TP2 Exam (Reverse)

Question 1

• 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.

Answer 1

Exogenous Growth Theory

Question 2

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

Answer 2

Endogenous Growth Theory

Question 3

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

Answer 3

Pareto criterion

Question 4

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

Answer 4

Compensation principle

Question 5

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

Answer 5

Arrow, 1962: Externalities in production of knowledge.

Question 6

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

Answer 6

Grilliches, 1962: Inventions.

Question 7

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

Answer 7

Nelson, 1959: University research.

Question 8

• 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.

Answer 8

Arrow, 1962: ____ Effect

Question 9

• 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.

Answer 9

Gilbert and Newbury, 1982: _____ Effect

Question 10

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

Answer 10

Blundell et al., 1999: Competition and innovation

Question 11

• 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.

Answer 11

Aghion etc al., 2005: Competition vs Innovation graph

Question 12

• 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.

Answer 12

Denicolo, 1996: Patent length

Question 13

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

Answer 13

Bertrand competition

Question 14

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

Answer 14

Cournot competition

Question 15

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

Answer 15

Katz, 1985: Licensing

Question 16

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

Answer 16

Griliches, 1957: Diffusion pattern

Question 17

• 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.

Answer 17

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