TP2 Exam

Question 1

Aggregate Production Function

Answer 1

DGP=A(K, L, anything else)
K = Capital
L = Labour
A = Technical Knowledge and Efficiency

Question 2

Exogenous Growth Theory

Answer 2

• The aggregate production function gives decreasing returns to any single factor.
• Provides constant returns when all factors increase in the same proportion.
• The investment rate is a key determinant of GDP.
  -High population growth = low income per person
  -Institutions set the long run steady state.

Question 3

Endogenous Growth Theory

Answer 3

• Adds human capital
• Constant MPK (Marginal Product Capital) achieved through spillovers.
• Private return does not equal private return.

Question 4

Consumer and Producer Surplus

Answer 4

• Price (Y) vs Quantity (X)
• Supply upward slope
• Demand downward slope
• Consumer surplus: triangle between demand, crossing point, and (Y)
• Producer surplus: triangle between supply, crossing point, and (Y)

Question 5

Pareto criterion

Answer 5

Not possible to make one person better off without making another worse off.

Question 6

Compensation principle

Answer 6

Pursue policies which produce the most surplus possible. Winners can then compensate the losers and still be better off.

Question 7

Sources of market failure

Answer 7

• Monopoly
• Asymmetric information
• Externalities
• Public goods

Question 8

Defining public goods

Answer 8

1) Non-rival: The marginal cost of its provision to an additional consumer is zero.
2) Non-excludable: You can’t exclude someone from using it, so charging for its use is difficult.

Question 9

Arrow, 1962: Externalities in production of knowledge.

Answer 9

• Indivisibilities: Only the inventor pays.
• Inappropriability: Selling knowledge is hard.
• Uncertainty: Unobserved research effort, moral hazard.

Question 10

Moral hazard

Answer 10

The risk of being dependant on the moral behaviours of others.

Question 11

Grilliches, 1962: Inventions.

Answer 11

• Care about useful knowledge or information and the factors determining its growth rate.
• Inventions are only one aspect of this.

Question 12

Nelson, 1959: University research.

Answer 12

It’s not that Universities can’t do applied research, but they’re better at basic research.

Question 13

Arrow, 1962: ____ Effect

Answer 13

• Replacement Effect
• Innovative activity is likely to be too little (from a society’s point of view) because innovators consider only the monopoly profit that the innovation brings and not the additional consumer surplus.
• Monopoly provides less incentive to innovate than a competitive industry.

Question 14

Gilbert and Newbury, 1982: _____ Effect

Answer 14

• If a monopolist has to worry about a new entrant using innovation.
• Cournot competition - so competing on quantity, the market decides price.
• The monopolist must now consider losing their monopoly as a cost, so they will innovate to prevent the new entrant.

Question 15

Blundell et al., 1999: Competition and innovation

Answer 15

Higher competition higher innovation, but usually the larger firms who innovate.

Question 16

Aghion etc al., 2005: Competition vs Innovation graph

Answer 16

• Low competition: Little innovation as firms earn moderate efforts.
• Medium competition: Innovate to escape competition.
• High competition: Schumpeterian effect - Become leader-follower industries, reducing incentives to innovate.

Question 17

Denicolo, 1996: Patent length

Answer 17

• The more competitive an industry, the more long, -narrow patents are desirable.
• Shorter the lower the cost of R&D
• The shorter the more elastic the demand.

Question 18

Hold up problem

Answer 18

The hold-up problem is a situation where two parties may be able to work most efficiently by cooperating but refrain from doing so because of concerns that they may give the other party increased bargaining power and thus reduce their own profits.

Question 19

Bertrand competition

Answer 19

Competing on price. The firm with the lowest price takes the entire market.

Question 20

Cournot competition

Answer 20

Competing on quantity, with the price set by the market.

Question 21

Licensing (pro/cons)

Answer 21

• Enable the development of complementary inventions.
• Follow-on innovation.
• No incentive if competition is Bertrand.
• Can be anticompetitive through fixed payments or royalties.

Question 22

Katz, 1985: Licensing

Answer 22

Social welfare is nearly always increased by licensing. It is desirable if total output increases as a result.

Question 23

Spillovers definition

Answer 23

Capturing benefits of other parties investment in knowledge without paying its full price.

Question 24

R&D co-operation methods

Answer 24

• As separate firms: High spillover = More incentive for R&D. Low spillover = Less R&D
• As a joint firm: Unambiguously beneficial.

Question 25

Drivers of diffusion

Answer 25

- Cost of adopting - Expected benefits - Network effects - Information and uncertainty - Regulation - Social: Goldbricking

Question 26

Griliches, 1957: Diffusion pattern

Answer 26

- Origin - Globe - Ceiling (Gradient decided by drivers)

Question 27

Indirect vs Direct network effects

Answer 27

- Direct: As the number of consumers increases, the utility of each consumer also increases. Cause switching costs in network markets. - Indirect: If size increases, users know the quality will increase. Are the consequence of switching costs in system markets.

Question 28

Rohlfs, 1974: Price, number of users - Network effects

Answer 28

- A network market will fail if the firm has costs and must charge p>peak of the curve - Two equilibriums, at fl one more customer will push the equilibrium to fh. -fl is a critical mass. You can use low or free introductory pricing to get here.