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. 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 formula for marginal revenue for a monopoly is MR = P(1-1/ E), where E is the price elasticity of demand.

In this case, the inverse demand function is P = 50-Q, which implies Q = 50 - P.

Taking the derivative of Q with respect to P, we get dQ/dP = -1.

Using the formula for elasticity of demand, E = (P/Q) * (dQ/dP), we get E = (P/Q) * (-1/P) = -1/(Q/P) = -1/(1 - P/50).

Substituting this value for E into the formula for MR, we get:
MR = (50-Q)(1+Q/50) = 50-Q-Q^2/50 = 50 - 2Q/50

Simplifying, we get MR = 50 - 0.04Q, which is equivalent to choice D.

Therefore, the answer is D.

Question 2

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

C

Question 3

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

C

Question 4

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 is usually used to enhance competition and reduce market power, as it involves setting prices equal to the marginal cost of producing and supplying a good or service. Firms with market power usually employ pricing strategies that increase their profits, such as price matching, cross-subsidies, and two-part pricing.

Question 5

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 6

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...

Question 7

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

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

Question 8

Which of the following statements is true?
A) The more elastic the demand, the higher the profit-maximizing markup.
B) The more elastic the demand, the lower 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, consumers are more sensitive to changes in price and will likely reduce their purchases if the price increases. Therefore, the profit-maximizing markup will be lower in order to keep prices competitive and maintain sales. Statements A, C, and D are false.

Question 9

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 demand elasticity of a widget at the monopoly price and quantity is -1.5. This is because the inverse demand function is P = 50 - Q, which means that the demand elasticity is -1.5.

Question 10

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 is correct.

Accepted Answer

Senior citizens may have more free time and flexibility to go to the movies than younger people who may have work or family responsibilities. However, they may be on a fixed income and have less disposable income. Offering a discount may incentivize them to choose the cinema over other forms of entertainment or to attend more frequently, thus increasing revenue for the cinema. This aligns with a profit-driven motivation rather than pure benevolence or assuming that senior citizens lack alternative activities.

Question 11

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

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

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. 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 13

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

We know that MC = 2Q and we want to find the output where MC = MR in order to maximize profits.

MR = dTR/dQ = P(1+dQ/dP) = P(1/Q + 0) = P/Q

Setting MC = MR, we get:

2Q = P/Q

2Q^2 = P

Substituting P into the demand equation:

20 - 2Q = 2Q^2

2Q^2 + 2Q - 20 = 0

Solving for Q using the quadratic formula, we get:

Q = 2.887 or Q = -3.45 (ignore negative value)

Substituting Q back into either the demand or MC equation, we get:

P = 13.33

Therefore, the equilibrium price and output are $13.33 and 3.33 units respectively. The answer is C.

Question 14

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

The answer of A monopoly producing a chip at a...

Question 15

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

The answer of Which of the following is true for...

Question 16

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

Two-part pricing involves charging a lump-sum fee plus a per-unit price. In this case, the per-unit price would be the marginal cost of 2Q. To maximize profits, the firm should set the lump-sum fee equal to the consumer surplus at the profit-maximizing quantity. This quantity can be found by setting the market demand equal to the marginal cost and solving for Q:

20 - 2Q = 2Q
20 = 4Q
Q = 5

At Q = 5, the market price is P = 20 - 2Q = 10. The consumer surplus is the area between the demand curve and the market price, or:

(20 - 10) x (5/2) = $25

Therefore, the firm should set the lump-sum fee at $25 and charge a per-unit price of 2Q = 10. The total profit is:

Profit = (Price - Marginal Cost) x Quantity + Lump-sum Fee
Profit = (10 - 2(5)) x 5 + 25
Profit = $50

So, the most profits the firm will earn is $50.

Question 17

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 is correct.

Accepted Answer

Charging two different groups of consumers two different prices is known as price discrimination, which is a commonly practiced pricing strategy.

Question 18

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

All of the statements associated with this question are correct. Price discrimination is profitable when the seller is able to identify different types of consumers with differing levels of willingness to pay, when the good cannot be easily resold, and when there are differences in demand elasticities among consumer groups. When all three conditions are met, a seller can capture more surplus from consumers by offering different prices to different groups.

Question 19

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 sincere in revealing their true natures.
D) There is no resale market for the good.

Accepted Answer

Consumer sincerity in revealing their true natures is not a condition for a firm to engage in price discrimination. The other three conditions are necessary for price discrimination to be effective: consumer types must exist with different elasticities of demand (A), the firm must be able to identify and target these consumer types (B), and there should be no resale market for the good (D) that would undermine the price discrimination strategy.

Question 20

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

In a Cournot oligopoly, each firm assumes that its competitors' output will remain constant when determining its output level. Hence, the market demand elasticity perceived by the firm is influenced by the output of all N firms, while the firm's own output affects only a fraction of the total output in the market. Therefore, the price elasticity of demand for the market (MS) will be more elastic than that of an individual firm (FS), and the relationship between them will be E_M = E_F/N.

Quiz 11: Pricing Strategies for 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. Which of the following is the marginal revenue function for the firm?

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 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?

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?

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 statements is true?

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:

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

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 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:

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 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?

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

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:

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

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

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

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: