Intermediate Micro Exam III

How much profit will the monopolist whose cost and demand curves are shown below earn at output Q1? https://tracs.txstate.edu/access/content/attachment/fd5d8832-619c-4067-bde2-2fdd05c004cc/Assessments/34eeca74-52b0-41d5-85b4-035d74bad8fe/f1q9g1.jpg

BCDE

Use the following statements to answer this question: I. Cartels are illegal in the United States. II. Once price and production levels are agreed upon, each member of a cartel has an incentive to "cheat" on the agreement.

Both I and II are true.

Which of the following market structures is (are) capable of earning positive economic profits in the long run? A. monopoly B. oligopoly C. monopolistic competition D. Both A and B.

D. Both A and B.

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?

Demand becomes more elastic, Lerner index declines

What is one difference between the Cournot and Stackelberg models?

In Cournot, both firms make output decisions simultaneously, and in Stackelberg, one firm sets its output level first.

In the Stackelberg model, suppose the first-mover has MR = 15 - Q1, the second firm has reaction function Q2 = 15 - Q1/2, and production occurs at zero marginal cost. Why doesn't the first-mover announce that its production is Q1 = 30 in order to exclude the second firm from the market (i.e., Q2 = 0 in this case)?

In this case, MR is negative and is less than MC, so the first-mover would be producing too much output.

A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits?

MRA = MRB = MC.

A situation in which each firm selects its best action, given what its rivals are doing, is called a

Nash equilibrium.

Suppose a monopoly sells to two identifiably different types of customers, A and B, who are unable to practice arbitrage. The inverse demand curve for group A is PA = 10 - QA, and the inverse demand curve for group B is PB = 18 - QB. The monopolist is able to produce the good for either type of customer at a constant marginal cost of 2, and the monopolist has no fixed costs. If the monopolist practices group price discrimination, the profit maximizing prices charged to each type of customer are

PA = 6, and PB = 10.

MNO Limited publishes a magazine targeted at urban professionals who live on the east and west coasts of the U.S., and all of the magazines are printed at a marginal cost of $0.50 per copy at a publishing plant in Kansas. If the East Coast elasticity of demand for the magazine is -1.25 and the West Coast elasticity of demand is -1.50, what prices should MNO Limited charge for the magazines in these two markets in order to maximize profits?

Price should be $1.50 on the West Coast and $2.50 on the East Coast

In a Cournot duopoly, we find that Firm 1's reaction function is Q1 = 50 - 0.5Q2, and Firm 2's reaction function is Q2 = 75 - 0.75Q1. What is the Cournot equilibrium outcome in this market?

Q1​ = 20 and Q2​ = 60.

The oligopoly model that is most appropriate when one large firm usually takes the lead in setting price is the ________ model.

Stackelberg

Which of the following is true in the Stackelberg model?

The first firm produces more than its rival.

Which of the following markets is most likely to be oligopolistic?

The market for aluminum

The above figure shows the reaction functions for two pizza shops in a small isolated town. The Cournot equilibrium is at point https://tracs.txstate.edu/access/content/attachment/fd5d8832-619c-4067-bde2-2fdd05c004cc/Assessments/d9c65f7c-db2d-45b4-8e62-817798710e65/f1q28g1.jpg

b. Where the two best response curves intersect

Airlines offer lower prices to vacationers than to business travelers because

business travelers are less flexible in their travel plans than vacationers are.

Second-degree price discrimination is the practice of charging

different prices for different quantity blocks of the same good or service.

A firm is charging a different price for each unit purchased by a consumer. This is called

first-degree price discrimination.

Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ________ price and sell a ________ quantity.

higher smaller

If all producers in a market are cartel members, then the demand curve facing the cartel is

identical to the monopolist's demand curve.

The ________ elastic a firm's demand curve, the greater its ________.

less monopoly power

Regardless of market structure, all firms

maximize profit by setting marginal revenue equal to marginal cost.

In 1994, the Walt Disney Corporation ran a special promotion on tickets to Disneyland. Residents of southern California who lived near the amusement park were offered admission at the special price of $22. Other visitors to Disneyland were charged about $30. This practice is an example of:

price discrimination.

A ________ shows how much a firm will produce as a function of how much it thinks its competitors will produce.

reaction curve

The cartel of oil-producing nations (OPEC) once controlled about 80% of the world petroleum market, but OPEC's market share has declined to about half of its former level. This outcome is a good example of how firms may have:

relatively high short-run monopoly power that declines in the long run.

If a firm offers a senior citizen discount,

the firm expects the average senior citizen to have a higher price elasticity of demand.

Humana Hospital's price/marginal cost ratio of 2.3 is most likely to decline if

the number of nearby hospitals increases.

The Cournot equilibrium can be found by treating ________ as a pair of simultaneous equations and by finding the combination of Q1 and Q2 that satisfy both equations.

the reaction curves for firms 1 and 2

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing

third-degree price discrimination.

Suppose mountain spring water can be produced at no cost and that the demand and marginal revenue curves for mountain spring water are given as follows: Q = 6000 - 5P MR = 1200 - 0.4Q Refer to Scenario 12.1. What will be the price in the long run if the industry is a Cournot duopoly?

$400

Bob is the only carpet installer in a small isolated town. The above figure shows the demand curves of two distinct groups of customers-residential and business. If the marginal cost of installing carpet is a constant $1 per sq yard, what price does Bob charge each segment? https://tracs.txstate.edu/access/content/attachment/fd5d8832-619c-4067-bde2-2fdd05c004cc/Assessments/ac57578f-aba3-48fc-bac4-5c7140c16b1d/f1q17g1.jpg

$5.50 in the residential market and $8 in the business market

"Suppose mountain spring water can be produced at no cost and that the demand and marginal revenue curves for mountain spring water are given as follows: Q = 6000 - 5P MR = 1200 - 0.4Q Refer to Scenario 12.1. What is the profit maximizing price of a monopolist?"

$600

If the marginal cost of production is $10, the elasticity of demand for group 1 is -1.5, the elasticity of demand for group 2 is -2.5, and the price paid by group 1 is $15, the price for group 2 is

$8.33.

Bob is the only carpet installer in a small isolated town. The above figure shows the demand curves of two distinct groups of customers-residential and business. Bob is likely to price discriminate because

-Bob can probably identify which consumers belong to which segment. -the installation of carpets cannot be resold. -elasticities differ across markets. ^All of the above^

DVDs can be produced at a constant marginal cost of $10 per disk, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. What are the Lerner indices for these two movies?

0.5 and 0.67, respectively

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8Q MC = 4Q Refer to Scenario 10.9. At the profit maximizing level of output, what is the level of consumer surplus?

1,800 CS is equal to the area above the price and under the demand curve. Q=30, P=360-4Q=240. After we draw a graph for demand curve and figure out the quantity and price, we can calculate the CS as the area under the demand curve and above the price. CS=1800.

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8Q MC = 4Q Refer to Scenario 10.9. What is the profit maximizing level of output?

30 At profit maximizing level, MR=MC. So 360-8Q=4Q, and Q=30.

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then the firm's Lerner Index equals

42/58

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8Q MC = 4Q Refer to Scenario 10.9. What level of output maximizes the sum of consumer surplus and producer surplus?

45

Refer to Scenario 10.9. What is the maximum amount that Maui Macadamia would be willing to spend in order to maintain its monopoly through rent seeking?

5,400 Maui Macadamia is willing to pay the difference between the profit at perfect competitive market (which is equal to 0) and the profit under monopoly (which is 5400). So Maui Macadamia is willing to pay 5400-0=5400.

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8Q MC = 4Q Refer to Scenario 10.9. At the profit maximizing level of output, what is the level of producer surplus?

5,400 PS is equal to the area below the price and above the supply curve. Q=30, P=360-4Q=240. After we draw a graph for supply curve and figure out the quantity and price, we can calculate the PS =5400.

Johnny's Shop-and-Pay is a regional grocery chain, and their marketing manager is trying to determine the profit-maximizing coupon program for the store's laundry detergent brand. Coupon users at the store have an elasticity of demand for this product that equals -3, and the elasticity of demand for non-users of the coupon for the store brand equals -1.5. If the full retail (undiscounted) price of the detergent is $10 per box, what is the optimal discount to provide for coupon users?

50% off

The above figure shows the reaction functions for two pizza shops in a small isolated down. The Stackelberg leader will produce https://tracs.txstate.edu/access/content/attachment/fd5d8832-619c-4067-bde2-2fdd05c004cc/Assessments/d9c65f7c-db2d-45b4-8e62-817798710e65/f1q28g1.jpg

66.7 pizzas.

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8Q MC = 4Q Refer to Scenario 10.9. At the profit maximizing level of output, what is the deadweight loss?

900

What is the value of the Lerner index under perfect competition?

A perfectly competitive firm has a Lerner Index equal to zero (L = 0), since price is equal to marginal cost (P = MC).