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2018 past paper Questions
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This is the past paper for EC231 taken in 2018
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EC2310UNIVERSITY OF WARWICK
Summer Examinations 2017/18
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. Consider two firms (𝑗 = 0, 1) located at 𝑎𝑗 along the unit interval [0,1] and a unit mass
of consumers uniformly distributed between them. The preferences of a consumer
located at point 𝑥 ∈ [0,1] are determined by their underlying preferences for the two
goods (𝑈𝑗 , assumed not to depend on 𝑥), the prices of the two goods (𝑝𝑗 ), the distance
from the consumer (𝑥) to the firms and a quadratic ‘transport cost’ from 𝑥 to each of
2
the firms (𝑡(𝑎𝑗 − 𝑥) ): in other words, a customer at x will buy from firm 0 if 𝑈0𝑥 − 𝑝0 −
𝑡(𝑎0 − 𝑥)2 > 𝑈1𝑥 − 𝑝1 − 𝑡(𝑎1 − 𝑥)2 .
Assume first that all customers regard both goods as identical (𝑈0 = 𝑈1 = 𝑈 ̅ for all 𝑥),
and that firms choose locations 𝑎𝑗 in the first stage and prices 𝑝𝑗 in the second stage.
(a) Given the firms’ locations, find an expression giving the location of the consumer
who is just indifferent between the two firms and use this to derive the sales by
each firm as a function of their locations and prices. (2 marks)
(b) If the firms have identical and constant marginal costs 𝑐 (so the cost of producing a
quantity 𝑞 is 𝑐𝑞) solve for the equilibrium prices for given locations (𝑎𝑗 ) (5 marks)
1 (Question 1 continued overleaf)
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