ECON 510 Exam 3

Suppose that initially the price is $20 in a perfectly competitive market. Firms are making zero economic profits. Then the market demand shrinks permanently, some firms leave the industry, and the industry returns to a long-run equilibrium. What will be the new equilibrium price, assuming cost conditions in the industry remain constant?

$20

You are the manager of a firm that sells its product in a competitive market at a price of $48. Your firm's cost function is C=60+2Q^2 prime Your firm's maximum profits are:

$228

During spring break, students have an 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.

$270

Suppose that initially the price is $50 in a perfectly competitive market. Firms are making zero economic profits . Then the market demand shrinks permanently , some firms leave the industry , and the industry returns to a long-run equilibrium What will be the new equilibrium price , assuming cost conditions in the industry remain constant ?

$50

You are the manager of a firm that sells its product in a competitive market with market (inverse) demand given by P = 100 - 0.5Q The market equilibrium price is $50. Your firm's cost function is C = 40 + 5Q ^ 2 . Your firm's marginal revenue is

$50

You are the manager of a monopoly that faces a demand curve described by P = 230 - 20Q Your costs are C = 5 + 30Q The profit -maximizing output for your firm is:

5

You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + 5Q ^ 2 Your firm's maximum profits:

85

Economies of scale exist whenever:

average total costs decline as output increases.

A local video store estimates its average customer's 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 each rental if it engages in optimal two-part pricing?

$0.5

What price should a firm charge for a package of two shirts given a marginal cost of $4 and an inverse demand function P = 8 - 2Q by the representative consumer ?

$12

A local video store estimates its average customer's 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?

$9 Calculating demand at price, when P = MC - MC = $0.5 So, P = $0.5 Q = 7 - 2P = 7 - 2*$0.5 = 7 - 1 = 6 Calculate price at which demand will be zero - Q = 7 - 2P 0 = 7 - 2P P = $3.5 Calculate Consumer Surplus - CS = 1/2 * ($3.5 - $0.5) * 6 = $9 Total consumer surplus is equal to $9.

Suppose Qx^d = 10, 000 - 2Px + 3Py - 4.5M where Px = $100, Py =$50 , and M=$2,000 . What is the own price elasticity of demand?

-0.21

You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + 5Q ^ 2 The profit -maximizing output for your firm is:

5

Which of the following statements concerning monopoly is NOT true?

A monopoly is always undesirable.

In a competitive industry with identical firms, long-run equilibrium is characterized by:

All of the statements associated with this question are correct.

When two or more divisions mark up prices in excess of marginal cost:

double marginalization occurs

You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5Q ^ 2 What price should you charge in the short run?

In the short run the perfectly competitive firm charges the price decided by the market ( by equating market demand with market supply ). So the price we should charge is P =$14. $14

The own price elasticity of demand for apples is -1.2. If the price of apples falls by 5 percent , what will happen to the quantity of apples demanded ?

It will increase 6 percent.

Which of the following is a correct representation of the profit maximization condition for a monopoly?

MC = MR

A monopoly has two production plants with cost functions C 1 =50+0.1Q 1 ^ 2 and C 2 =30+0.05Q 2 ^ 2 The demand it faces is Q = 500 - 10P . What is the condition for profit maximization ?

MC1(Q1) = MC2(Q2) = MR(Q1+Q2)

Consider a monopoly where the inverse demand for its product is given by P = 200 - 5Q. Based on this information, the marginal revenue function is:

MR(Q)=200-10Q

Which of the following statements is NOT correct about monopoly?

Monopolists always make positive profits in the long run

Suppose perfectly competitive market conditions are characterized by the following market inverse demand, P = 100 - 5Q, and market inverse supply, P = 10 + 5Q. The demand curve facing an individual firm operating in this market is:

P = 100 - 5Q and P = 10 + 5Q Demand Equation = (P + 100)/5 Supply Equation = (P - 10)/5 At Equilibrium Point Demand = Supply 100 - 5Q = 10 + 5Q - 10 Q = 90 Q = 9 Price when Q = 9 P = 100 - 5* 9 P = 100 - 45 P = 55 a horizontal line at $55.

You are the manager of a monopoly that faces a demand curve described by P = 230 - 20 . Your costs are C = 5 + 30Q . Your firm's maximum profits are :

P = 230 - 20Q. TR = P * Q. TR = (230 - 20Q) * Q. TR = 230Q - 20Q2. MR = TR/Q. MR = 230 - 40Q. C = 5 + 30Q. MC = C/Q. MC = 30. MR = MC, 30 = 230 - 40Q. 40Q = 230 - 30. 40Q = 200. Q = 200/40. Q = 5 units. P = 230 - 20*5 P = $130. Profit = TR - TC. TR = 130 * 5 = $650. TC = 5 + 30 * 5 = $155. Profit = 650 - 155 = $495.

Which of the following is true for perfect competition but not true for monopolistic competition and monopoly ?

P = MC

Which of the following is true under perfect competition ?

P = MR

Which of the following is true under monopoly?

P > MC

A Broadway theater sells weekday show tickets at a lower price than for a weekend show. This is an example of:

Price discrimination or peak-load pricing

Which of the following is true under monopolistic competition in the long run?

Profits are always zero

You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + 5Q ^ 2 The profit -maximizing output for your firm is:

So, we can find the firm's optimal output by equating price and marginal cost, 10Q=50 Q=50/10=5 So, the firm's optimal output is 5. 5

You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5Q ^ 2 What will happen in the long run if there is no change in the demand curve ?

Some firms will enter the market eventually.

Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal cost, but the high equipment rental fee keeps generating big profits . Which pricing strategy is the management using ?

cross subsidization

A study has estimated the effect in interest rates and consumer confidence on the demand for money to be: ln M = 14.666 + .021 ln C - 0.036 ln r, where M denotes real money balances, C is an index of consumer confidence, and r is the interest rate paid on bank deposits. Based on this study, 5% increase in interest rates will cause the demand for money to:

drop by 0.18 percent

If the cross-price elasticity between ketchup and hamburgers is -1.2, a 4 percent increase in the price of ketchup will lead to a 4.8 percent :

drop in quantity demanded of hamburgers

A linear demand function exhibits:

less elastic demand as output increases.

Which of the following market structures would you expect to yield the greatest product variety?

monopolistic competition

Differentiated goods are a feature of a:

monopolistically competitive market

Firms have market power in: (can have multiple answers)

monopolistically competitive markets monopolistic markets

First-degree price discrimination:

occurs when a 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

The idea of charging two different groups of consumers two different prices is practiced in:

price discrimination

You are the manager of a monopoly that faces a demand curve described by P = 230 - 20Q Your costs are C = 5 + 30Q . The profit -maximizing price is :

revenue R = Q * P = 230Q - 20Q^2 MR = dR/dQ = 230 - 40Q for profit maximization MR = MC230 - 40Q = 30 40Q = 200 Q = 5 so profit maximizing Price P = 230 - 20 * 5 = 130