Assignment:
Question 1: In the furniture industry, two firms compete by locating in different points of the city (linear). Suppose that the price of gas increases so that consumers have higher transportation cost. What are the consequences of that cost increase?
A) The firms decide to relocate to the city center.
B) The firms decide to relocate to the boundaries of the city.
C) The equilibrium prices increase.
D) The equilibrium prices decrease.
Question 2: There is an ice cream monopoly in the town of Eureka. The monopoly firm is deciding how many ice cream carts to distribute in the town. Each cart has a cost of 1. The consumers have a utility for ice cream of V=10. The unit transport cost of the consumers is 5. Which of the following is true?
A) The optimal number of ice cream carts is 3.
B) The optimal number of ice cream carts is 2.
C) None of the answers is correct
D) The optimal number of ice cream carts is 1.
Question 3: Which of the following statements is true regarding a monopoly firm that covers the market?
A) The firm should relocate its product.
B) The price is independent of the transportation cost.
C) If the transportation cost increases, the firm should decrease the price.
D) If the transportation cost increases, the firm should increase the price.
Question 4: When we say that a firm is covering the market, we mean that:
A) The firm chooses the price to maximize her profit, independent of the demand.
B) None of the answers is correct
C) The firm is choosing a price for which all consumers have nonnegative net utility from buying the product.
D) The firm is choosing many varieties, so that all consumers find their most preferred variety in the market.
Question 5: Consider the Figure 2 depicting a Hotelling model with a monopoly that sells two varieties. Which of the following statements is true?
A) If the monopoly decides to cover the market, he should move both varieties inwards and increase the price.
B) If the monopoly decides to cover the market, he should maintain the position of the varieties and lower the price.
C) If the monopoly decides to cover the market, he should maintain the price and move both varieties inwards.
D) If the transportation cost increases, with everything else constant, the monopoly gains clients.
Question 6: Consider the problem of quality differentiation between two firms. Which of the following statements is true?
A) If both prices are high, consumers that have a strong preference for quality are more likely not to buy than consumers that have a weak preference for quality.
B) If the prices are very high, it is possible that some consumers decide not to buy.
C) None of the answers is correct.
D) Regardless of the prices, all consumers will buy one of the products.
Question 7: Suppose that the government fixes the price of gas to be $1.00 per gallon. The industry is a duopoly. In a linear city we expect that
A) None of the answers is correct.
B) Gas stations cluster at the city center.
C) Gas stations will be distributed evenly along the city.
D) Gas stations will be located in the city boundaries.
Question 8: Suppose two knitting shops Purl and Knit, open in Candy street, one in each end. Candy street is one mile long and consumers are uniformly distributed along the street. Consumers have a transportation cost, t per unit of distance traveled. Which of the following is true?
A) The optimal price charged by Purl decreases if Knit increases the price.
B) If the transportation cost increases, the demand of the consumers is less elastic.
C) None of the answers is true.
D) If the transportation cost increases, the demand of the consumers is more elastic.
Question 9: A monopoly firms sells chocolate with 75% cocoa. The consumer preferences range from 0% cocoa and 100% cocoa chocolate. Consumers are uniformly distributed (one consumer for each point of the preference range). Currently, the monopoly firms sells the chocolate at p=$2.00. Consumers value chocolate at V=$3 and have a unit transport cost of t=$2.
A) All consumers buy.
B) 75% of the consumers buy.
C) 25% of the consumers buy.
D) None of the answers is correct
Question 10: Suppose that two firms offer different qualities of wine. Firm H offers a high quality and firm L offers a low quality. Consumers have a preference for quality given by x∈[0,1]. The utility of the consumers when they buy the high quality wine is given by V+xvH-pH and the utility of the consumers when they buy the low quality is given by V+xvL-pL. In this context, the indifferent consumer
A) is the consumer x=0, because he does not care for quality of the wine.
B) depends on the ratio between the price difference and the quality difference.
C) is the consumer x=1, because he is the consumer that has a higher preference for quality.
D) is the consumer x=1/2, because he is exactly in the middle of the interval of all consumers.
Question 11: Recently, Bloomingfoods opened a store halfway between the two stores that it already owned and that are in extreme points of Third Street. Assuming that Bloomingfoods holds the monopoly for organic food in the city of Bloomington, which of the following is true?
A) The fixed cost of opening the third store must be higher than the increase in profit from opening that store.
B) We can expect that the price of organic food does not change.
C) We can expect a decrease in the price of organic food in all Bloomingfoods.
D) We can expect an increase in the price of organic food in all Bloomingfoods.
Question 12: When two firms sell different varieties of the same product and compete in prices, their choice of product differentiation reflects:
A) The need to create a backyard of consumers.
B) All the answers are correct.
C) The fact that if the firms sell the same variety, their profit is zero.
D) The need to separate their variety from the variety of the rival firm.
Question 13: In a situation in which firms decide first their quality and then compete in prices we have that:
A) All the answers are correct.
B) The equilibrium price of the low quality firm is increasing in the quality difference of the firms.
C) The firms will choose the highest possible level of quality differentiation.
D) The equilibrium price of the high quality firm is increasing in the quality difference of the products.
Question 14: The principle of maximal differentiation holds when:
A) All the answers are correct.
B) Firms compete in prices and sell differentiated quality.
C) Firms compete in prices and sell differentiated varieties.
D) Firms do not compete in prices and sell differentiated varieties.
Question 15: Where different firms' products have the same quality but differ on design, color etc this is called:
A) horizontal product differentiation.
B) market segmentation.
C) vertical product differentiation.
D) niche marketing.
Question 16: Consider two firms that compete in prices offering different qualities of handbags. The consumers have a preference for quality given by x∈[0,1]. The high quality handbags have a value of vH=10 and the low quality handbags have a value of vL=4. The indifferent consumer is x=(pH-pL)/6. Which of the following is true, regarding the price competition of firms?
A) The price equilibrium is pH=4 and pL=2
B) The price reaction of the low quality firm is given by pL=pH/2.
C) All the answers are correct.
D) The price reaction of the high quality firm is given by pH=3+pL/2.
Question 17 : Two firms offer different qualities of shoes in the market and compete in prices. Shabby Shoes sells the low quality, whereas Sleek Shoes sells the high quality. Shabby Shoes is deciding to invest in higher quality raw material to produce its shoes. Which of the following is true.
A) Any quality improvement that Shabby Shoes is able to achieve leads to higher profits for Shabby Shoes.
B) Any quality improvement that Shabby Shoes is able to achieve leads to higher profits for Sleek Shoes.
C) Sleek shoes should decrease the quality of the raw material to increase its profits
D) The quality improvement of Shabby Shoes is only profitable if Shabby shoes becomes the highest quality in the market and the quality difference is high enough.
Question 18: Considering a model of price competition with differentiated product in which firms are located in the two extremes of the Hotelling line. Which of the following statements is true?
A) If the firm located at zero charges a higher price than the opponent, the indifferent consumer is located to the right of the midpoint of the line.
B) No consumer is indifferent because each one has a strict preference for one of the goods.
C) If the firms charge equal prices, the indifferent consumer is located at the midpoint of the line.
D) If the firm located at one charges a higher price than the opponent, the indifferent consumer is located to the left of the midpoint of the line.