Examen de Economia de L'empresa UPF 2011 · Final Exam Business Economics - December 2011

Short Question 1 (6 points). Consumer rationality and search costs

A buyer walks out of an electronics store after acquiring a specific TV set. When questioned whether that model was the absolute optimal choice on the market, the buyer replies: “I cannot be certain; I simply acquired the first television that satisfied my requirements instead of examining every alternative on display.”

Based on this statement, can we conclude that the consumer is acting sub-optimally from an economic perspective? True or False? Briefly justify your answer.

True

False

Short Question 2 (6 points). Disclosure of negative news and the asymmetric value function

During a political campaign, a candidate sequentially acknowledged multiple personal scandals over several months, revealing them one at a time. This communication strategy can be explained by applying the principles of the asymmetric value function from Prospect Theory.

True or False? Provide a concise justification.

True

False

Short Question 3 (6 points). Labor costs vs. transaction costs in outsourcing

A manufacturing company located in Alicante wants to focus on net design and outsource net production to an Indian contractor. This subcontracting will reduce total production expenses as a consequence of a reduction in transaction costs, given that hourly manufacturing wages in India are one-tenth of those in Alicante.

True or False? Briefly justify your reasoning.

True

False

Short Question 4 (6 points). Mutual trust and specialization

Degrees of specialization among members of a group who trust each other not to engage in opportunistic behavior should be higher than among groups of unrelated individuals who are uncertain about opportunistic risks.

True or False? Briefly justify your answer.

True

False

Short Question 5 (6 points). Bailouts and incentive distortion

Consider the following two commentaries regarding financial rescues during an economic crisis:

An article argues that if the Central Bank assists governments that engaged in excessive public spending, it signals that accumulating large deficits is harmless because an institutional rescue will always arrive.

An editorial in a financial magazine states: “the key issue is that the offer of external assistance will weaken the urgency for distressed nations to implement structural reforms.”

Short Question 6 (6 points). Definition of residual loss in agency theory

Under agency theory, the residual loss corresponds to the difference between monitoring expenditures and safeguarding (bonding) expenditures.

True or False? Provide a brief justification.

Short Question 7 (6 points). Asset specificity and quasi-rents

Diwali Inc., an Indian manufacturer, is contracted to produce specialized nets for Eurored S.A. (Alicante) after investing in specific machinery designed for that contract. Subsequently, the Indian authorities pass safety and manufacturing regulations requiring all fishing nets produced domestically to comply with European Union norms. Following this regulatory harmonization, Eurored’s appropriable quasi-rent will decline.

True or False? Provide an economic justification.

True

False

Short Question 8 (6 points). Adverse selection vs. moral hazard in dining choices

Two tourists in New Zealand must choose between two restaurants for dinner. Lacking information about which venue maintains superior cleanliness standards, they decide to dine at the cheaper establishment, which happens to have substandard hygiene conditions. This situation represents an instance of asymmetric information and moral hazard.

True or False? Justify your answer.

True

False

Short Question 9 (6 points). Quality assurance: pet food vs. pizza

A producer of premium-quality pet food and a manufacturer of premium-quality artisanal pizza face identical problems when it comes to guaranteeing and signaling the quality of their products to consumers.

True or False? Provide a brief justification.

True

False

Short Question 10 (6 points). Incentive schemes and free-riding in teamwork

Rosa and Modest pick fruit on an agricultural estate. The farm manager considers two alternative payment schemes:

Pay Rosa €0.10 for each piece of fruit she picks, and pay Modest €0.10 for each piece of fruit he picks.

Pay a team rate of €0.10 per piece of fruit picked, divided equally (€0.05 each) regardless of who harvested it.

Total fruit harvested under Scheme 1 will most likely be greater than under Scheme 2. True or False? Justify your response.

True

False

Sr. Pallerols, a 48-year-old corporate engineer, has developed in his free time an innovative, patented food product dubbed FRESQUIA with major commercial potential. He is evaluating four distinct options:

Option 1: Sell the patent outright.

Option 2: License production rights to interested manufacturers for a royalty of 1 cent per unit produced.

Option 3: Form a 50/50 joint venture with Nestlé. Sr. Pallerols contributes a temporary operating license for FRESQUIA; Nestlé expands an existing manufacturing plant. Management is handled entirely by Nestlé’s current executive team.

Option 4: Create an independent startup company with 4 investors who contribute 50% of the financial capital, while Sr. Pallerols contributes the remaining 50% plus a permanent assignment of the patent. The company will hire 100 workers, a professional CEO, and 5 industry managers.

11 Practice Case - Question 1 (10 points). Economic returns per option for Sr. Pallerols

What does Sr. Pallerols obtain in economic terms under each of the four alternatives?

1.

2.

3.

4.

Sr. Pallerols, a 48-year-old corporate engineer, has developed in his free time an innovative, patented food product dubbed FRESQUIA with major commercial potential. He is evaluating four distinct options:

Option 1: Sell the patent outright.

Option 2: License production rights to interested manufacturers for a royalty of 1 cent per unit produced.

Option 3: Form a 50/50 joint venture with Nestlé. Sr. Pallerols contributes a temporary operating license for FRESQUIA; Nestlé expands an existing manufacturing plant. Management is handled entirely by Nestlé’s current executive team.

Option 4: Create an independent startup company with 4 investors who contribute 50% of the financial capital, while Sr. Pallerols contributes the remaining 50% plus a permanent assignment of the patent. The company will hire 100 workers, a professional CEO, and 5 industry managers.

12 Practice Case - Question 2 (10 points). Asset specificity and hold-up hazards

In which of the four proposed options would issues related to specific assets (hold-up / opportunism) arise? Explain why these issues emerge in those cases and why they do not occur in the other options.

a)

b)

Sr. Pallerols, a 48-year-old corporate engineer, has developed in his free time an innovative, patented food product dubbed FRESQUIA with major commercial potential. He is evaluating four distinct options:

Option 1: Sell the patent outright.

Option 2: License production rights to interested manufacturers for a royalty of 1 cent per unit produced.

Option 3: Form a 50/50 joint venture with Nestlé. Sr. Pallerols contributes a temporary operating license for FRESQUIA; Nestlé expands an existing manufacturing plant. Management is handled entirely by Nestlé’s current executive team.

Option 4: Create an independent startup company with 4 investors who contribute 50% of the financial capital, while Sr. Pallerols contributes the remaining 50% plus a permanent assignment of the patent. The company will hire 100 workers, a professional CEO, and 5 industry managers.

13 Practice Case - Question 3 (10 points). Agency and information problems

Select one option between 1 and 2, and one option between 3 and 4. For each chosen option, identify an agency or asymmetric information problem that could occur and suggest a contractual or organizational mechanism to solve it.

Part A: Choose between Option 1 and Option 2

Option 1

Option 2

Part B: Choose between Option 3 and Option 4

Option 3

Option 4

Sr. Pallerols, a 48-year-old corporate engineer, has developed in his free time an innovative, patented food product dubbed FRESQUIA with major commercial potential. He is evaluating four distinct options:

Option 1: Sell the patent outright.

Option 2: License production rights to interested manufacturers for a royalty of 1 cent per unit produced.

Option 3: Form a 50/50 joint venture with Nestlé. Sr. Pallerols contributes a temporary operating license for FRESQUIA; Nestlé expands an existing manufacturing plant. Management is handled entirely by Nestlé’s current executive team.

Option 4: Create an independent startup company with 4 investors who contribute 50% of the financial capital, while Sr. Pallerols contributes the remaining 50% plus a permanent assignment of the patent. The company will hire 100 workers, a professional CEO, and 5 industry managers.

14 Practice Case - Question 4 (10 points). Major sources of transaction costs

For each of the four alternatives, identify what aspects would generate the largest transaction costs (both coordination and motivation costs) and explain why.

1.

2.

3.

4.