# Business Economics

# PART A (40 points in total)

Answer ALL of the following Questions. Please choose ONE (and only one) available answer for each one of them. Choosing more than one option is treated as a wrong answer. List your chosen option in your answer booklet(s).

- Pulsar Plc is considering of exporting its products to the Swedish market. It expects to earn an annual accounting profit of £200m from doing so. It has also the option to begin exporting to India, Brasil or South Africa, but it has the production capacity for only one of the four possible markets (including Sweden). The expected annual accounting profit for the above three markets is £250m, £200m, and £150m respectively. On the basis of this information, the economic profit of exporting to Sweden is equal to:
- -£50m.
- £0m.
- £50m.
- £200m.

- If the marginal cost is above the average cost at a certain level of production and the firm decides to increase output, then:
- The average cost will increase but the marginal cost will decrease.
- Both the average and the marginal cost will increase.
- The average cost will increase but the average cost will decrease.
- Both the average and the marginal cost will decrease.

- Which one of the following conditions you would
*least*expect in a supply-driven market?- Highly standardized products.
- Massive market size.
- Big corporate customers.
- Fast technological change.

- Samsung sells its 16in monitors to Apple for £85 per screen. Its estimated cost is £49 and Apple is willing to pay up to £99. The value creation (VC) and consumer surplus (CS) in this case are equal to:
- VC=£50 , CS=£14.
- Impossible to say.
- VC=£36 , CS=£14.
- VC=£99 , CS=£36.

- Which one of the following is not an element of the five forces framework? a. Internal rivalry.
- Supplier power.

- The market for social-media-monitoring software exhibits very strong network externalities: The firm with the highest market share
*doubles*its market share every year. It took Rogue Inc 20 years to obtain 100% market share and become a monopoly. How may years did it take for Rogue Inc to obtain 25% market share?

- In order to increase the creativity of its staff, Google invested in a highly unique headquarters building, brimming with indoor leisure activities and places for staff to socialize. What type of asset-specific investment is this?
- Site-specific investment.
- All other options are correct.
- Physical asset investment.
- Human asset investment.

- The two most important types of innovation risk for businesses are:
- Funding risk and fire risk.
- Regulation risk and insurance risk.
- Project-completion risk and methodology-correlation risk.
- Ethical risk and supply-chain risk.

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# PART B (30 points in total)

- ǯ ȋȌ below:

- How much is the fixed cost of production for Ouroboros? (5 points)

- If q=5,000, how much is the total cost for Ouroboros? (5 points)

- Evaluate the marginal cost for Ouroboros when q=3,000. (5 points)

- For this part, suppose that Ouroboros has two corporate customers. The first

ǯ demand as a function of ǯ
ܦ_{}ሺሻ ൌ ͳͲǡͲͲͲ െ and the second corporationǯ
ܦ_{}ሺሻ ൌ ʹͲǡͲͲͲ െ .

ǯ maximum possible profit level. (15 points)

- HealthLife and Voltality are competing in a patent race for a new generation of anti-ageing products. Each one of them needs to pick one of two research approaches. The first approach (X1), is fully deterministic and it will take 10 years to complete. The second one, (X2) is probabilistic and it has a probability of 60% to complete in 5 years and a probability of 40% to complete in 20 years. X2 is statistically independent, i.e. if both companies select it, then the outcome for one company is independent of the outcome for the other. Moreover, if one company achieves the innovation before the other then it will enjoy the advantage of being a monopolist for some period of time and it will generate expected profit of £40bn. The other company gets nothing in this case. Finally, if the two companies complete the innovation at the same time, they will have to share the market and, due to price competition, each one will generate expected profit of £18bn.

- Suppose that HealthLife select X1. Assuming that both companies are risk-neutral, i.e. they evaluate their options on the basis of expected profits, which approach does

Voltality prefer to take? (5 points)

- Find what is the likely outcome of its patent race in terms of selected approaches from

the two companies. (10 points)

- Suppose that the two companies also compete in a different patent race, which is fully probabilistic and there is only one available methodology. HealthLife invests
_{ி}and Voltality invests ܫ_{}amount of money in the race. The winner gets a market worth of £100 bn and the loser gets nothing. The probability that each company has to win the patent race depends on the investment of both companies and it is given by:

Find how much the two companies will invest in this patent race, their chances of winning it, and their expected profit from participating in this patent race. (15 points)

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# PART C (30 points in total)

- With the use of an example, briefly explain the main difference between the ex-ante and the ex-post opportunity cost of capital. Why does this matter for the evaluation of an

investment decision? (15 points)

- In what ways can managers utilise the distinction between ex-ante and ex-post

ǯ? (15 points)

- Briefly describe the managerial support framework for vertical integration and

explain its usefulness for managerial decisions. (15 points)

- How can it assist managers in setting-up and sustaining their strategic positioning?

(15 points)

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**END OF PAPER **