Questions -
Q1) At the profit-maximizing level of production of a monopolist ________; therefore, at a certain level of output where the marginal revenue is $8 and the marginal cost is $6, the monopolist should ________.
A) marginal revenue is less than marginal cost, contract production.
B) marginal revenue exceeds marginal cost, contract production.
C) both marginal revenue and marginal cost are negative, expand production.
D) marginal revenue equals marginal cost, expand production.
Q2) Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market is perfectly competitive, with boxes currently selling for $100 per thousand. Conigan's total and marginal cost curves are:
TC = 3,000,000 + 0.001Q2
MC = 0.002Q
where Q is measured in thousand box bundles per year.
a. Calculate Conigan's profit maximizing quantity. Is the firm earning a profit?
b. Should Conigan Box Company employ a pricing strategy to improve their long run prospects? If so, which strategy would be best? If not, explain why.
c. Using your answer from part a, analyze Conigan's position in terms of the shutdown condition. Should Conigan operate or shut down in the short run?
Q3) The price of on-campus parking from 8:00 AM to 5:00 PM, Monday through Friday, is $3.00. From 5:00 PM to 10:00 PM, Monday through Friday, the price is $1.00. At all other times parking is free. This is an example of
A) second-degree price discrimination.
B) bundling.
C) tying.
D) a two-part tariff.
E) none of the above - PEAK PRICING
Q4) Bud Owen operates Bud's Package Store in a middle of a small college town. Bud sells six packs of beer for off-premises consumption. Bud has very limited store space and has decided to limit his product line to one brand of beer, choosing to forego the snack food lines that normally accompany his business. Bud faces considerable competition from other sellers and the market demand for beer is Qd=12000-2P. Bud regards the market as highly competitive and considers the current $2.50 per six pack selling price to be beyond his control.
Bud's total and marginal cost functions are:
TC=$2000 + .0005Q2
MC= .001Q
where Q refers to thousands of six pack per week. Included in the fixed total cost figure is a $750 per week salary for Bud because he knows this would be his wage if he quit the store and worked elsewhere.
What is Bud's maximum economic profit?
Q5) Customers attending basketball games at the local arena must pay for parking on the grounds and then pay for a ticket needed to enter the arena. The arena manager knows that the customers' demand for the event can be expressed collectively as P = 25 - 0.000625Q. (This collective market demand curve adds up all individual demand curves which can be represented as P=25-15Q.) Assume the arena employs a two part tariff as its pricing strategy. It uses the parking fee as an entry fee and the game ticket as the usage fee. What is the total the arena will make from parking fees if the marginal cost of providing entertainment is a constant MC = $10 per seat?
A) $ 15
B) $ 7.50
C) $ 24,000
D) $ 180,000
Q6) A perfectly competitive market is in long-run equilibrium. At present there are 100 identical firms each producing 5,000 units of output. The prevailing market price is $20. Assume that each firm faces increasing marginal cost. Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $24. Which of the following describes the effect of this increase in demand on a typical firm in the industry?
A) In the short run, the typical firm increases its output and makes an above normal economic, profit.
B) In the short run, the typical firm increases its output but its total cost also rises. Hence, the effect of the firm's profit cannot be determined without more information.
C) In the short run, the typical firm increases its output but its total cost also rises, resulting in no change in profit.
D) In the short run, the typical firm decreases output and its profit increases.
!7. Classic Programs has purchased distribution rights for two television programs that are ready for syndication. One series, The Detectives, was enormously popular during its prime time run and will command a large rental fee. The second series, Kittie and Alma, was a poor parody of a popular series. Kittie and Alma is not expected to be in demand for syndication. The managers at Classic Programs feel that there are only two legitimate bidders for the two series. One bidder is a large independent television station that is carried across the country by cable TV companies. The other bidder is a youth oriented pay TV network called Kidwork. The independent station and Kidwork are rarely carried by the same cable companies, so that a successful bid by one has almost no impact on the willingness of the other to show the programs. Based upon previous experience, Classic estimates the following reservation prices for each bidder. Bidding is for the right to show the programs on an unlimited basis.
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Independent Station
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Kidwork
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The Detectives
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100,000
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120,000
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Kittie and Alma
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15,000
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8,000
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a. Assuming that Classic's managers set separate prices for the two programs, what is the most profitable pricing strategy? (Because of information that is shared within the industry, different prices for the two bidders are impossible.) How much revenue will be earned?
b. Classic's managers are considering bundling the two programs under a single price. Is bundling feasible in this instance? Why or why not? If so, what should the bundled price be? What will total revenue be?
Q8) Assume that a firm's marginal cost is $10 and the elasticity of demand is -2. We can conclude that the firm's profit maximizing price is approximately
A) $10.
B) $20.
C) $5.
D) The answer cannot be determined without additional information.
Scenario - Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows:
Q = 160 - 4P, TR= 40Q - 0.25Q2, MR = 40 - 0.5Q, TC=4Q, MC= 4
Q9) How much output will Barbara produce and at what price will she sell them?
A) 0 units at $0. (Her costs are too high to be in business.)
B) 22 units at $32
C) 72 units at $56
D) 72 units at $22
E) 56 units at $22
Q10) BioMed Pharmaceutical has held a patent on an important heart medication called Heartex, but the patent will expire in the coming year. After the patent expires, other firms can legally sell the same medication as a generic drug product. What will happens to the demand for Heartex and to the Lerner index for this product as the generic drugs enter the market?
A) Demand becomes more elastic, the markup allowed as a percentage of price increases
B) Demand becomes less elastic, the markup allowed as a percentage of price declines
C) Demand becomes less elastic, the markup allowed as a percentage of price increases
D) Demand becomes more elastic, the markup allowed as a percentage of price declines
Q11) The textbook cites statistical evidence that the price elasticity of demand for Royal Crown cola is -2.4, and the price elasticity of demand for Coke is roughly -5.5. Which firm likely has stronger brand loyalty among customers that provides greater potential for monopoly power in the cola market?
A) Coke
B) Royal Crown
C) Both firms should have identical monopoly power
D) We do not have enough information to answer this question.
Q12) The following figure shows the demand curve for Good X in a perfectly competitive market. Later, the government grants one of the firms the exclusive right to manufacture and sell Good X. MR represents the marginal revenue curve of the firm when it operates as a monopoly. The marginal cost of producing Good X is constant at $5.
a) What is the quantity supplied when the market is perfectly competitive? What happens to the quantity supplied once the market changes to a monopoly?
b) What is the market price when the market is perfectly competitive? What is the market price when the market changes to a monopoly?
c) As an economist, how would you argue for or against the government's decision to let one company control the market for Good X? Be specific and include an economic measure of welfare for the scenario above.
Q13) Freddy Fast Car was heard explaining pricing strategy to his new employee as follows, "We charge different prices to everyone depending on what they can pay. This helps people that aren't as wealthy because they'd never be able to afford a car if we only charged one price to everyone."
a. What type of pricing strategy does Freddy use?
b. Would an economist agree with Freddy? Why or why not?
c. Draw a model of Freddy's pricing strategy that illustrates your answer in part b.
Q14) McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of:
A) two-part tariff.
B) first degree price discrimination.
C) second-degree price discrimination.
D) third degree discrimination.
Q15) Calloway Shirt Manufacturers sells knit shirts in two sub-markets. In one sub-market, the shirts carry Calloway's popular label and breast logo and receive a substantial price premium. The other sub-market is targeted toward more price conscious consumers who buy the shirts without a breast logo, and the shirts are labeled with the name Archwood. The retail manager, Bucky, set the price of the shirts carrying the Calloway label at $42.00 while the Archwood shirts sell for $25. Calloway's market research indicates a price elasticity of demand for the higher priced shirt of -2.0, and the elasticity of demand for the Archwood shirts is -4.0. Moreover, the research suggests that both elasticities are constant over broad ranges of output. When Sam, the marketing manager for Calloway examines the pricing strategy, he argues the prices should be be repriced based on their given elasticities.
Which of the following statements is correct?
A) Assuming the price of the Archwood shirt is optimal, the price of the Calloway shirt is too high.
B) There is no way to tell how the prices should be related without more information.
C) Assuming the price of the Archwood shirt is optimal, the price of the Calloway shirt is too low.
D) Bucky is correct, the current prices are optimal.
Reading Material
1. Microeconomics, Robert Pindyck and Daniel Rubinfeld, 8th edition, 2012 (required).
2. Roadside MBA, Michael Mazzeo, Paul Oyer, and Scott Schaefer, 2014 (recommended).