ECON 351 Quiz 4

What will be the price of this new drink if the industry is a Cournot duopoly?

$12

What is the monopoly price of this new drink?

$16.50

What will be the price of this new drink if the firms in the industry collude with one another to maximize joint profit?

$16.50

What price would this new drink sell for if it sold in a competitive market?

$3

What will be the price of this new drink if the industry is a Bertrand duopoly?

$3

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

0

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 Ram- beau 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?

1/2 and 1/3 respectively

Consumers of Colombian coffee in the U.S. have an elasticity of demand of -1.5 and consumers of Colombian coffee in Europe have and elasticity of demand of -2.3. Suppose that Colombian coffee was produced under a monopoly. Then to maximize profits the Colombian coffee monopolist should:

A) Charge higher prices in the U.S. market than in Europe.

Examples of price discrimination are:

A) Intertemporal price discrimination. B) Peak-load pricing. C) Two-part tariffs.

In a competitive market structure producers maximize profits where ___ and a monopolist maximizes profits where ___

A) P=MC; MR=MC.

Although firms earn zero profits in the long run, why is the outcome from monopolistic competition considered to be inefficient?

A) Price exceeds marginal cost. B) Quantity is lower than the perfectly competitive outcome.

Examples of second-degree price discrimination are:

A) Volume discounts. D) Blockpricing.

Monopolistically competitive firms have monopoly power because they

A) face downward sloping demand curves.

The most important factor in determining the long-run profit potential in monopolistic competition is

A) free entry and exit.

You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. You will charge the higher price in the market with the

A) lower own price elasticity of demand (more inelastic demand).

A local theater charges $5.00 for every matinee (daytime) ticket, but the ticket prices are much higher during the evening. This is an example of

A) peak-load pricing.

Suppose that an industry has a duopolistic market structure. Both firms compete simultaneously choosing prices, have marginal costs equal to 5, and face the following aggregate demand: P=100-Q Then in equilibrium it should be true that:

All of the above

When first-degree price discrimination takes place

All of the above.

In every market, as the number of firms increases it should be true (in general) that:

B) Each firm has less market power and the aggregate production is larger. C) The price decreases.

A monopolist applying third-degree price discrimination should charge

B) Higher prices in inelastic markets.

Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long-run? I - P=AC II - MR = MC III - P = MR

B) I and II are true, III is false

In the Stackelberg model, suppose the first-mover has revenues REV1 =(15−Q1 −Q2)Q1, 22 the second firm has reaction function Q2 = 15 − Q1 , and production occurs at zero 2 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)?

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

Airline miles programs are an example of:

B) Second-degree price discrimination.

A firm setting a two-part tariff with only one customer should set the entry fee equal to

B) consumer surplus.

Second-degree price discrimination is the practice of charging

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

Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the

B) firm's output is smaller than the profit maximizing quantity.

The maximum price that a consumer is willing to pay for each unit bought is the ___ price.

B) reservation

Discrimination based upon the quantity consumed is referred to as ____ price discrimination.

B) second-degree

A monopolistically competitive firm in long-run equilibrium

B) will make zero profit.

Which oligopoly model(s) have the same results as the competitive model?

Bertrand

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?

C) MRA = MRB = MC.

Barbara is a producer in a monopoly industry. Her demand curve and total cost curve are given as follows: Q = 160 − 4P , T C = 4Q. How much output will Barbara produce? Will she have positive profits?

C) Q = 72, P = 22, and profits are positive an equal to π = 1,296.

A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). The marginal cost to sell to either market is the same. After selling all of its output, the firm discovers that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30. To maximize profits the firm should

C) have sold less output in the local market and more on the internet auction site.

When a company introduces new audio products, it often initially sets the price high and lowers the price about a year later. This is an example of

C) intertemporal price discrimination.

For a monopolist that faces a downward sloping demand, marginal revenue is

C) less than price.

A market with few entry barriers and with many firms that sell differentiated products is

C) monopolistically competitive.

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

C) third-degree price discrimination.

You are hired by Google to advise them on how to price a new secret product (called Q) that they are about to launch. The marginal cost of producing Q is 5. Google knows that there are two demands for this product coming from professionals (denoted by P) and students (denoted by S). What would you advice Google if the demand for Q (expressed in millions of units) for each group of individuals is given by: 𝑃𝑠 =120-10𝑄𝑠 𝑃𝑝 =400-9𝑄𝑝

Charge a price 𝑃𝑠 = 62.5 and 𝑃𝑝 = 202.54.

A monopolistically competitive firm in short-run equilibrium:

D) Any of the above are possible.

Which of the following is true at the output level where P=MC?

D) The monopolist is not maximizing profit and should decrease output.

Which of the following is true for both perfect and monopolistic competition?

D) There is freedom of entry and exit in the long run.

When a firm charges each customer the maximum price that the customer is willing to pay, the firm

D) engages in first-degree price discrimination.

In comparing the Cournot equilibrium with the competitive equilibrium,

D) profit is higher, and output level is lower in Cournot.

Which of the following is NOT true for monopoly?

E) At the profit maximizing output, price equals marginal cost.

Suppose that an industry has a duopolistic market structure. Both firms compete simultaneously choosing quantities, have zero marginal costs, and face the following aggregate demand: P=100-Q Then in equilibrium it should be true that:

Each firm will produce an equal amount of 33.3 and the price will be P=33.3

Firm 1 and Firm 2 are Cournot competitors. They have the same cost function C1(Q1) = 2Q1 C2(Q2) = 2Q2 The market demand is QD =40−0.5P Compute the Cournot equilibrium, and find the profit of Firm 1.

Firm 1 Profit = 338 and Firm 2 Profit = 338

All the statements below are true for monopolistic competition market structures EXCEPT:

Firms have barriers to entry.

All of the statements below are true EXCEPT:

In Cournot and Stackelberg duopolistic market structures the Nash equilibrium describes quantities produced that are larger than those of competitive market structures.

Is there a first-mover advantage in the Bertrand duopoly model with homogeneous products?

No, the second-mover would be able to set a slightly lower price and capture the full market share.

If the monopolist is not regulated, the price will be set at ___

P2

The minimum feasible price is ___

P3

Suppose that the government decides to limit monopoly power with price regu- lation. If the government sets the price at the competitive level, it will set the price at ___

P4

Monopolies typically generate deadweight loss in the markets they operate as they charge higher prices and sell lower quantities relative to competitive markets. To minimize deadweight loss the government may decide to regulate monopolies markets up to a point where

P=MC. Both the consumer and producer surplus are maximized in an industry.

Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run?

Profits equal zero

Suppose that an industry has a duopolistic market structure. Both firms compete sequentially choosing quantities, have zero marginal costs, and face the following aggregate demand: P=100-Q If firm one chooses quantities first (is the leader) and firm 2 chooses quantities second (is the follower), then in equilibrium it should be true that:

Q1=50 and Q2=25 and P=25. Firm 1 has a first-mover's advantage.

Two large diversified consumer products firms are about to enter the market for a new pain reliever. The two firms are very similar in terms of their costs, strategic approach, and market outlook. Moreover, the firms have very similar individual demand curves so that each firm expects to sell one-half of the total market output at any given price. The market demand curve for the pain reliever is given as: Q = 2600 − 400P. Both firms have marginal costs of $2.00 per bottle. Patent protection insures that the two firms will operate as a duopoly for the foreseeable future. Price and quantity values are stated in per-bottle terms. If the firms act as Cournot duopolists, solve for the firm and market outputs and equilibrium prices.

Q1=Q2=600, P=3.5

You are hired as an economic adviser. Your objective is to increase the profit margins of a firm which is competing in a duopolistic market structure. To follow your assigned objectives, you will always advice the firm to do all of the following EXCEPT:

Start a price war, lowering prices below those of the competitor to keep the market from the competitor.

Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct?

The Japanese firm will sell steel at a lower price abroad than they will charge domestic users.

From the point of view of a regulator will it be desirable to regulate a monopolistic competition market structure?

There is no definitive answer. If we make P=MC many monopolistic competitors will go out of business and product diversity will be reduced but consumers will pay lower prices.

All of the statements below are true EXCEPT:

When a monopolist applies first-degree price discrimination the consumer surplus is positive.

An amusement park charges an entrance fee of $75 per person plus $2.50 per ride. This is an example of

a two-part tariff

Consider the following information about the market: Market Demand Function: QD (P ) = 53 − P Firm 1 Cost Function: C1(Q1) = 5Q1 Firm 2 Cost Function: C2(Q2) = 5Q2 a) Compute the perfectly competitive equilibrium outcome (price and quantity). b) Now suppose Firm 1 is a monopolist (there is no Firm 2). Find equilibrium price, quantity and profit. c) For this monopolist, draw the demand, the marginal revenue, and the marginal cost functions. Mark on the graph the equilibrium price and quantity for the monopolist. d) For this monopolist, compute the consumer surplus, the producer surplus, and the deadweight loss. e) Now suppose Firm 2 enters the market. Suppose Firm 1 and Firm 2 behave as 5 Bertrand competitors. Compute the equilibrium price, quantities and profits of each firm. f) Now suppose Firm 1 and Firm 2 behave as Cournot competitors. Compute the equilibrium price, quantities and profits of each firm. g) Now suppose Firm 1 has a first-move advantage (Stackelberg model). Compute the equilibrium price, quantities and profits of each firm. h) Now consider, again, the Cournot model from part (f). What would be the equi- librium price, quantities and profits of each firm if the two firms could collude to maximize joint profits?

a) P=5, Q=48 b) Q=24, P=29, pi=576 c) d) CS=288, PS=576, DWL=288 e) P=5, Q=48, pi=0 f) P=21, pi=256, Q=16 g) Q1=24, Q2=12, P=17, pi1=288, pi2=144 h) Q1=Q2=12, P=29, pi1=pi2=288

Suppose that the market demand for mountain spring water is given as follows: P =1200−Q Mountain spring water can be produced at no cost. a. What is the profit maximizing level of output and price of a monopolist? b. What level of output would be produced by each firm in a Cournot duopoly? What will the price be? c. What will be the level of output and price if this industry were perfectly competi- tive?

a) Q=600, P=600 b) Q1=Q2=400, P=400 c) Q=1,200 and P=0

Third-degree price discrimination involves

charging different prices to different groups based upon differences in elasticity of demand.

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

higher; smaller

To find the profit maximizing level of output, any firm (independent of the mar- ket structure) finds the output level where

none of the above

What will be the price of this new drink if the industry is a Stackelberg duopoly?

none of the above

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 hamburger. This practice is an example of:

price discrimination

A national chain of bookstores has initiated a frequent buyer program. If you buy a frequent buyer card for $10, you are entitled to a 10 percent discount on all purchases for 1 year. This practice is an example of:

two-part tariff