Question 1

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs.It faces an inverse demand function given by P = 50 − Q.Suppose fixed costs rise to $400.What happens in the market?

Accepted Answer

Fixed costs do not affect the marginal cost of production or the pricing decision in the short run for a monopoly. The firm's decision on output and pricing is based on marginal costs and the demand curve, not fixed costs.

Question 2

Which of the following is true for perfect competition but not true for monopolistic competition and monopoly?

Accepted Answer

In perfect competition, price (P) equals marginal cost (MC) because firms are price takers and can only sell at the market price, which is determined by the intersection of the industry supply and demand curves. In monopolistic competition and monopoly, firms have some control over the price due to product differentiation and lack of competition, respectively, so P does not necessarily equal MC.

Question 3

Cinemas sometimes give senior citizens discounts.What is the possible privately motivated purpose for them to do so?

Accepted Answer

Seniors have a more flexible schedule and may be more likely to attend movies during non-peak hours, which benefits the cinema by increasing ticket sales during slower times. Additionally, seniors may be on fixed incomes and offering discounts can incentivize them to choose the cinema over other forms of entertainment, ultimately increasing revenue for the cinema.

Question 4

Suppose P = 20 − 2Q is the market demand function for a local monopoly.The marginal cost is 2Q.The firm currently uses a standard pricing strategy.Which of the following will allow the firm to enhance the profits?

Accepted Answer

The answer of Suppose P = 20 − 2Q is...

Question 5

Which of the following pricing strategies does NOT usually enhance the profits of firms with market power?

Accepted Answer

Marginal cost pricing involves setting prices equal to the marginal cost of producing the product, which leads to no mark-up and zero profits. Firms with market power, who have the ability to set prices higher than marginal cost, would not want to use this strategy as it would actually decrease their profits. In contrast, price matching, cross-subsidies, and two-part pricing all have the potential to enhance the profits of firms with market power.

Question 6

The idea of charging two different groups of consumers two different prices is practiced in:

Accepted Answer

Charging different prices to different groups of consumers is known as price discrimination.

Question 7

You are the manager of a gas station and your goal is to maximize profits.Based on your past experience,the elasticity of demand by Texans for a car wash is −4,while the elasticity of demand by non-Texans for a car wash is −6.If you charge Texans $20 for a car wash,how much should you charge a man with Oklahoma license plates for a car wash?

Accepted Answer

Since the elasticity of demand for non-Texans is higher, their demand is more sensitive to changes in price. This means that if we increase the price of a car wash for non-Texans, their demand will decrease more than the decrease in demand by Texans if we increase the price for them.

Therefore, we can charge more for non-Texans without a significant decrease in demand. To find the optimal price for the man with the Oklahoma license plates, we can use the price elasticity formula:

Price elasticity of demand = (% change in quantity demanded) / (% change in price)

We know that the elasticity of demand for non-Texans is -6 and we need to find the price that would make the elasticity for the man with the Oklahoma license plate -6 as well. Let x be the price we charge for the man with Oklahoma license plates.

-6 = ((Qd_Oklahoma/Qd_Texans) - 1) / ((x/$20) - 1)

Simplifying this equation, we get:

Qd_Oklahoma / Qd_Texans = 3/2 * (x/20) - 5/2

We know that Qd_Texans will not change since we are only changing the price for the man with Oklahoma license plates. We can assume that Qd_Texans is 1 (for simplicity). So,

Qd_Oklahoma = 3/2 * (x/20) - 5/2

We want to find x when the price elasticity for the man with Oklahoma license plates is -6, so we can use the formula:

Price elasticity of demand = (% change in quantity demanded) / (% change in price)

-6 = ((Qd_Oklahoma/1) - 1) / ((x/$20) - 1)

Simplifying this equation, we get:

Qd_Oklahoma = 6x/5 - 6

Substituting this into our equation for Qd_Oklahoma, we get:

3/2 * (x/20) - 5/2 = 6x/5 - 6

Solving for x, we get:

x = $18

Therefore, we should charge the man with an Oklahoma license plate $18 for a car wash.

Question 8

Which of the following statements is true?

Accepted Answer

The profit-maximizing markup is higher for less elastic demand because the seller can increase the price without causing a significant decrease in demand. Conversely, if the demand is more elastic, the seller cannot increase the price so much since it would cause a significant decrease in demand. Therefore, the more elastic the demand, the lower the profit-maximizing markup.

Question 9

One of the conditions under which price discrimination is profitable is:

Accepted Answer

To successfully implement price discrimination, a firm must be able to differentiate between consumer types, prevent resale of the good, and identify differences in demand elasticities. Therefore, all of the statements associated with this question are correct.

Question 10

Suppose P = 20 − 2Q is the market demand function for a local monopoly.The marginal cost is 2Q.If fixed costs are zero and the firm engages in two-part pricing,the most profits the firm will earn is:

Accepted Answer

To maximize profits, the local monopoly should charge a price that is equal to its marginal cost of production. In this case, the marginal cost is 2Q.

The monopoly is engaging in two-part pricing, which means it is charging a fixed fee (F) in addition to per-unit pricing (P). The formula for total revenue in this case is:

TR = (P - 2Q)Q + F

To maximize profits, the monopoly should set P = 2Q, which means that the per-unit price should be equal to the marginal cost.

Substituting P = 2Q into the formula for total revenue, we get:

TR = (2Q - 2Q)Q + F 
TR = F

Therefore, the total revenue generated by the monopoly is equal to the fixed fee (F). To maximize profits, the monopoly should set F as high as possible without discouraging consumers from participating.

Since the demand function is P = 20 - 2Q, we can solve for Q in terms of P:

P = 20 - 2Q 
2Q = 20 - P 
Q = 10 - 0.5P

We can plug this equation for Q into the formula for total revenue:

TR = (P - 2Q)Q + F 
TR = (P - 2(10 - 0.5P))(10 - 0.5P) + F

To maximize profits, we need to find the value of P that maximizes total revenue. We can do this by taking the derivative of TR with respect to P and setting it equal to zero:

dTR/dP = -3P/2 + 30 = 0 
P = 20

Therefore, the per-unit price should be $20, and the quantity demanded will be Q = 10 - 0.5P = 5.

To find the optimal fixed fee, we can plug in the values of P and Q into the formula for total revenue:

TR = (P - 2Q)Q + F 
TR = (20 - 2(5))(5) + F 
TR = 50 + F

Therefore, the total revenue is $50 + F. To maximize profits, the monopoly should set F = $25, which will result in total revenue of $75.

The monopoly's profit will be equal to total revenue minus total cost, which in this case is just total revenue since fixed costs are zero:

Profit = TR - TC 
Profit = $75 - $0 
Profit = $75

Therefore, the most profits the firm will earn is $75, which corresponds to choice C.

Question 11

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs.It faces an inverse demand function given by P = 50 − Q.Which of the following is the marginal revenue function for the firm?

Accepted Answer

The marginal revenue (MR) function can be derived from the inverse demand function, P = 50 - Q, by doubling the slope of the demand curve. Therefore, MR = 50 - 2Q.

Question 12

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs.It faces an inverse demand function given by P = 50 − Q.What are the profits of the monopoly in equilibrium?

Accepted Answer

The answer of A monopoly produces widgets at a marginal...

Question 13

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs.It faces an inverse demand function given by P = 50 − Q.The demand elasticity of a widget at the monopoly price and quantity is:

Accepted Answer

The answer of A monopoly produces widgets at a marginal...

Question 14

A new firm successfully enters a three-firm Cournot oligopoly without changing the demand and cost structures.The new price becomes:

Accepted Answer

The answer of A new firm successfully enters a three-firm...

Question 15

Which of the following is NOT a condition for a firm to engage in price discrimination?

Accepted Answer

The condition that consumers be sincere in revealing their true natures is not necessary for price discrimination to occur. In fact, firms often use indirect methods, such as observing purchasing patterns or demographic information, to identify consumer types and set prices accordingly.

Question 16

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs.It faces an inverse demand function given by P = 50 − Q.The monopoly price is:

Accepted Answer

To find the monopoly price, we first determine the quantity where marginal revenue (MR) equals marginal cost (MC). The inverse demand function is P = 50 - Q, so the total revenue (TR) is P*Q = (50 - Q)Q. The marginal revenue (MR) is the derivative of TR with respect to Q, which is MR = 50 - 2Q. Setting MR equal to MC (which is $10) gives 50 - 2Q = 10, solving for Q gives Q = 20. Substituting Q = 20 back into the demand function gives P = 50 - 20 = $30.

Question 17

A monopoly producing a chip at a marginal cost of $6 per unit faces a demand elasticity of −2.5.Which price should it charge to optimize its profits?

Accepted Answer

Given the demand elasticity (E) of -2.5 and the marginal cost (MC) of $6, the monopoly can optimize profits by setting the price (P) using the formula P = MC / (1 + 1/E). Substituting the given values, P = $6 / (1 + 1/(-2.5)) = $10.

Question 18

In a Cournot oligopoly with N firms and identical marginal costs,the relationship between the price elasticity of market demand and that of the firm is:

Accepted Answer

The price elasticity of market demand is the same for all firms in a Cournot oligopoly, while the price elasticity of an individual firm depends on its own quantity produced and market share. In this scenario, all firms have identical marginal costs, so they will produce the same quantity and have an equal market share. Therefore, the price elasticity of each firm will be the same and proportional to the inverse of the number of firms in the market. This gives us the relationship E_M = E_F/N.

Question 19

Suppose P = 20 − 2Q is the market demand function for a local monopoly.The marginal cost is 2Q.The local monopoly tries to maximize its profits by equating MC = MR and charging a uniform price.What will be the equilibrium price and output?

Accepted Answer

To find the equilibrium price and output, we need to equate MC = MR:
MC = 2Q
MR = P + dP/dQ * Q
dP/dQ = -2 (since P = 20 - 2Q, the derivative of P with respect to Q is -2)
MR = 20 - 4Q
Equating MC and MR, we get:
2Q = 20 - 4Q
6Q = 20
Q = 3.33
Substituting Q back into the demand equation, we get:
P = 20 - 2(3.33)
P = $13.33
Therefore, the equilibrium price and output are $13.33 and 3.33 units respectively. Therefore, the correct choice is C.

Question 20

You are the manager of a Mom and Pop store that can buy milk from a supplier at $3.00 per gallon.If you believe the elasticity of demand for milk by customers at your store is −4,then your profit-maximizing price is:

Accepted Answer

The formula for profit maximization is Marginal Revenue = Marginal Cost. Here, the supplier price is $3.00 per gallon, so the marginal cost is $3.00. 
We need to find the profit maximizing price using the elasticity of demand formula: 
Elasticity = (% Change in Quantity Demanded) / (% Change in Price)
-4 = (% Change in Quantity Demanded) / (% Change in Price)
We know that our goal is to increase revenue, so we want to increase the price. Given the elasticity of demand, a 1% increase in price leads to a 4% decrease in quantity demanded. This means that when we increase the price from $3.00 to $4.00, the quantity demanded will decrease by 16%. 
Now, let's look at the revenue and profit. 
At $3.00 price: Quantity demanded = Q1
Revenue = $3.00 * Q1
Profit = Revenue - Cost = $3.00 * Q1 - $3.00 * Q1 = $0
At $4.00 price: Quantity demanded = Q2 = 0.84Q1 (Q1 decreases by 16%)
Revenue = $4.00 * Q2 = $4.00 * 0.84Q1 = $3.36Q1
Profit = Revenue - Cost = $3.36Q1 - $3.00 * Q1 = $0.36Q1

Since we want to maximize profit, we need to choose the price that gives us the highest profit. In this case, the profit maximizing price is $4.00. Therefore, the answer is (C) $4.00.

Quiz 11: Pricing Strategies for Firms With Market Power