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Exam 3 - Industrial Organization Exam 3 Instructor Nick...

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Industrial Organization: Exam 3 Instructor: Nick Galunic 23 November 2009 Instructions: This is a ”closed book, closed notes” exam. Calcu- lators are not permitted. Turn your cell phones off and put them away. Pencil use is recommended but not required. If you cannot get the arithmetic, just give your answers in an unsimplified form. For example, you may write 4(3) 3 . Write your answers in the space provided and limit open responses to a few sentences. Write your name on all pages. When you are asked to prove a statement, I expect you to present a concise mathematical response which es- tablishes the statement unequivocally. When you are asked to show the truth of a statement, come up with a simple example that jus- tifies it. Show all work and submit with the exam. You have eighty minutes. 1
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Question 1: Two countries are run by their respective production sectors. In other words, these are “corporatocracies.” There is growing concern about pollution levels. If firm A, representing country A, and firm B, representing country B agree on new pollution control legislation, social welfare goes up, giving a payoff of 20 to each. If country A commits to a climate change bill while country B does not, country A is at a competitive disadvantage. Payoffs are, in this case, 5 to country A and 30 to country B. If country
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