ECON300 Exam 3
If MR _____ MC, the firm should expand output to increase profits
exceeds
are monopoly's market price higher or lower than competitive firm's mark price
higher
with lerner index, the more inelastic demand is, the ____ the Lerner index & markup
higher
requirement under direct P.D. that the price offered to each consumer group is chosen by that group; w/o incentive compatibility, firm using indirect PD won't max its producer surplusI
incentive compatible
If a firm has no costs of producing, it should continue producing until ________
mr=0
Mark Pow Prof-max output level
mr=mc
when its efficient for a single firm to produce the entire industry output. NM characteristics: Cost curve is econ of scale at any output level
natural monopolies
charging dif prices to dif customers based on observable characteristics of the customers
direct (price discrimination second degree)
firms with market power have a _____ sloping demand curve
downward
represents the inefficiency of market power
dwl
there are consumers who demand the product at a price above its MC but below the higher price set by the firm w market power. The resulting loss in surplus for these consumers who do not purchase the product under monopoly is the
dwl
when a firm has a special asset that other firms don't (secret formula, scarce resource). Control of input allows a firm to keep its costs lower than competitors
(cost advantage of) key inputs
The inverse demand for a drug that treats melanoma is given by P = 3,000 - 10Q, where Q measures the number of drug treatments and P is the price per treatment. Suppose that the marginal cost per drug treatment is constant at $10. What is the profit-maximizing price per drug treatment?
1,505
Suppose the doll company American Girl has an inverse demand curve of P = 150 - 0.25Q, where Q measures the quantity of dolls per day and P is the price per doll. The marginal cost is given by MC = 10 + 0.50Q. What is the total surplus at the profit-maximizing output level?
12,250
A firm's demand curve is given by Q = 100 - 0.67P. What is the firm's corresponding marginal revenue curve?
150 - 1.5Q
: pricing strategy where payment has two components (standard per-unit price & fixed fee that must be paid to buy any amount of the good) A
2 part tarriff
(Table 10.6) Assume that the marginal cost of producing software is zero. The most profitable bundling strategy would be to sell the statistical and graphical programs together for:
2,100
Silky Inc., which sells custom silk ties designed by famous people, faces a demand curve of Q = 150 - 0.2P, where Q is measured in hundreds of ties and P is the price per tie. The marginal cost of production is given by MC = 5Q. What is Silky's profit-maximizing output level? (Hint: Add two zeros to the number you get.)
5,000
Bubba Golf, a manufacturer of golf clubs, can sell 3 drivers at $600 each. To sell 4 drivers, Bubba Golf must lower the price to $580 each. The marginal revenue of the fourth club is:
520
A profit-maximizing skeet club segments its market. It charges juniors $4 per round based on their price elasticity of demand of -2.0. Its adult shooters have a price elasticity of demand of -1.4. The marginal cost per round does not vary by the shooter's age. What price does the skeet club charge adult shooters?
7
Market power arises from: a) the entry of new firms to an industry in which the firms are earning large producer surplus. b) barriers to entry. c) diseconomies of scale. d) diminishing marginal returns.
b
_____- Surplus is the difference between the price that consumers pay and the price that they are willing to pay.
Consumer
profit-maxing strategy of firms with market power creates _____
DWL (deadweight loss)
____ surplus is the difference between how much a person would be willing to accept for given quantity of a good versus how much they can receive by selling the good at the market price.
Producer
_______ measures the benefit to sellers of participating in a market.
Producer surplus
(Figure 10.1) Producer surplus under monopoly and under perfect price discrimination are _____ and _____, respectively. a) $16; $32 b) $24; $48 c) $8; $12 d) $32; $12
a
(Figure 9.7) The levels of producer surplus under monopoly and perfect competition are _____ and _____, respectively. a) $800; $0 b) $1,200; $0 c) $800; $400 d) $600; $200
a
A firm that can affect the price of its product: a) faces a downward-sloping demand curve. b) has no demand curve (i.e., the relationship between price and quantity demanded breaks down). c) has a perfectly elastic demand curve. d) can sell whatever quantity it produces without changing its price.
a
An amusement park's customers have the demand curve for park rides given by Q = 11 - 0.5P, where P is the price per ride and Q is the number of rides. The marginal cost is $4. If the amusement park uses a two-part tariff, the park's entrance fee is _____, and its price per ride is _____. a) $81; $4 b) $100; $11 c) $40; $4 d) $22; $2
a
If a firm has market power but cannot prevent its customers from reselling the product, the firm will: a) produce a quantity of output at which marginal revenue equals marginal cost. b) produce a quantity of output at which price equals marginal cost. c) engage in second-degree price discrimination. d) engage in first-degree price discrimination.
a
In Louisiana, it was a crime to sell burial caskets without a funeral director's license. This law was a source of _____ for licensed funeral directors and an example of _____. a) market power; a government-sanctioned barrier to entry b) market power; a natural monopoly c) product differentiation; scale economies d) scale economies; a natural monopoly
a
Rent-seeking refers to: a) the costly actions that firms undertake in their attempt to receive monopoly privilege from the government. b) the government's attempt to limit collusive price setting by industrial groups. c) the ability of some landlords to charge above competitive rental rates. d) any illegal activity designed to increase a firm's market power.
a
Suppose a firm has two types of customers but cannot tell which type of buyer a customer is before a purchase is made. One group has an inverse demand of P = 100 - 10Q; another has an inverse demand curve of P = 110 - 22.5Q. The marginal cost of production is constant at $20. If the firm wanted to use quantity discounting, it should charge _____ per unit for any quantity purchased or _____ or more units a) $65; $60 for 4 b) $50; $40 for 8 c) $25; $20 for 2 d) $85; $75 for 6
a
The Hagerstown Suns, a Minor League Baseball team, sells a single game-day ticket for $9. If you buy the 35-game ticket package, the price per ticket falls to $8.34. The Hagerstown Suns is using: a) second-degree price discrimination in the form of quantity discounts. b) third-degree price discrimination. c) first-degree price discrimination. d) a strategy of bundling.
a
If a firm practices first-degree price discrimination, the firm must: a) have customers with identical demand curves. b) have complete information about each customer's unique demand curve before the customer buys the product. c) be able to identify each customer's demand curve after the customer buys the product. d) lack market power but know how its customers differ by their willingness to pay for the product.
b
type of indirect PD; charging lower per-unit price to customers who buy larger quantities
quality discounting
(Figure 10.10) Which of the following statements is (are) TRUE? I. Producer surplus under perfect price discrimination is $75.II. Producer surplus under a single-price monopoly is $45.III. The price of the first block is $28 and the price of the second block is $20. Producer surplus under block pricing is $75. a) I, II, and III b) I and II c) II and III d) II
b
(Figure 10.8) If the golf instructor set a single price to maximize profit, she would earn producer surplus of _____. If she set a price of $120 an hour for the first four hours of instruction and $80 an hour for each hour of instruction beyond four hours, she would earn producer surplus of _____. a) $480; $960 b) $320; $400 c) $500; $800 d) $80; $120
b
Government encouragement of monopoly: a) usually leads to lower prices and higher consumer surplus. b) through patents causes higher consumer prices but encourages firms to innovate and bring new products to the market. c) reduces the market power of regulated firms. d) results in the regulated firm producing beyond the competitive output level.
b
Price discrimination is the practice of charging: a) different prices for different goods. b) different prices to different customers for the same good. c) high prices for products with high marginal costs and low prices for products with low marginal costs. d) the same price for different goods in different regions.
b
Sparkling Water Co. has determined that for Michigan residents the price elasticity of demand for a case of its purified water is -3.0, while the price elasticity of demand for Florida residents is -2.5. Assume that the marginal cost is constant at $8. What price per case should Sparkling Water Co. charge Michigan and Florida customers? a) Customers in Michigan and Florida should be charged $16. b) Michigan customers should be charged $11.94 and Florida customers charged $13.33. c) Michigan customers should be charged $10 and Florida customers charged $14. d) Customers in Michigan and Florida should be charged $13.33.
b
The purchase price for Stata version 12 (statistical software used by many economists) is $895. For users of Stata version 11, the price to upgrade to version 12 is $395. Which of the following statements is (are) TRUE? a) Stata is using a two-part tariff strategy. b) Stata is segmenting its market by past purchasing behavior. c) Stata is practicing first-degree price discrimination by charging different groups different prices. d) The current users of Stata are less price-sensitive than possible future users.
b
Which of the following statements is (are) TRUE? I. A firm with market power maximizes profit by producing so that P = MC or MR = MC. II. If marginal revenue exceeds marginal cost, the firm should expand output to increase profits. III. If a firm has no costs of production, it should continue producing until marginal revenue falls to zero. a) I b) II and III c) II d) I, II, and III
b
Which of the following statements is (are) TRUE? I. A natural monopoly owes its existence to economies of scale. II. In contrast to a monopoly industry, industries served by natural monopolies have no barriers to entry. III. Natural monopolies have cost structures characterized by small fixed costs and steeply rising marginal costs. a) I and II b) I c) III d) II and III
b
keep entrants out of a market despite a large producer surplus
barriers to entry
market power is when a firm can affect the supply or demand of a market to force price changes through ______
barriers to entry
pricing strat where firm sells two or more products together at a single price
bundling
Antitrust laws: a) encourage firms to work together on setting prices, market share, and output levels. b) cannot be used to prevent the merger of two firms. c) restrict firms from engaging in behaviors that make markets less competitive. d) ensure that firms with market power are not penalized for colluding.
c
Market power occurs when a firm: a) can sell additional units of output without lowering the price of its product. b) must sell additional units of output at a constant marginal cost. c) can influence the price of its product. d) maximizes profit at the output level where P = MC.
c
To practice indirect or second-degree price discrimination, a firm must have: I. a Lerner index equal to zero.II. market power and the ability to prevent resale.III. customers with different demand curves, without the firm knowing which customers have which type of demand before purchase of the product. a) I and II b) I, II, and III c) II and III d) I and III
c
Which of the following requirements is necessary to practice price discrimination? I. The firm must have market power.II. The firm must be able to prevent arbitrage of its product.III. The firm must face a perfectly elastic demand curve.IV. The firm must operate in a perfectly competitive industry. a) II, III, and IV b) I, II, and III c) I and II d) III and IV
c
(Figure 10.1) The deadweight losses under monopoly and perfect price discrimination are _____ and _____, respectively. a) $16; $0 b) $8; $16 c) $0; $32 d) $8; $0
d
(Figure 9.7) The levels of consumer surplus under monopoly and perfect competition are _____ and _____, respectively. a) $600; $2,000 b) $200; $400 c) $800; $3,200 d) $400; $1,600
d
computes how much a firm should markup its price
lerner index
causes higher consumer prices but encourages firms to innovate & bring new products to the market
patent
2 types of direct PD
perfect (first degree), segmenting (third degree)
charging each customer exactly what they are willing to pay
perfect (price discrimination 1st degree)
the practice of charging different prices to different customers for the same product; a firm must have market power and be able to prevent resale or arbitrage of its products
price discrimination
method of pricing its product based on market characteristics
price strategies
creates an imperfect substitutability across otherwise similar products. As a result, new entrants to the market can't gain customers by having a lower price
product differentiation
having dif DC curves & price sensitivities; firm still earns surp by offering all customers option to purchase large quantity at a lower price Product Versioning: offering dif product options designed to attract dif types of customers (ex: an airline that offers business class & coach tickets to max producer surp)
product versioning
costly actions that firms undertake in their attempt to receive monopoly privilege from the gov.
rent seeking
charging dif prices to dif groups of consumers using knowledge of characteristics of groups (ex: age, gender, past purchasing behavior, location, & overtime)
segmenting (price discrimination 3rd degree)
what the consumer has to give up when switching to another business/product
switching cost
