Question 1

A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs.It faces an inverse demand function given by P = 38 − Q.The monopoly price is:

Accepted Answer

A)  $30. 
B)  $23. 
C)  $15. 
D)  $8.

Question 2

A firm with market power has an individual consumer demand of Q = 20 − 4P and costs of C = 4Q.What is the optimal amount of this product to package in a single block?

Accepted Answer

A)  2 
B)  3 
C)  4 
D)  5

Question 3

First-degree price discrimination:

Accepted Answer

A)  occurs when a firm charges each consumer the maximum price he or she would be willing to pay for each unit of the good purchased. 
B)  results in the firm extracting all surplus from consumers. 
C)  occurs when a firm charges each consumer the maximum price he or she would be willing to pay for each unit of the good purchased and results in the firm extracting all surplus from consumers. 
D)  None of the answers are correct.

Question 4

Grocery stores make most of their profits on soft drinks,beer,chips,and candy.A casual look at prices of these items reveals that these prices change extremely often and can vary as much as 50 percent.Is this because the wholesale price of these items fluctuates this dramatically,or is there some other possible explanation?

Accepted Answer

The answer of Grocery stores make most of their profits...

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.Suppose fixed costs rise to $400.What happens in the market?

Accepted Answer

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.

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?

Accepted Answer

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

Question 7

Price-matching strategies may fail to enhance profits when:

Accepted Answer

A)  firms cannot prevent customers from making deceptive claims. 
B)  firms have different marginal costs. 
C)  firms cannot prevent customers from making deceptive claims or firms have different marginal costs. 
D)  None of the statements are correct.

Question 8

A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs.It faces an inverse demand function given by P = 38 - Q.What are the profits of the monopoly in equilibrium?

Accepted Answer

A)  $225 
B)  $120 
C)  $345 
D)  None of the preceding statements is correct.

Question 9

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

Accepted Answer

A)  EF = EM. 
B)  EF = NEM. 
C)  EF = EM/N. 
D)  EF = N/EM.

Question 10

The average consumer at a firm with market power has an inverse demand function of P = 10 − Q.The firm's cost function is C = 2Q.If the firm engages in two-part pricing,what is the optimal fixed fee to charge each consumer?

Accepted Answer

A)  $2 
B)  $32 
C)  $64 
D)  None of the answers are correct.

Question 11

Refer to the figure below.During high-peak times,what price-quantity combination should the firm charge to maximize profit?

Accepted Answer

A)  P1 and Q3 
B)  P2 and Q3 
C)  P4 and Q3 
D)  P1 and Q2

Question 12

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

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

Question 13

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

Accepted Answer

A)  5 times marginal revenue. 
B)  0.2 times marginal revenue. 
C)  5 times marginal cost. 
D)  0.2 times marginal cost.

Question 14

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

A)  1 
B)  3 
C)  4 
D)  7

Question 15

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

A)  −0.5. 
B)  0.5. 
C)  −.25. 
D)  There is insufficient information to answer this question.

Question 16

A necessary cost-side condition for a firm to implement a cross-subsidization pricing strategy is:

Accepted Answer

A)  economies of scale. 
B)  economies of scope. 
C)  constant marginal cost. 
D)  limited capacity.

Question 17

Suppose you are an analyst for the Coca-Cola Company.An individual's inverse demand for Coca-Cola is estimated to be P = 98 − 4Q (in cents).If Coca-Cola is produced according to the cost function C(Q)= 1,000 + 2Q (in cents),compute the optimal price and the number of cans to sell as a single package.

Accepted Answer

A)  $120 per package and 12 cans 
B)  $12 per package and 24 cans 
C)  $11.52 per package and 12 cans 
D)  $15 per package and 16.67 cans

Question 18

Suppose two types of consumers buy suits.Consumers of type A will pay $100 for a coat and $50 for pants.Consumers of type B will pay $75 for a coat and $75 for pants.The firm selling suits faces no competition and has a marginal cost of zero.If the firm sells coats and pants for $25 each,but offers a bundle containing both a coat and pants for $150,how many bundles will the firm sell?

Accepted Answer

A)  0 
B)  1 
C)  2 
D)  Insufficient information

Question 19

The price elasticity of demand for senior citizens purchasing coffee from McDonald's is −5,while non-senior citizens have a price elasticity of demand equal to −1.25.If it costs McDonald's $0.02 to produce a coffee,the optimal price for a cup of coffee for non-senior citizens and the resultant marginal cost under third-degree price discrimination are:

Accepted Answer

A)  $0.004 and $0.02. 
B)  $0.02 and $0.80. 
C)  $0.10 and $0.02. 
D)  $10 and $0.20.

Question 20

Which of the following is a true statement about the process of cross-subsidization,given that a firm is selling two products?

Accepted Answer

A)  The two products cannot have interdependent demand functions. 
B)  The firm will sell both of its products at prices set above costs. 
C)  The firm needs cost complementarities in the production of the two goods. 
D)  The firm will sell both of its products at prices set above costs and the firm needs cost complementarities in the production of the two goods.

Exam 11: Pricing Strategies for Firms With Market Power