Industrial OrganizationClemson Economics

Spring ‘06

Final Examination in Economics 424: The Organization of Industry

Rules: (1) Make sure that your name is at the top of the first page of your document. (2) Single space and number the pages. (3) Make sure that your answers are in the order that the questions are asked. (4) Remember that you are to do your own work. You may not work together or with any other person, though you may feel free to consult any published source. If you take passages directly from other people's work, you must quote and give a full citation. (5) Email me your completed answers within twenty minutes of the end of the examination period.

Notes: The optimal answer length varies considerably across questions. Try to be clear and responsive, but also succinct.

DO (1), (2) & (3) PLUS THREE MORE FROM (4) – (10). BONUS QUESTION AT END.

  1. Under what circumstances does a company go into bankruptcy? Under what circumstances does a firm dissolve and cease doing business? Is it normal for a bankrupt firm to shut down?
  1. Why is the concept of U-shaped average cost a good characterization of the nature of production within a firm?
  1. Bacon is packaged so that the buyer cannot see the amount of lean meat relative to fat. It is argued that this is an efficient suppression of information. I claim that the same argument can be made about makeup for women. Explain how makeup might efficiently suppress information. In particular, explain what the term “efficient” means in this context.

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  1. Title-loan firms offer high interest loans (the interest rate can exceed 200 percent per year) to high-risk customers. The title of a car often is used as collateral. If the borrower defaults on the loan, the company can repossess the car. Recently, the financial press has reported stories of poor people who have had their cars repossessed by title lending companies. Legislation is being proposed in some states to make this lending practice illegal. A proponent of the law made the following argument: “The market for loans is very competitive given all of the banks, savings and loans, and finance companies. Outlawing title lending will make poor people better off. It will motivate the lending companies to provide loans with less onerous terms. Thus low income people and people with bad credit histories will be able to obtain credit on more favorable terms.” Analyze the above argument, and be specific in your analysis to get full credit.
  1. Textbook publishers have traditionally produced both United States and international editions of most leading textbooks. The United States version typically sells at a higher price than the international edition. (a) Explain why publishers use this pricing scheme. (b) Explain how the internet might affect the ability of companies to implement this type of pricing policy. (c) What will be the effect on the price and quantity of textbooks if textbook publishers are forced to abandon this pricing policy? (d) Does a similar argument apply in the market for prescription drugs?
  1. Discuss the application of the Coase Theorem in the following settings: coastal development, restaurant smoking, and the depletion of timber in south Georgia (U.S.) compared to the Amazon rain forests.
  1. Payola, which is inducement paid by record companies to DJs to get playing time for songs, was made illegal in 1960. Was this a good law? Explain. Is payola from text-book publishers to college professors the same thing as payola to DJs?
  1. Predatory pricing has enjoyed a long life in antitrust economics. It first arose in the case of Standard Oil. More recently it came into play with Brown & Williamson. It is often argued that Wal-Mart engages in predatory pricing. Generally speaking, economists believe, following McGee, that the Court’s decision in Standard Oil was wrong, the decision in Brown & Williamson was correct, and that Wal-Mart does not engage in the practice. However, it is the case that when Wal-Mart enters a market, prices on some things fall deeply at first and then rebound. Explain why this is not evidence of predatory pricing. (McGee discusses this point.)
  1. Intellectual property is protected by patents, copyrights, trade-secret and trademark law. We say that intellectual property is a public good. How does this affect the nature of property right protection for intellectual property? What is the fundamental tradeoff faced by society in determining the degree to which these property rights are enforced? What tips the balance?
  1. Define the “the tragedy of the commons”; give some examples.

Bonus:

The deterrent effect of capital punishment has been empirically documented by economists many times. Even so, some people are still skeptical. What evidence would offer the strongest proof of a deterrent effect?

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x-final.doc; Revised: April 30, 2005 / M.T. Maloney