Question 1

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?
A)$6 per unit.
B)$8 per unit.
C)$10 per unit.
D)$12 per unit.

Accepted Answer

C

Question 2

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:
A)$5.
B)$10.
C)$25.
D)$50.

Accepted Answer

C

Question 3

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?
A)Engage in two-part pricing.
B)Engage in commodity bundling.
C)Engage in randomized pricing.
D)Engage in two-part pricing and engage in commodity bundling.

Accepted Answer

A

Question 4

Cinemas sometimes give senior citizens discounts.What is the possible privately motivated purpose for them to do so?
A)Purely because entrepreneurs are benevolent.
B)Senior citizens have a more elastic demand for movies than ordinary citizens.
C)Senior citizens lack recreational activities.
D)None of the statements associated with this question are correct.

Accepted Answer

Offering senior citizens discounts is a pricing strategy based on the assumption that senior citizens have a more elastic demand for movies than ordinary citizens. This means that they are more sensitive to changes in price than other age groups, and the discount may incentivize them to continue patronizing the cinema.

Question 5

Which of the following is not a condition for a firm to engage in price discrimination?
A)Consumers are partitioned into two or more types, with one type having a more elastic demand than the other.
B)The firm has a means of identifying consumer types.
C)The consumers are assured to be sincere in telling their true natures.
D)There is no resale market for the good.

Accepted Answer

All of the other conditions listed are necessary for a firm to engage in price discrimination. However, consumer sincerity in revealing their true natures is not a condition for price discrimination. The firm can still identify consumer types and set different prices based on their elasticity of demand even if some consumers are not sincere about their preferences.

Question 6

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:
A)-1.5.
B)-2.
C)-2.5.
D)2.

Accepted Answer

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

Question 7

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:
A)$30.
B)$20.
C)$10.
D)$40.

Accepted Answer

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

Question 8

The idea of charging two different groups of consumers two different prices is practiced in:
A)price discrimination.
B)two-part pricing.
C)price matching.
D)none of the statements associated with this question are correct.

Accepted Answer

The concept of charging two different prices from two different groups of consumers is known as price discrimination. It is a pricing strategy used by companies to maximize profits based on the different willingness to pay from different customer segments.

Question 9

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: A)E_M = E_F. B)E_M = NE_F. C)E_M = E_F/N. D)No deterministic relationship.

Accepted Answer

The price elasticity of market demand is the same for all firms in a Cournot oligopoly, so ES1U1B1MS1U1B0 = ES1U1B2MS1U1B0 = ... = ES1U1BNMS1U1B0. Therefore, the elasticity of each firm's own demand is ES1U1B1FS1U1B0/N, because each firm's output only affects a fraction of the market demand. So, ES1U1B1MS1U1B0 = ES1U1B1FS1U1B0/N.

Question 10

One of the conditions under which price discrimination is profitable is:
A)ability to identify consumer types.
B)inability to resell the good.
C)differences in demand elasticities.
D)all of the statements associated with this question are correct.

Accepted Answer

Price discrimination is profitable when the seller is able to identify consumer types, when consumers are unable to resell the good, and when there are differences in demand elasticities among the different consumer types. Therefore, all of the statements associated with this question are correct.

Question 11

Which of the following statements is true?
A)The more elastic the demand, the higher is the profit-maximizing markup.
B)The more elastic the demand, the lower is the profit-maximizing markup.
C)The higher the marginal cost, the lower the profit-maximizing price.
D)The higher the average cost, the lower the profit-maximizing price.

Accepted Answer

When demand is more elastic, the firm cannot raise the price too high without losing too many customers, so the profit-maximizing markup will be lower. Marginal cost affects the profit-maximizing quantity, not the price. Average cost is not directly related to the profit-maximizing price.

Question 12

Which of the following is true for perfect competition but not true for monopolistic competition and monopoly?
A)MC = MR.
B)P = MC.
C)Positive long run profits.
D)P = MC and positive long run profits.

Accepted Answer

In perfect competition, the price is equal to marginal cost (P = MC) in both the short and long run. This is also true in monopolistic competition and monopoly in the short run, but in the long run, firms in monopolistic competition and monopoly can have some pricing power and may not need to set price equal to marginal cost to maximize profits. However, in perfect competition, firms have no pricing power, so they must always set price equal to marginal cost in order to be competitive. Positive long run profits are possible in monopolistic competition if firms can differentiate their products and create some pricing power, and in monopoly because there are no close substitutes for the product. In perfect competition, there are no barriers to entry, so firms cannot earn positive long run profits.

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.Which of the following is the marginal revenue function for the firm?
A)MR = 60 - 2Q.
B)MR = 50 - Q.
C)MR = 100 - Q.
D)MR = 50 - 2Q.

Accepted Answer

The inverse demand function given is P = 50 - Q. 
We know that Marginal revenue (MR) is the derivative of the total revenue (TR) function with respect to quantity (Q).
TR = P * Q
Taking the derivative of TR w.r.t Q, we get
MR = d(TR)/d(Q) = P + Q*(dP/dQ)
Given, P = 50 - Q, we get
dP/dQ = -1
Substituting the value of dP/dQ in the above equation, we get
MR = 50 - Q - Q*(-1) = 50 - 2Q
Hence, the marginal revenue function for the firm is MR = 50 - 2Q.

Therefore, the best choice is D because it correctly calculates the marginal revenue function using the given information.

Question 14

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?
A)The firm will raise the price.
B)The firm will shut down immediately.
C)The firm continues to produce the same output and charge the same price.
D)The firm will reduce its output and raise price.

Accepted Answer

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

Question 15

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
A)$2.00.
B)$2.50.
C)$4.00.
D)$5.00.

Accepted Answer

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

Question 16

A new firm successfully enters a three-firm Cournot oligopoly without changing the demand and cost structures.The new price becomes:
A)75 percent of the original price.
B)50 percent of the original price.
C)the same as the original price.
D)unknown for lack of other information.

Accepted Answer

Without knowing the specific demand and cost structures, it is impossible to determine the impact of the new firm on the market price. It is possible that the entry of the new firm will increase competition and drive down prices, or it may have no significant effect. Therefore, the correct answer is D, as the information provided is insufficient to answer the question.

Question 17

Which of the following pricing strategies does not usually enhance the profits of firms with market power?
A)Price matching.
B)Cross-subsidies.
C)Two-part pricing.
D)Marginal cost pricing.

Accepted Answer

Marginal cost pricing would not enhance the profits of firms with market power as it would result in lower prices and lower profit margins. Firms with market power would prefer to charge higher prices and earn higher profit margins. The other options (price matching, cross-subsidies, and two-part pricing) can be used by firms with market power to enhance their profits.

Question 18

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?
A)$300.
B)$400.
C)$500.
D)$600.

Accepted Answer

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

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?
A)$6.33, 3.33 units.
B)$6.33, 5 units.
C)$13.33, 3.33 units.
D)$10, 5 units.

Accepted Answer

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

Question 20

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?
A)$1.50.
B)$15.00.
C)$18.00.
D)$20.00.

Accepted Answer

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

Quiz 11: Pricing Strategies for Firms With Market Power

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?

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:

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?

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

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

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:

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:

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

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:

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

Which of the following statements is true?

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

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?

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?

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

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

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

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?

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?