Market and Information Economics

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Dominic Carroll
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1 Market and Information Economics Preliminary Examination Department of Agricultural Economics Texas A&M University January 2017 Instructions: This examination consists of six questions. You must answer the first question and you must answer four of the remaining five questions (i.e. answer four of the questions numbered 2-6). Each question answered (five in total) has a weight of 20% in the final examination score. Please read through the entire examination before making a decision on the particular set of five questions you actually answer. The examination proctor will review the content of the exam at the beginning of the time period (9:00 am). He or she will answer general questions for the entire set of students writing this prelim. You have until 1:15 pm to complete the exam. Good Luck!

2 You Must Answer this Question 1. A completely new resort town is being built, and a single firm has been awarded the right to build and run all the restaurants. The firm expects T tourists to eat at the restaurants once a day, as well as L local people living and working in the town. It expects tourists to pay at most p t for a meal and to choose restaurants randomly, and it expects locals to pay at most p l < p t and to eat only at the cheapest restaurants. a. If it costs a fixed sum $F to build a restaurant but meals are produced at zero marginal cost, how many restaurants does the firm build? (Hint: Discuss if the firm should price-discriminate or not.) b. How will the number of restaurants change if it turns out that the firm underestimated the number of local people eating at the restaurants?

3 Answer four of the following five questions 2. You have the following two fractional-factorial experimental designs for a discrete experiment: Design 1 X1 X2 X3 X4 Design 2 X1 X2 X3 X a) In terms of efficiency, which design is better? b) Can efficiency be increased for any of the designs? Please explain your answer. c) If you include an intercept on each design, would D-efficiency increase, decrease, or stay the same?

4 3. For the Logit model: a) Derive the log-likelihood function b) Is the log-likelihood function for the logit model: i. Always positive? ii. Always negative? iii. Sometimes positive/sometimes negative? c) How are the parameter estimates interpreted in a Logit model?

5 4. Policy makers in Texas are concerned that oil and gas development in the state has lowered air quality, and would like to estimate the economic effects of air quality declines. In particular, policy makers are concerned about the relationship between air quality and property values. a. Suppose you have unlimited funding and carte blanche approval from IRB. Describe the ideal field experiment to estimate the effect of air pollution on property values. b. Suppose you regress property values on air pollution measures and covariates that control for observable differences across location. You find positive effects of air quality on property values, but those estimates vary widely by specification. Describe in detail why you might be skeptical about the results from this model. c. In 1970, the Federal Clean Air Act (CAA) set air quality standards for common pollutants. In counties where pollution levels exceeded the CAA standard ( nonattainment counties ), major polluters were required to invest in abatement technologies. There was no policy intervention in counties with pollution levels below the CAA standards ( attainment counties ). Describe how you would use county-level attainment designations to estimate the effect of air quality on housing prices. Assume you also have county-level data on pollution levels, housing values, and demographics. Provide a detailed description of the model, assumptions, and any other data you would need.

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7 6. In the United States it has been common for producers of agricultural commodities to engage in generic advertising of the commodity they produce for the purpose of increasing sales to consumers. Examples of such practice are cattle producers promoting beef, orange growers promoting orange juice, cotton producers promoting cotton products and hog producers promoting pork and pork products. You have been asked by one of these commodity production groups, say cotton producers, to assess the economic benefits to cotton farmers (producers) of the generic cotton advertising program, which has been going on in the US for the last thirty years. i. Design a theoretical model to help you isolate the effect of these advertising expenditures on cotton product sales. ii. Discuss the data you would need (in addition to advertising expenditures over the last thirty years) to quantify the underlying relationships in your model. iii. Propose an econometric method for estimating the effects theoretically defined in part i with the data defined in part ii. Be sure to account for the fact that you will be using observational data over all or at least some of the years

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FIGURE 1-2

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FIGURE 1-2 Questions of this SAMPLE exam were randomly chosen and may NOT be representative of the difficulty or focus of the actual examination. The professor did NOT review these questions. MULTIPLE CHOICE. Choose