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2021 Exam Paper
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The exam paper for 2021 industrial 231
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EC2310UNIVERSITY OF WARWICK
Summer Examinations 2020/21
Industrial Economics 1: Strategic Behaviour
Time Allowed: 2 Hours
Read all instructions carefully- and read through the entire paper at least once before you
start entering your answers.
There are TWO Sections in this paper. Answer TWO questions in Section A (60 marks in
total) and ONE question in Section B (40 marks).
Approved pocket calculators are allowed.
You should not submit answers to more than the required number of questions. If you do,
we will mark the questions in the order that they appear, up to the required number of
questions in each section.
Section A: Answer TWO questions
1. A distributor (Zorro, Ltd.) supplies soft drinks to two retail shops. Zorro can buy the
drinks at a cost-price of per case and also faces fixed costs of . There are two
retailers = 1,2, with fixed costs of . Zorro, Ltd. supplies them with drinks at a
wholesale price of per case; the retail price can be determined from the (local)
market demand curve = + = − . Retailer chooses how many cases
to sell as a function of , and . Suppose
= 10; = 100; = 50; = 4; = 50; = 0.5
(a) First, assume that is set at a level that permits both retailers to operate
profitably. Find the profit-maximising wholesale price, equilibrium retail price,
corresponding retailer quantities and profits for Zorro and the two retailers.
Hint: Find each retailer’s best reply quantity ∗ , to the other retailer’s
quantity. Find the retailers’ equilibrium quantities as functions of in the
duopoly case where both retailers operate. (9 marks)
(b) At what wholesale price would Retailer 1 (the high-cost firm) just be priced out of
the market? At that price, what would be the retail quantity and price, and the
profits of Zorro and the retailers? (5 marks)
1
(Question 1 continued overleaf)
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