Question 1

Consider a monopoly face demand structure where the price elasticity of demand is -1.25.The optimal mark-up 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. C

Question 2

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

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

Question 3

Suppose you are the marketing manager for the Fruit of the Loom.An individuals' inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25 - 3Q (in cents).If cost to Fruit of the Loom to producing 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

A)  $1.09.
B)  $1.37.
C)  $108.50.
D)  $136.50. B

Question 4

Suppose you are an analyst for the Coca-Cola Company.An individuals' inverse demand for Coca-Cola is estimated to be P = 98 - 4Q (in cents).If Coca-Cola is produced according to the following 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)  $1200 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 5

If your demand for renting videos is Q = 5 - 2P, should you purchase the annual membership from a video store that charges $0.5 per rental, plus an annual membership fee of $12?

Accepted Answer

A)  definitely yes.
B)  definitely no.
C)  probably yes.
D)  cannot be decided.

Question 6

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

Accepted Answer

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

Question 7

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 statements associated with this question are correct.

Question 8

The purpose of randomized pricing is to reduce:

Accepted Answer

A)  consumer price information only.
B)  competitor price information only.
C)  both customer and competitor information about price.
D)  the firm's pricing inflexibility.

Question 9

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 10

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

Accepted Answer

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

Question 11

If a monopolist claims his profit-maximizing markup factor is 3, what is the corresponding price elasticity of demand?

Accepted Answer

A)  -1.5.
B)  -2.0.
C)  -2.5.
D)  -3.0.

Question 12

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

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

Question 13

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

Accepted Answer

A)  Price matching.
B)  Cross-subsidies.
C)  Two-part pricing.
D)  Marginal cost pricing.

Question 14

A monopoly producing X at a marginal cost of $80 per unit and charges a price of $100 per unit.Determine the elasticity of demand at the profit-maximizing price of $100.

Accepted Answer

A)  -5.
B)  -0.2.
C)  -0.8.
D)  There is insufficient information to determine the monopoly's price elasticity of demand.

Question 15

A Broadway theater sells weekday show tickets at a lower price than for a weekend show.This is an example of:

Accepted Answer

A)  price discrimination.
B)  peak-load pricing.
C)  price discrimination or peak-load pricing.
D)  none of the statements associated with this question are correct.

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 demand elasticity of a widget at the monopoly price and quantity is:

Accepted Answer

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

Question 17

You are the manager of a gas station in a small town, and your goal is to maximize profits.Based on your experience, the elasticity of demand of Texans for a car wash is -2, while that of non-Texans is -1.5.Your marginal cost is $6.
a.Are the conditions necessary for price discrimination to be an effective means of enhancing profits being met? Explain.
b.What is the profit-maximizing price to charge a Texan for a car wash?
c.What is the profit-maximizing price to charge a Californian for a car wash?

Accepted Answer

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

Question 18

Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal cost, but the high equipment rental fee keeps generating big profits.Which pricing strategy is the management using?

Accepted Answer

A)  Price discrimination.
B)  Two-part pricing.
C)  Commodity bundling.
D)  Cross subsidization.

Question 19

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 20

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.

Exam 11: Pricing Strategies for Firms With Market Power