Question 1

If the profit-maximizing markup factor in a six-firm Cournot oligopoly is 3,what is the corresponding market elasticity of demand?

Accepted Answer

The answer of If the profit-maximizing markup factor in a...

Question 2

Consider a monopoly facing a demand structure where the price elasticity of demand is −1.25.The optimal markup factor is:

Accepted Answer

The optimal markup factor (M) for a monopoly firm facing a demand curve with price elasticity (-ε) can be calculated using the following formula:
M = (1/ε)
In this case, the price elasticity of demand is -1.25, so the optimal markup factor would be:
M = (1/-1.25) = -0.8
However, since the markup factor must be a positive value, we take the absolute value of -0.8 which gives us 0.8.

We know that the optimal markup factor is equal to the ratio of the markup over marginal cost (M= P-MC/MC), meaning
M = (P - MC) / MC  
Rearranging the formula gives us:
P = (1 + M) MC
Substituting the value of M that we just calculated, we get:
P = (1 + 0.8) MC = 1.8 MC

Therefore, the best choice is C because the optimal markup factor for this monopoly is 1.8 times the marginal cost.

Question 3

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 Ohioans for a car wash is −3,while the elasticity of demand by non-Ohioans for a car wash is −1.5.If you charge Ohioans $9 for a car wash,how much should you charge a man with a Kentucky license plate for a car wash?

Accepted Answer

The answer of You are the manager of a gas...

Question 4

Suppose you are the marketing manager for Fruit of the Loom.An individual's inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25 − 3Q (in cents).If the cost to Fruit of the Loom to produce an item of women's underwear is C(Q)= 1 + 4Q (in cents),compute the number of women's underwear items that should be packaged together.

Accepted Answer

The answer of Suppose you are the marketing manager for...

Question 5

A monopoly produces widgets at a marginal cost of $20 per unit and zero fixed costs.It faces an inverse demand function given by P = 100 − 4Q.What are the profits of the monopoly in equilibrium?

Accepted Answer

To find the profit-maximizing quantity, we first need to set marginal cost equal to marginal revenue. The marginal revenue can be found by taking the derivative of the inverse demand function:
MR = dTR/dQ = 100 - 8Q
Setting MR = MC, we get:
100 - 8Q = 20
Solving for Q, we get:
Q = 10
Plugging Q back into the inverse demand function, we can find the price:
P = 100 - 4Q = 60
Total revenue is then:
TR = P*Q = 60*10 = 600
Total cost is simply:
TC = MC*Q = 20*10 = 200
Therefore, the profit is:
π = TR - TC = 600 - 200 = 400
The correct answer is therefore C) $400.

Question 6

You are the only pharmacist in a small town; the next closest drugstore is 50 miles away.The population in your town consists of young farmers and older retired families.You have noticed that the young farmers are less sensitive to price changes than the retired population.Specifically,you have found that the working population has an own price elasticity of demand of −2 and the retired farmers have an own price elasticity of −4.How can you use this information to your advantage?

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The answer of You are the only pharmacist in a...

Question 7

During spring break,students have an elasticity of demand for a trip to Las Vegas of −5.How much should an airline charge students for a ticket if the price it charges the general public is $660? Assume the general public has an elasticity of −3.

Accepted Answer

The answer of During spring break,students have an elasticity of...

Question 8

Suppose you are the marketing manager for Fruit of the Loom.An individual's inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25 − 3Q (in cents).If the cost to Fruit of the Loom to produce an item of women's underwear is C(Q)= 1 + 4Q (in cents),compute the profit Fruit of the Loom will earn by charging the optimal block price.

Accepted Answer

The answer of Suppose you are the marketing manager for...

Question 9

Suppose P = 60 − 3Q 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

The answer of Suppose P = 60 − 3Q is...

Question 10

A monopoly produces widgets at a marginal cost of $20 per unit and zero fixed costs.It faces an inverse demand function given by P = -100 − 4Q.Suppose fixed costs rise to $401.What happens in the market?

Accepted Answer

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

Question 11

Suppose you compete in a Cournot oligopoly market consisting of four firms.The equilibrium market price and quantity are $8 and 20 units,respectively.The marginal cost for each firm is $4.Based on this information,we know the price elasticity of the market demand is:

Accepted Answer

The answer of Suppose you compete in a Cournot oligopoly...

Question 12

Which of the following pricing strategies is NOT used in markets characterized by intense price competition?

Accepted Answer

Transfer pricing refers to the pricing of goods, services, and intangibles between related entities within a corporation or conglomerate. It is not a strategy typically used in markets characterized by intense price competition among different companies.

Question 13

You are a truck farmer and bring produce to a farmer's market every Wednesday.You have found that on a typical day,five other farmers bring their produce to market.Years of experience have taught you that you make the most money by pricing your produce at 1.15 times your marginal cost.What is your elasticity of demand in this Cournot oligopoly?
 What is the market elasticity of demand?

Accepted Answer

The answer of You are a truck farmer and bring...

Question 14

Suppose that the inverse demand for a downstream firm is P = -82 − 2Q.Its upstream division produces a critical input with costs of C_U(Q_d)= 3(Q_d )².The downstream firm's cost is C_d(Q)= 2Q.When there is no external market for the downstream firm's critical input,the downstream firm should produce:

Accepted Answer

The answer of Suppose that the inverse demand for a...

Question 15

What price should a firm charge for a package of five ties given a marginal cost of $5 and an inverse demand function P = 10 − Q by the representative consumer?

Accepted Answer

To find the optimal price, we first need to determine the quantity that maximizes profit. The inverse demand function is P = 10 - Q, where P is the price and Q is the quantity. The marginal cost (MC) is constant at $5. To maximize profit, set marginal revenue (MR) equal to marginal cost. The total revenue (TR) is P*Q = (10 - Q)*Q. Differentiating TR with respect to Q gives MR = 10 - 2Q. Setting MR = MC gives 10 - 2Q = 5, solving for Q gives Q = 2.5. Since the question asks for the price of a package of five ties, we need to double the quantity to 5 (as Q = 2.5 represents the optimal quantity for a single tie). Substituting Q = 5 into the inverse demand function gives P = 10 - 5 = $5. However, since this is the price per tie, and the question asks for the price of a package of five ties, we multiply $5 by 5, resulting in $25. My explanation contains a mistake in the final step; the correct approach involves directly using the determined optimal price per tie or package without incorrectly adjusting the quantity again. The correct interpretation should involve directly applying the demand function or profit-maximizing condition without the misstep in quantity adjustment for the package pricing.

Question 16

A monopoly produces X at a marginal cost of $20 per unit and charges a price of $50 per unit.Determine the elasticity of demand at the profit-maximizing price of $50.

Accepted Answer

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

Question 17

Which of the following pricing strategies is NOT used in markets with special cost and demand structures?

Accepted Answer

Low-price guarantees are a common pricing strategy used in markets with normal cost and demand structures. In markets with special cost and demand structures, such as those with peak demand periods or varying levels of customer budget constraints, pricing strategies such as peak-load pricing, cross-subsidization, and transfer pricing are often used to maximize revenue and efficiency.

Question 18

Suppose you are the marketing manager for Fruit of the Loom.An individual's inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25 − 3Q (in cents).If the cost to Fruit of the Loom to produce an item of women's underwear is C(Q)= 1 + 4Q (in cents),compute the price Fruit of the Loom should charge for a package of women's underwear.

Accepted Answer

To find the optimal price, we need to set marginal revenue (MR) equal to marginal cost (MC), and solve for Q. Then, we can plug Q back into the demand function to find the optimal price (P).

MR = dTR/dQ = d(P*Q)/dQ = P + Q*dP/dQ
MC = dTC/dQ = 4

Setting MR = MC:
25 - 3Q + Q*(-3) = 4
22 = 6Q
Q = 3.67

Plugging Q back into the demand function:
P = 25 - 3(3.67) = $11.99

However, the unit of the demand function is in cents, so the actual price would be $0.1199. Therefore, the optimal price for a package of women's underwear is $1.02, which is answer B.

Question 19

A local dentist read an article published by the American Dental Association estimating that the elasticity of demand for the representative dentist's services is −2.5.How much should the dentist mark up her price over marginal cost?

Accepted Answer

The answer of A local dentist read an article published...

Question 20

Consider a Cournot oligopoly consisting of four identical firms producing good X.If the firms produce good X at a marginal cost of $7 per unit and the market elasticity of demand is −2,determine the profit-maximizing price.

Accepted Answer

To determine the profit-maximizing price in a Cournot oligopoly, we need to use the following formula:

P = MC / (1 + elasticity of demand * (total industry output / individual firm's output))

In this case, we know that:
- Marginal cost (MC) = $7 per unit
- Elasticity of demand = -2
- There are four identical firms, so each firm's output is 1/4 of the total industry output

Plugging these values into the formula, we get:

P = 7 / (1 - 2 * (1/4))
P = 7 / (1/2)
P = 14

Therefore, the profit-maximizing price would be $14 per unit. However, we need to check if this price is feasible, given the cost structure and demand conditions. Since the marginal cost is $7 per unit, a price of $14 would result in a loss of $7 per unit. This means that we need to lower the price to increase profit.

The next step is to consider how the other firms will react to this price. In a Cournot oligopoly, each firm assumes that its rivals' outputs will remain constant when it sets its own output level. This means that each firm needs to consider the effect of its own output on the market price.

Assuming that each firm produces the same amount (1/4 of the total industry output), the total industry output will be 4 * (1/4) = 1. Therefore, the formula for the profit-maximizing price becomes:

P = 7 / (1 - 2 * (1))
P = 7 / (-1)
P = -7

This price is negative, which doesn't make sense in the context of the problem. It indicates that the demand is not strong enough to support a price that covers the firms' costs. Therefore, each firm will need to lower its output to increase the market price.

Assuming that each firm reduces its output by half (to 1/8 of the total industry output), the total industry output will be 4 * (1/8) = 1/2. The formula for the profit-maximizing price becomes:

P = 7 / (1 - 2 * (1/2))
P = 7 / (0)
P = undefined

This price is undefined, which also doesn't make sense. It indicates that the firms cannot collectively produce enough to satisfy demand, so the market price would be extremely high.

Given these results, we can conclude that the profit-maximizing price must be somewhere between $7 and $14 per unit. We can try different prices within this range to see which one yields the highest profit.

When we plug in a price of $8 per unit, we get: