ECN 601 Midterm Review
The widget market is competitive and includes no transaction costs. Five suppliers are willing to sell one widget at the following prices: $38, $32, $26, $18, and $10 (one seller at each price). Five buyers are willing to buy one widget at the following prices: $10, $18, $26, $32, and $38 (one buyer at each price).
Price $10 $18 $26 $32 $38 Quantity Demanded 5 4 3 2 1 Quantity Supplied 1 2 3 4 5 In this market, the equilibrium price will be 26 per widget, and the equilibrium quantity will be 3 widgets.
An end-of-aisle price promotion changes the price elasticity of a good from −3 to −4. Suppose the normal price is $18, which equates marginal revenue with marginal cost at the initial elasticity of -3. What should the promotional price be when the elasticity changes to -4?
$16.00 MC = P×(1−1/|e|) $12.00 = P×(1−1/4) $12.00/(1−1/4)= P $16.00= P
A university spent $1.3 million to install solar panels atop a parking garage. These panels will have a capacity of 300 kilowatts (kW) and have a life expectancy of 20 years. Suppose that the discount rate is 20%, that electricity can be purchased at $0.20 per kilowatt-hour (kWh), and that the marginal cost of electricity production using the solar panels is zero. Approximately how many hours per year will the solar panels need to operate to enable this project to break even?
4,449.46 Present ValuePresent Value = $60.00(1+20%)^1+$60.00(1+20%)^2+$60.00(1+20%)^3+....+$60.00(1+20%)^20 = $292.17 $1,300,000/$292.17 per hour=4,449.46 hours If the solar panels can operate only for 4,005 hours a year at maximum, the project would not break even. In order for the project to be worthwhile (i.e., at least break even), the university would need a grant of at least $129,859.15 4,005 hours per year×$292.17 per hour=$1,170,140.85 $1,300,000−$1,170,140.85=$129,859.15
Indicate whether the following change would cause a shift in the demand curve for product A and, if so, the direction of the shift.
A decrease in the price of a complementary product Demand Curve Shift? yes Direction of Shift increase
In 2007, when the iPhone was introduced, Apple made it relatively easy for third-party developers to make applications that ran on the iPhone.
A larger number of "apps" for the iPhone increased the value of the iPhone to consumers, allowing Apple price the phone higher than they would otherwise be able to.
At a student café, there are equal numbers of two types of customers with the following values. The café owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (i.e., she cannot price-discriminate). Students with Early Classes Coffee 73 Banana 53 Students without Early Classes Coffee 63 Banana 103
Assume that if the price of an item or bundle is no more than exactly equal to a student's willingness to pay, then the student will purchase the item or bundle. For simplicity, assume there is just one student with an early class, and one student without an early class. Pricing strategy 1 yields the highest profit for the café owner. Mixed Bundling $239 $30 $209 Price Separately $229 $30 $199 Bundle Only $252 $50 $202 Pricing strategy 1 yields the highest profit for the café owner.
Suppose an initial investment of $80 will return $40/year for three years (assume the $40 is received each year at the end of the year).
At a discount rate of 30%, this investment is not profitable.
A copy company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two copiers, and output increased by 280,000 pages per day. One month ago, the firm added five workers, and productivity also increased by 100,000 pages per day. A copier costs about twice as much as a worker. Assume these increases in productivity per worker and productivity per copier are good proxies for future increases in productivity when hiring additional workers or purchasing additional copiers.
Based on this information, the copy company should purchase another copier in order to expand output.
Suppose that on Valentine's Day, the demand for both roses and greeting cards increases by the same percentage amount. However, the price of roses increases by more than the price of greeting cards.
Based on this information, you can conclude that the supply of Valentine's cards is more sensitive to price than the supply of roses.
Some high-end retailers place their most expensive products right in the entryway of the store, where consumers will see them first, and place their more popular, better-selling items further back. Which of the following would most likely be used by a behavioral economist as a justification for this strategy?
Consumers are motivated by a comparison of the price level of a good to a reference price.
You run a game-day shuttle service for parking services for the local ball club. Suppose you are compensated $16 per customer, per ride. In other words, your marginal revenue is $16. Your costs for different customer loads are summarized in the following table. For each customer load, calculate both the marginal cost and the average cost. Then answer the question that follows. In order to maximize profits, you should carry _ customers per load.
Customers 1 2 3 4 5 6 7 8 Total Cost $30 $34 $42 $54 $70 $90 $114 $142 Marginal Cost $34-$30 =4 8 12 16 20 24 28 Average Cost $30 $34/2=$17 $14 13.50 14 15 16.29 17.75 carry 4 customers per load
George's T-Shirt Shop produces 4,000 custom-printed T-shirts per month. George's fixed costs are $12,000 per month. The marginal cost per T-shirt is a constant $2.
George's break-even price is $5 per shirt. Q=F/(P−MC) Q=4,000, F=$12,000F=$12,000, and MC=$2MC=$2. Suppose George sells 50% more T-shirts per month. At this quantity of shirts, George's break-even price is$4per shirt. Q=4,000×1.5=6,000Q=4,000×1.5=6,000, F=$12,000F=$12,000, and MC=$2MC=$2
Distributors of pipes earn some monopoly profits in their local markets but see them slowly erode as substitutes enter the market. Suppose Nebraska has scheduled a vote on the legalization of marijuana. Additionally, suppose that marijuana and pipes are complements and that the legalization of marijuana would lead to a decrease in the price of marijuana.
Given the relationship between marijuana and pipes, the legalization of marijuana would lead to an increase in demand for pipes. Thus, distributors of pipes would likely support the legalization of marijuana.
In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will be able to sell only 10,000 room-nights, which cost $50 per room per night to service. You spent $30.00 million on the hotel in 2008, and your cost of capital is 20%. The current going price to sell the hotel is $25 million.
If the estimated demand is 10,000 room-nights, the break-even price is $550.00 per room, per night. $25,000,000×20%10,000 room-nights+$50 per unit=$550.00 per room, per night
Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $4.50 million in a plastic injection molding machine (which can be sold for $4 million immediately) and $200,000 in plastic injection molds specifically for the toy (not valuable to anyone else). The cost of labor and materials necessary to make each truck runs about $8. This year, a competitor has developed a similar toy, significantly reducing demand for the toy truck. Now, the original manufacturer is deciding whether it should continue production of the toy truck.
If the estimated demand is 100,000 trucks, the break-even price is $48.00 per truck. $4,000,000/100,000 units+$8 per unit=$48.00 per unit
Describe the difference in economic profit between a competitive firm and a monopolist in both the short and long run. Which should take longer to reach the long-run equilibrium? True or False: The adjustment to long-run equilibrium occurs more quickly for monopolists than for competitive industries.
In the short run, both monopolists and competitive firms can earn positive economic profits. In the long run, neither monopolists nor competitive firms can earn a positive economic profit. False
A firm sells 1,000 units per week. Suppose the average variable cost is $30, and the average cost is $75.
In the short run, the break-even price is$30.00. In the long run, the break-even price is$75.00. Suppose the firm charges a price of $20 per unit. Short Run = Shut Down Long Run = Shut Down
Suppose you have a production technology that can be characterized by a learning curve. Every time you increase production by one unit, your marginal cost decreases by $4. There are no fixed costs, and the first unit costs you $62 to produce.
Quantity 1 2 3 4 5 6 Marginal Cost $62 $62-$4=$58 54 50 46 42 Total Cost 62 $62+$58=$120 $174 $224 $270 $312 Average Cost $62 $120/2= $60 $58 $56 $54 $52 Your break-even price for three units is $58.00 $174/3=$58 The break-even price for those next two units alone is $48.00 $50+$46=$96 $96/2=$48
Relative to managers in more _ industries, managers in more _ industries are more likely to spend their time on pricing strategies rather than on reducing costs.
Relative to managers in more industries, managers in more industries are more likely to spend their time on pricing strategies rather than on reducing costs.
Suppose that due to the outbreak of a new flu, known as H14N9, the demand for hand sanitizer has tripled.
Smith & Smith, a company that produces and sells hand sanitizer, should increase production of its hand sanitizer. Suppose there is no vaccine for H14N9, and that a vaccine will not be developed for several decades. True or False: Smith & Smith should increase its productive capacity by leasing new plant and equipment. True
A manufacturer of microwaves has discovered that male shoppers have little value for microwaves and attribute almost no extra value to an auto-defrost feature. Female shoppers generally value microwaves more than men do and attribute greater value to the auto-defrost feature. There is little additional cost to incorporating an auto-defrost feature. Since men and women cannot be charged different prices for the same product, the manufacturer is considering introducing two different models. The manufacturer has determined that men value a simple microwave at $64 and one with auto-defrost at $83, while women value a simple microwave at $83 and one with auto-defrost at $147. Suppose the manufacturer is considering three pricing strategies: 1.Market a single microwave, with auto-defrost, at $83, to both men and women.2.Market a single microwave, with auto-defrost, at $147, to only women.3.Market a simple microwave to men, at $64. Market a microwave, with auto-defrost, to women at $127. For simplicity, assume there is only 1 man and 1 woman and that if the price of a microwave is equal to an individual's willingness to pay, the individual will purchase the microwave. Suppose that, instead of one man and one woman, the market for this microwave consisted entirely of women. For simplicity, you can assume this means that there are two women, and no men.
Strategy 1. Auto-Defrost Microwave only at $83 2. Auto-Defrost Microwave only at $147 3. Simple Microwave at $64, Auto-Defrost Microwave at $127 Revenue From Men $83 $0 $64 Revenue From Women $83 $147 $127 Total Revenue From Strategy $166 $147 $191 Under these conditions, pricing strategy2 would maximize revenue for the manufacturer.
Suppose Mattel, the producer of Barbie dolls and accessories (sold separately), has two types of consumers who purchase its dolls: low-value consumers and high-value consumers. Each of the low-value consumers tends to purchase one doll and one accessory, with a total willingness to pay of $40. Each of the high-value consumers buys one doll and two accessories and is willing to pay $77 in total. Mattel is currently considering two pricing strategies: •Strategy 1: Sell each doll for $20 and each accessory for $20 •Strategy 2: Sell each doll for $3 and each accessory for $37
Strategy 1 $20 + $20 accessory Revenue from Low Value Customers $40 Value, 1 Accessory $40 Revenue from High Value Customers $77 Value, 2 Accessories $60 Strategy 2 $3 doll + $37 accessory Revenue from Low Value Customers $40 Value, 1 Accessory $40 Revenue from High Value Customers $77 Value, 2 Accessories $77 The strategy that generates the most revenue is strategy 2
A local Pilates studio recently began offering a monthly subscription service for its patrons. Suppose a particular patron at this studio has the following willingness-to-pay schedule, per session. Session Willingness to Pay 1 $77 2 $66 3 $55 4 $44 5 $33 6 $22 Suppose the studio has devised a new pricing scheme for consumers who demand more than 1 session. This pricing scheme is a subscription service, whereby consumers can pay a flat fee of $222.75 and can have up to 6 sessions total.
Suppose this consumer would not demand any more sessions, even for free. Also assume that the marginal cost to the studio, per session, is constant at $11. At a price of $60.50 per session, the number of sessions demanded by this consumer would be 2. At this price and quantity, consumer surplus is $22.00 and producer surplus is $99.00. ($77−$60.50)+($66−$60.50)=$22.00 ($60.50−$11)+($60.50−$11)=$99.00 Using this subscription pricing model, this consumer would demand6 sessions. Under this scenario, consumer surplus is$74.25and producer surplus is$156.75. $77+$66+$55+$44+$33+$22=$297 $297−$222.75=$74.25 6×$11=$66.00 $222.75−$66.00=$156.75
In 2005, Clear Channel (an owner of multiple popular radio stations) spun off concert promoter Live Nation into an independent company. Assume that music radio stations and concerts are complements in consumption.
The price of concert tickets should fall. False
A business incurs the following costs: •Labor: $130/unit•Materials: $90/unit•Rent: $200,000/month
The total variable cost, per month, is $220.00 million 1 million units×$130unit)+(1 million units×$90unit)=$130 million+$90 million=$220 million1 million units×$130unit+1 million units×$90unit=$130 million+$90 million=$220 million. The total fixed cost, per month, is $0.20 million $200,000/1,000,000=$0.20 million The total cost is $220.20 million $220 million+$0.20 million=$220.20 million
Your family business uses a secret recipe to produce salsa and distributes it through both smaller specialty stores and chain supermarkets. The chain supermarkets have been demanding sizable discounts, but you do not want to drop your prices to the specialty stores. True or False: The Robinson-Patman Act limits your ability to offer discounts to the chain supermarkets while leaving the price high for the smaller stores.
True
Under decreasing returns to scale, average cost as the quantity produced increases. Over this range of output, the marginal cost curve is the average cost curve.
Under decreasing returns to scale, average cost rises as the quantity produced increases. Over this range of output, the marginal cost curve is higher than the average cost curve.
The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes one hour (and $23,000), and, after setting up, you can produce 1,000 units of a particular design per hour (at a cost of $12,000).
Which of the following best represents the average cost function for producing any single design? AC=$23,000Q+$12 Based on this information, production in any one single design exhibits economies of scale.
