Exam (elaborations)
Tentamen Economie (25 mei 2002)
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Exam block 3, Economics, April 25, 20021. (26 points)
In competitive markets demand and supply determine the market equilibrium.
a. What is a competitive market and which conditions make a market competitive?
b. Sketch the determination of market equilibrium in a graph.
c. Suppose that producers from abroad enter the market. The consequence is that
market supply increases which is shown as a shift in the supply curve. Draw this shift
of the supply curve in a (new) graph. What happens with the equilibrium price and
quantity (increase, decrease or stay the same)?
d. What would be the effect of the increase in supply on the equilibrium price and
quantity if the demand were completely inelastic?
2. (20 points)
a. Explain the hidden information problem for an insurance company that supplies
health insurance.
b. Insurance companies may also suffer from hidden action. Give an example of
hidden action and indicate clearly why this is an example of hidden action.
c. What are the similarities between hidden information and hidden action and what is
the main difference between the two?
3. (16 points)
In an auction the price mechanism assigns a particular good, or number of goods, to a
particular buyer. An example is the auctioning of UMTS frequencies for
telecommunication companies.
a. Why is an increasing bid auction not optimal for the seller?
b. What is meant by the ‘winner’s curse’ in the context of a sealed bid auction?
4. (22 points)
In the positive theory of agency the existence of several organizational forms is
explained. Team production is a condition for the explanation for the existence of the
entrepreneurial firm.
a. What is meant by team production in this context?
b. Explain how team production can be used to explain the existence of entrepreneurial
firms.
5. (16 points)
In transaction cost economics three dimensions of transactions which involve
transaction costs are distinguished.
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