G300 Exam 2

A firm might choose to produce its own inputs if

Long-term contracts are costly to write

Which of the following is the primary disadvantage of producing inputs within a firm?

Loss of specialization

The price elasticity of demand for senior citizens purchasing coffee from McDonald's is -5, while non-senior citizens have a price elasticity of demand equal to -1.25. If it costs McDonald's $0.02 to produce a coffee, the optimal price for a cup of coffee for senior citizens and the resultant marginal cost under third-degree price discrimination are, respectively: (module 7)

$0.025 and $0.02

You are the manager of a gas station, and your goal is to maximize profits. Based on your past experience, the elasticity of demand by Ohioans for a car wash is -3, while the elasticities of demand by non-Ohioans for a car wash is -1.5. If you charge Ohioans $9 for a car wash, how much should you charge a man with a Kentucky license plate for a car wash? (Module 7)

$18

You are the manager of a gas station and your goal is to maximize profits. Based on your past experience, the elasticity of demand by Texans for a car wash is - 4, while the elasticity of demand by non-Texans for a car wash is -6. If you charge Texans $20 for a car wash, how much should you charge a man with Oklahoma license plates for a car wash? (Module 7)

$18.00

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: (module 7)

$25

During spring break, students have and elasticity of demand for a trip to Florida of -3. How much should an airline charge students for a ticket if the price it charges the general public is $360? Assume the general public has an elasticity of -2 (module 7)

$270

Suppose P = 60 - 3Q 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: (module 7)

$360

You are the manager of a mom and pop store that can buy milk from a supplier at $3 per gallon. If you believe the elasticity of demand for milk by customers at your store is -4, then your profit maximizing price is: (module 7)

$4.00

A local video store estimates it's average customers demand per year is Q= 7-2P, and it knows the marginal cost of each rental is $0.5. How much should the store charge for an annual membership in order to extract the entire consumer surplus via an optimal two-part pricing strategy? (Module 7)

$9

If a monopolist claims his profit maximizing markup factor is 3, what is the corresponding price elasticity of demand? (Module 7)

-1.5

An industry is comprised of 10 firms, each with an equal market share. What is the four firm concentration ratio of this industry

0.4

Suppose that the demand for a monopolist production is estimated to be Q=100 -2P and its total costs are C(Q)=10Q. Under first-degree price discrimination, the optimal price (P), number of total units exchanged (Q), profit (R), and consumer surplus (CS) are: (module 7)

10<=P<=50; Q=80; R=$1600; CS=$0

Markets with an HHI of less than 1500=

A competitive marketplace

Herfindahl Index of 10000 suggests what

A monopoly

T/F: Fixed costs are always greater than sunk costs

False

Which of the following statements is true? (Module 7) A. The higher the marginal cost, the lower the profit maximizing price B. The more elastic the demand, the lower the profit maximizing markup C. The more elastic the demand, the higher the profit maximizing markup D. The higher the average cost, the lower the profit maximizing price

B. The more elastic the demand, the lower the profit maximizing markup

Price takers

Buyers and sellers take prices as given when making purchase and production decisions

A monopolist claims his profit maximizing markup factor is 10. What is the price elasticity of demand for the firms product? (Module 7) A. -2.5 B. -2.0 C. None of the answers are correct D. -1.5

C. None of the answers are correct

Which of the following is NOT a condition for a firm to engage in third-degree price discrimination? (Module 7) A. Consumers are partitioned into two or more types, with one type having a more elastic demand than the other B. The firm has a means of identifying consumer types C. The consumers are sincere in revealing their true natures

C. The consumers are sincere in revealing their true nature's

Decision rule for deciding PRICE in perfect competition:

Cannot decide price! Take marker price as given

Suppose that Verizon wireless has hired you as a consultant to determine what price it should set for calling services. Suppose that an individuals inverse demand for wireless services in the greater Boston area is estimated to be P=100-33Q and the marginal cost of providing wireless services in the area is $1 per minute. What is the optimal two-part pricing that you would suggest to Verizon? (Module 7)

Charge a fixed fee= $95.5 and a usage fee of $1 per minute

Supposed two types of consumers by suits. consumers of Type A will pay $100 for a coat and $50 for pants. Consumers of Type B will pay $75 for coat and $75 for pants. The firm selling suits faces no competition and has a marginal cost of zero. If the firm can identify each consumer type and can price discriminate what is the optimal price for a pair of pants? (Module 7)

Charge type A consumers $50, and type B consumers at $75

Perfect information

Consumers know the prices being charged by all sellers

Identical products

Consumers perceive each firms product to be the same

If price is greater than or equal to min avc, a firm should:

Continue operating

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 (module 7)

Definitely no

Types of products in monopolistic competition

Different

In an oligopoly, is it easy or difficult for firms to form cartels and honor their agreements?

Difficult

Ease of entering monopoly

Difficult (there exist barriers to entry)

Ease of entering oligopoly

Difficult (there exist barriers to entry)

Ease of entering monopolistic competition

Easy (free entry and exit)

Ease of entering perfect competiton

Easy (free entry and exit)

Types of products in oligopoly

Either identical or different

Isocosts further away from the origin are associated with _______

Higher costs

Markets with an HHI of 2500 or greater=

Highly concentrated marketplace

Demand curve in perfect competition

Horizontal (perfectly elastic)

Types of products in perfect competitoon

Identical

What do a wheat farm, gas station, construction firm and lumber mill have in common?

Identical products and has little/no market power (perfect competition)

Long run zero economic profit

If there are positive profits, other firms will enter and compete them away

The further out the isoquant curve is from the origin the _______ the _______

Larger; output

"Optimal capital and labor"=

Long run

Decision rule for deciding QUANTITY in a monopoly:

MR=MC, solve for Q

Decision rule for deciding QUANTITY in monopolistic competition:

MR=MC, solve for Q

number of firms in monopolistic competition

Many

Oligopoly, profits are:

May be positive in short run AND long run

Perfect competition, profits are:

May be positive in short-run. 0 in the long-run

Monopoly, profits are:

May be positive in the short run AND long run

monopolistic competition, profits are:

May be positive or 0 in long-run

Markets with an HHI of 1500-2500=

Moderately concentrated marketplace

Types of products in monopoly

None (only one product)

First-degree price discrimination: (module 7)

Occurs when the 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

Which market structure is an industry where there is a higher level of industry concentration

Oligopoly

Decision rule for deciding QUANTITY in perfect competition:

P=MC, solve for Q

In the long run, monopolistically competitive firms produce a level of output such that:

P> MC P=ATC (average total cost)

Why does the government dislike monopoly?

P>MC (too little output, at too high price) Monopolies creat deadweight loss

Examples of variable costs

Raw materials, labor, patents, shipping

Examples of fixed costs

Rent, utilities, overhead, licenses, taxes

Examples of monopolistic competition

Restaurants, hotels and pubs, shampoo, toothpaste, hairdressing

Cinemas sometimes give senior citizens discounts. What is the possible privately motivated purpose for them to do so? (Module 7)

Senior citizens have a more elastic demand for movies than ordinary citizens

"Capital is fixed" =

Short run

Shut down decision rule for perfect competition

Shut down when Price < min Average cost

Decision rule for PRICE in a monopoly

Take the Q you solved for and plug it into demand function. Solve for P

Decision rule for PRICE in monopolistic competition:

Take the Q you solved for and plug it into demand function. Solve for P

Deadweight loss

The consumer and producer surplus that is lost due to the monopolist charging a price greater than marginal cost

A monopoly produces widgets at a marginal cost of $20 per unit and zero fixed costs. It faces an inverse demand function given by P=100 - 4Q. Suppose fix cost rise to $401. What happens in the market? (Module 7)

The firm will shut down immediately

Law of one price

There is a single price at which transactions will occur

Short run decision rule for labor

VMPl=w where VMPl=PxMPl

In perfect competition, long run profits=

Zero

Sunk cost

a cost that is forever lost after it has been paid

Monopolistic competition is characterized by

differentiated products

Number of firms in oligopoly

few (usually 2-10)

If the price of labor increases, in order to minimize the costs of producing a given level of output, the firm manager should use:

less labor and more capital

Number of firms in perfect competition

many

Total product begins to fall when:

marginal product is zero

Which market structure has the most market power?

monopoly

Which market structure is the least competitive

monopoly

Number of firms in a monopoly

one

Spot exchange can be inefficient in the presence of:

opportunism

Spot markets are an efficient way for the firm to purchase inputs if:

opportunism is not a problem.

Which market structure is the most competitive

perfect competition

An incentive for managers to maximize profits is:

performance bonuses, takeovers, and reputation

If the last unit of input increases total product, we know that the marginal product is:

positive

A manager who tries to enhance worker effort by tying workers compensation to the profitability of the firm is using:

profit sharing

Long term contracts are NOT efficient if

specialized investments are unimportant.