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EC231 2020 paper
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EC2310UNIVERSITY OF WARWICK
Summer Examinations 2019/20
Industrial Economics 1: Strategic Behaviour
Time Allowed: 2 hours.
Answer TWO questions from Section A (60 marks total) and ONE question from Section B
(40 marks). Answer Section A questions in one booklet and Section B questions in a
separate booklet.
Approved pocket calculators are allowed.
Read carefully the instructions on the answer book provided and make sure that the
particulars required are entered on each answer book. If you answer more questions than
are required and do not indicate which answers should be ignored, we will mark the
requisite number of answers in the order in which they appear in the answer book(s);
answers beyond that number will not be considered.
Section A: Answer TWO questions
1. A firm has designed a new product which is significantly different from existing
products in the marketplace. Its market research people have estimated demand for
the product as q( p, A) 120 2 p 4 A0.5 where q is quantity sold, p is price and A is the
amount of advertising done. The production team assess the marginal cost will be 20
and the fixed costs of producing the product will be 1000.
(a) So far, the firm has had a policy of not advertising. Assuming they continue this
policy, what is the profit-maximising price? Will they go ahead to introduce the
product? (6 marks)
(b) The marketing team are keen to introduce the product with an advertising
campaign, to take advantage of the product’s predicted demand response to
advertising. The unit cost of advertising is 10. Calculate the new price and profit
and comment. (8 marks)
(c) Another team within the firm want to try an alternative strategy. They want to give
away a number of units of the product to “opinion formers”, who they anticipate
will promote the product through the opinion formers’ social media outlets. The
cost of this will be 700. The predicted effect on demand will be the same as if the
firm had spent 1000 on advertising. Assess this strategy in comparison with the
previous two approaches from the firm’s point of view. (10 marks)
1 (Question 1 continued overleaf)
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