignment will allow you to demonstrate having met the following module
learning outcome:
•LO2: Appraise theory and its application in a variety of international business and economic contexts
You are required to answer ALL FOUR questions of the assignment.
Question 1 (25 marks)
a) Outline the Random Growth Hypothesis and explain the implications of Girbat’s Law for the long-run trend in seller concentration. [10 marks]
b) Suppose in period 0 an industry comprises 8 equal-sized firms, each with sales of £12 millions. The assumed random growth process is as follows: in any subsequent year, each firm has an equal chance of either doubling or halving its sales. Show the validity of Gibrat’s law, using both CR4 and HHI indices after 3 periods [15 marks]
Question 2 (25 marks)
A market has a demand curve given by 𝑄 = 80 − 2𝑃. All suppliers have identical marginal cost, 𝑀𝐶 = 16, there are no fixed costs, and produce homogeneous goods.
a) For each of the following market structures, compute the output produced by each firm (if possible), the total industry output, the market price and each firms’ (if possible) profit.
i) There is only one firm in the industry (Monopoly) [2 marks]
ii) There are many small firms in the market (Perfect Competition) [2 marks]
iii) There are two firms in the industry (Firm A and Firm B), compete in quantities, and choose quantities simultaneously (Cournot duopoly) [2 marks]
iv) There are two firms in the industry (Firm A and Firm B), compete in quantities, and firm A moves first. (Stackelberg duopoly) [2 marks]
v) There are two firms in the industry (Firm A and Firm B), compete in prices, and choose prices simultaneously (Bertrand duopoly) [2 marks]
b) How the solutions would change in (iii), (iv) and (v) if 𝑀𝐶! = 16 and 𝑀𝐶” = 20?
[8 marks]
c) How the solutions would change in (iii) and (iv) if there are three firms with 𝑀𝐶! =
16and𝑀𝐶” =20and𝑀𝐶# =16? [7 marks]
Question 3 (25 marks)
Two Firms, Mac Havant’s and Fratton Burger must decide whether to put one of their restaurants in University Campus. The strategies are to “Enter” or “Don’t Enter”. If either firm plays “Don’t Enter”, it earns £0 profits. If one firm plays “Enter” and the other plays “Don’t Enter”, the firm that plays “Enter” earns £200,000 per year in profits and the firm that plays “Don’t enter” always yields £0 profits”. If both firms choose to play “Enter”, both lose £50,000 per year as there is not enough demand for two restaurants to make positive profits.
a) Construct the pay-off matrix [5 marks]
b) Is there a dominant strategy for any of the firms? [5 marks]
c) Is there a Nash equilibrium in pure strategies? If yes which one(s). [8 marks]
d) Find all Nash equilibria and draw best response graph for each of the firm. [7 marks]
