Econ 301 practice final

The following graph summarizes the demand, marginal revenue, and marginal cost for your product. Suppose your firm engages in first-degree price discrimination. Determine your firm's profits resulting from this pricing strategy

1,350 Answer range +/-0 (1350 - 1350 ) Response Feedback: Step 1: Solve the profit maximization problem under perfect competition by intersecting the MC curve with the demand curve. The resulting quantity is 90. Step 2: Calculate the consumer surplus and producer surplus under perfect competition. CS = 0.5*90*($40-$10) = $1350; PS = 0 since MC = ATC. Step 3: The profits under 1st degree PD is CS + PS = $1350.

You are the manager of a local sporting goods store and recently purchased a shipment of 60 sets of skis and ski bindings at a total cost of $25,000 (your wholesale supplier would not let you purchase the skis and bindings separately, nor would it let you purchase fewer than 60 sets). The community in which your store is located consists of many different types of skiers, ranging from advanced to beginners. From experience, you know that different skiers value skis and bindings differently. However, you cannot profitably price discriminate because you cannot prevent resale. There are about 20 advanced skiers who value skis at $400 and ski bindings at $275; 20 intermediate skiers who value skis at $300 and ski bindings at $400; and 20 beginning skiers who value skis at $200 and ski bindings at $350. What is your maximum revenue if you sell skis and bindings as a bundle? Answer: Revenue = $______

33,000 Answer range +/-0 (33000 - 33000 ) Response Feedback: Step 1: Create a table listing the valuation of different types of consumers: Consumer TypeValuation of SkisValuation of Ski BindingsValuation of BundleAdvanced (20)$400$275$675Intermediate (20)$300$400$700Beginning (20)$200$350$550 Step 2: Since you are only interested in commodity bundling, we can try different bundling prices: If the price of the bundle = $550, you can sell 60 units of the bundle. Total revenue = $550*60 = $33,000. If the price of the bundle = $675, you can sell 40 units of the bundle. Total revenue = $675*40 = $27,000. If the price of the bundle = $700, you can sell 20 units of the bundle. Total revenue = $700*20 = $14,000. The maximum revenue you can get from commodity bundling is $33,000.

All of the following are characteristics of monopolistic competition except which one?

barriers to entry

The monopolist's marginal revenue curve

lies below the demand curve

The table below presents information for a simultaneous-move, one-shot game. Player 2 StrategyDEFPlayer 1A200, 150350, 100-50, 600B200, -300400, 100300, 200C-150, 250-250, 550250, -350 If this one-shot game is repeated 100 times, the Nash equilibrium payoffs of the players will be ________ each period.

(300, 200) Response Feedback: The NE of a finitely repeated game with known ending period is to play the NE of the corresponding one-shot game in each period. So the problem is asking you to find the NE of the one-shot game.

The table below presents information for a simultaneous-move, one-shot game. Strategy DEF Player 1A-200, 150350, 100-50, 600B200, 300400, 200300, 100C-150, 250-250, 550250, -350 What is a Nash equilibrium of this game?

(B,D)

Revenues when a firm engages in peak-load pricing based on the figure below will be:

(P 3 × Q 1) + (P 4 × Q 3). Response Feedback: When demand is high, Q=Q3 and P=P4. When demand is low, Q=Q1 and P=P3.

The following graph summarizes the demand, marginal revenue, and marginal cost for your product. Suppose your firm engages in block pricing. Determine the optimal price your firm should for the package with the optimal number of units to put in it. Answer: $_________

1,875 Answer range +/-0 (1875 - 1875 ) Response Feedback: Step 1: Solve the profit maximization problem under perfect competition by intersecting the MC curve with the demand curve. The resulting quantity is 50, which is the optimal number of units in the package. Step 2: Calculate the consumer surplus and total revenue under perfect competition. CS = 0.5*50*($50-$25) = $625; TR = PQ = $25*50 = $1250. Step 3: The firm should set the price of the package as P = CS + TR = $1875.

You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1's elasticity of demand is -2, while group 2's is -5. Your marginal cost of producing the product is $10. Determine the optimal price for group 2 under third-degree price discrimination.

12.5 Answer range +/-0.01 (12.49 - 12.51 ) Response Feedback: Step 1: The 3rd degree price discrimination rule: (1) P1 = (E1 / (1 + E1))*(MC) (2) P2 = (E2 / (1 + E2))*(MC) Step 2: In this question: MC = $10, E1 = -2, E2 = -5. Step 3: Plugging these values into equation (2), we have: P2 = (E2 / (1 + E2))*(MC) = (-5 / (1 -5))*($10) = (1.25)*($10) = $12.50. (Not asked: P1 = (E1 / (1 + E1))*(MC) = (-2 / (1 -2))*($10) = (2.00)*($10) = $20.00.)

Suppose that when firm A and its largest rival advertise, each company earns $2 billion in profits. When neither company advertises, each company earns profits of $13 billion. If one company advertises and the other does not, the company that advertises earns $72 billion and the company that does not advertise loses $3 billion. Suppose the game will be played over and over again forever. For what range of interest rates could these firms use trigger strategies to support the collusive level of advertising? Answer: i≤_____________% Firm A Rival Advertise No Yes No $13, $13 $-3, $72 Yes $72,$-3 $2, $2

18.64 Answer range +/-0.01 (18.63 - 18.65 ) Response Feedback: Step 1: Firm A Rival Advertise No Yes No $13, $13 $-3, $72 Yes $72,$-3 $2, $2 Step 2: NE: (Yes, Yes) Cooperative outcome: (13,13) Step 3: πN=2, πCoop=13, πCheat=72 Step 4: PVCoop=πCoop+πCoop/i=13+13/i PVCheat=πCheat+πN/i=72+2/i Step 5: To support the collusive level of advertising, we must ensure that PVCoop≥PVCheat, which implies that 13+13/i ≥ 72+2/i. Solving this inequality yields: i≤11/59=18.64%. You should enter 18.64, not 18.64%.

You are a risk-neutral manager of a firm that sells a product in a perfectly competitive market, and your cost function is C(Q) = 7Q + 8Q2. Unfortunately, due to production lags, you must make your output decision prior to knowing for certain the price that will prevail in the market. You believe that there is a 60% chance the market price will be $231 and a 40% chance it will be $554. What output should you produce in order to maximize the expected profits? Answer: __________ units

22.08 Answer range +/-0.01 (22.07 - 22.09 ) Response Feedback: Step 1:The profit maximization rule under uncertainty for a risk-neutral manager: E[MR]=MC. Under perfect competition, MR=P, so (1) E[P]=MC Step 2: E[P] = 60%*231 + 40%*554 = 360.2. Step 3: According to the cost function, MC(Q) = 7+16Q. Step 4: Plugging E[P] = 360.2 and MC(Q) = 7+16Q into equation (1), we have: 360.2 = 7+16Q Step 5: Solving the equation yields: Q=22.075≈22.08.

The following graph summarizes the demand, marginal revenue, and marginal cost for your product. Suppose your firm engages in two-part pricing. Determine the optimal fixed fee your firm should charge with this pricing strategy.

450 Answer range +/-0 (450 - 450 ) Response Feedback: Step 1: Solve the profit maximization problem under perfect competition by intersecting the MC curve with the demand curve. The resulting quantity is 60. Step 2: Calculate the consumer surplus under perfect competition. CS = 0.5*60*($30-$15) = $450. Step 3: For two-part pricing, set price equal to MC and a fixed fee equal to CS. So Fixed fee = CS = $450.

You are the manager of a monopolistic competitive firm, and your inverse demand and cost functions are given by P = 63 - 4Q and C(Q) = 15 + 16Q + 3Q2. What is the profit-maximizing price?

49.57 Answer range +/-0.01 (49.56 - 49.58 ) Response Feedback: Step 1: Profit maximization rule under monopolistic competition: (1) MR = MC Step 2: In this question: MR=63-8Q MC=16+6Q. Step 3: Plugging them into equation (1), we have 63-8Q=16+6Q. Step 4: Solving the above equation yields Q=(63-16)/(6+8)=47/14. Do not round Q here. Step 5: Plugging the value of Q into the inverse demand function, we have P=63-4*47/14=49.57. In Excel, you can enter "=63-4*47/14" in any cell to get the answer. Then format the cell to round to two decimal places.

Consider a Cournot oligopoly consisting of five identical firms producing good X. If the firms produce good X at a marginal cost of $7 per unit and the market elasticity of demand is −3, determine the profit-maximizing per-unit price.

7.5 Answer range +/-0.01 (7.49 - 7.51 ) Response Feedback: Step 1: Cournot pricing rule: (1) P=NE/(1+NE)*MC Step 2: In this question: N =5, NE = -3, MC = $7 Step 3: Plugging in these values into equation (1): P = (-3*5)*$7/(1-3*5) =$7.50

The manager of a local monopoly estimates that the own-price elasticity of demand for its product is constant and equal to -7.6. The firm's marginal cost is constant at $61 per unit. Determine the profit-maximizing per-unit price.

70.24 Answer range +/-0.01 (70.23 - 70.25 ) Response Feedback: Step 1: The profit-maximizing price under monopoly and monopolistic competition is: (1) P = [E/(1+E)]*MC Step 2: In this question: E = -7.6; MC = $61 Step 3: Plugging these values into equation (1): P = [-7.6/(1-7.6)]*$61 = $70.24.

The following graph summarizes the demand, marginal revenue, and marginal cost for your product. Suppose your firm engages in second-degree price discrimination, charging $25 per unit for the first 35 units and $15 per unit for each additional unit sold in excess of 35 units. Determine the profits resulting from this pricing strategy. Answer: $_________

775 Answer range +/-0 (775 - 775 ) Response Feedback: Step 1: Looking at the graph, at P1 = $25, the firm is able to sell Q1 = 35 units; at P2 = $15, the firm is able to sell Q2 = 85 units. Step 2: Under 2nd-degree PD, the firm sells the first 35 units at a price of $25 and the remaining 85-35=50 units at a price of $15. Step 3: Total profits = 35* ($25-$10) + 50*($15-$10) = $775

Which of the following is NOT a condition under which third-degree price discrimination is possible for the firm:

Ability to know the maximum price each consumer is willing and able to pay.

A firm sells its product in a perfectly competitive market where other firms charge a price of $105 per unit. The firm's total costs are C(Q) = 46 + 28Q + 2Q2. How much output should the firm produce in the short run?

Correct Answer: 19.25Answer range +/-0.01 (19.24 - 19.26 ) Response Feedback: Step 1: Profit maximization rule under perfect competition: (1) P = MC Step 2: A perfectly competitive firm is a price taker and must charge the same price as other firms, so its price P = 105. Step 3: According to the MC formula, MC(Q)=28+4Q. Step 4: Plugging P = 105 and MC(Q)=28+4Q into equation (1): 105 = 28 + 4Q Step 5: Solving this equation, we get Q=(105-28)/4=19.25.

Which of the following is a true statement about the process of cross-subsidization, given that a firm is selling two products?

The firm needs cost complementarities in the production of the two goods or complements in demand.

Local stores sometimes give discounts to U.S. military veterans, active-duty military, National Guard and Reserve members, and their families. What is the most possible motivated purpose for them to do so?

Military members have a more elastic demand for movies than ordinary citizens.

occurs when people smoke more after buying life insurance.

Moral hazard

Which of the following pricing policies does NOT extract the entire consumer surplus from the market?

Peak load pricing

The table below presents information for a simultaneous-move, one-shot game. Player 2 Strategy DEF Player 1 A-200, 150350, 100-50, 600 B200, -300400, 400300, 100 C-150, 250-250, 550250, -350 What are dominant strategies for player 1 and player 2 respectively?

Player 1's dominant strategy is B, and player 2 has no dominant strategy

President Joe Biden's American Jobs Plan includes a $174 billion investment in the electric vehicle market to support automakers in the form of tax incentives. Consider the market for electric vehicles. Ceteris paribus (holding everything else constant and considering only the impact of this event), what do you think would happen to the equilibrium price and quantity of electric vehicles if his Plan is implemented? Which determinant changes and shifts which curve to which direction? What happens to equilibrium price and quantity of electric vehicles? Use the drop-down menus to complete the following sentence.

President Joe Biden's American Jobs Plan includes a $174 billion investment in the electric vehicle market to support automakers in the form of tax incentives. Consider the market for electric vehicles. Ceteris paribus (holding everything else constant and considering only the impact of this event), what do you think would happen to the equilibrium price and quantity of electric vehicles if his Plan is implemented? Which determinant changes and shifts which curve to which direction? What happens to equilibrium price and quantity of electric vehicles? Use the drop-down menus to complete the following sentence. A change in government policies (choose a demand or supply shifter) causes supply (choose "supply" or "demand") curve to shift to the right (choose "left" or "right"), leading to a(n) decrease (choose "increase" or "decrease") in equilibrium price and a(n) increase (choose "increase" or "decrease") in equilibrium quantity in the market of electric vehicles, ceteris paribus.

Your friend Susan will graduate from Strome in December. She has already got two job offers: company A offered a fixed salary of $80,000 in the next year, and her compensation at company B for the next year would be contingent on the U.S. economy. If the economy had a strong recovery from the COVID-19 pandemic, Susan will receive $100,000; otherwise, she will receive $50,000. Suppose that the offers of the two companies are exactly the same for the periods beyond December 2021. Susan estimated that the probability of a strong recovery is 60% and she accepted the offer from company B. Based on the information provided, what can we conclude?

Susan is risk-loving. Response Feedback: E(B)=60%*$100,000+40%*$50,000=$80,000.

The following paragraphs were taken from news articles: Many stores stayed closed this Thanksgiving, in a break with a pre-pandemic tradition of opening Thursday evening. Retailers have moved away from doorbusters, the deeply discounted items available for a limited time that drew hordes of shoppers to stores on Friday morning. Tyson Foods Inc. reported a jump in sales after sharply raising prices for its beef, chicken and pork, citing growing costs the company said were likely to persist. The Arkansas-based meat giant lifted prices across all of its major divisions as executives said Tyson's cost of cattle jumped by one-fifth year over year in the quarter ended Oct. 2. Tyson's logistics expenses climbed about 30%, they said, while the company also has paid more for ingredients and packaging materials. Why did many companies hike the prices of their products this year? Follow what we have learned from this course, and answer this question by using the drop-down menus to complete the following sentence. According to Chapter 11, the higher the marginal cost, the [a] (choose "higher" or "lower") the profit-maximizing price. This year, many stores experienced a(n) [b] (choose "increase" or "decrease") in costs, and the optimal pricing rule directed them to [c] (choose "increase", "decrease", or "not change") prices.

The following paragraphs were taken from news articles: Many stores stayed closed this Thanksgiving, in a break with a pre-pandemic tradition of opening Thursday evening. Retailers have moved away from doorbusters, the deeply discounted items available for a limited time that drew hordes of shoppers to stores on Friday morning. Tyson Foods Inc. reported a jump in sales after sharply raising prices for its beef, chicken and pork, citing growing costs the company said were likely to persist. The Arkansas-based meat giant lifted prices across all of its major divisions as executives said Tyson's cost of cattle jumped by one-fifth year over year in the quarter ended Oct. 2. Tyson's logistics expenses climbed about 30%, they said, while the company also has paid more for ingredients and packaging materials. Why did many companies hike the prices of their products this year? Follow what we have learned from this course, and answer this question by using the drop-down menus to complete the following sentence. According to Chapter 11, the higher the marginal cost, the higher (choose "higher" or "lower") the profit-maximizing price. This year, many stores experienced a(n) increase (choose "increase" or "decrease") in costs, and the optimal pricing rule directed them to increase (choose "increase", "decrease", or "not change") prices.

Which of the following features is (are) common to both perfectly competitive markets and monopolistically competitive markets?

There is free entry and long-run profits are zero.

Richard Roe is a recently hired Strome graduate at a Fortune 500 firm. His job responsibilities involve spending a significant amount of time outside the corporate office visiting business prospects. Which of the following is a strategy his manager could employ to solve the principal-agent problem?

To reduce Richard's base salary and pay him a commission when payment is received from a client.

People with a bad driving record find it difficult to buy automobile insurance because insurance companies fear that ________ may happen if they raise the premiums.

adverse selection

Despite a 30% rise in the average selling price of its line of phones, a major smartphone manufacturer's product shipment decreased by 58%. Given this information, we would expect the company's revenue to

drop.

Cooperation is possible in a ________ game if both firms ________ know the final period of the game.

finitely repeated; do not

If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is:

for neither firm to advertise. Response Feedback: Step 1: Write the game in normal form: Your Rival To AdvertiseNot to AdvertiseYouTo Advertise4, 41, 5 Not to Advertise5, 110, 10 Step 2: Find the NE of this game.

Firms in a perfectly competitive market face ________ demand curves and earn ________ economic profits in the long run.

horizontal; zero

You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. If w = $40, r = $400, MP L = 4, and MP K = 40 the firm:

is cost minimizing.

John Doe recently received a promotion and is now managing his former co-workers. Previously, John and his co-workers would go out together and they still remain friends on social media. John has found that trusting his former co-workers to "get the job done" is not working. It seems that while some are working as hard as usual, others are now taking more time on breaks, playing with their phones at their desks, or not showing up for work at all. John's management style of "we are all friends, let's work together" is failing because of:

moral hazard

A campus auditorium sells tickets at half price to students during the last 30 minutes before a concert starts. This is an example of:

price discrimination or peak-load pricing. Response Feedback: The demand could be lower during the last 30 minutes before a concert starts -> Peak-load pricing. Students could have a more elastic demand -> Price discrimination.

If a 1% change in the price causes less than 1% change in the quantity demanded of a product, the demand for the product is:

relatively inelastic

An uninformed party can use ________ to sort an informed party according to their characteristics.

screening

If the value marginal product of labor is less than the wage rate, the firm:

should hire fewer units of labor to maximize profits.

If a roofer offers a one-year warranty on their work, this is an example of _

signaling

Which of the following is NOT an incentive scheme to ensure that workers do a good job?

straight hourly wages for dock workers

A player's best response is

the strategy that maximizes his payoff given what he thinks the other player will do.

Use the following normal-form game to answer the questions below. Player 2 StrategyCDPlayer 1A3, 7 - x2, 3B4, 47 - x, 5 For what values of x is (B, D) a Nash equilibrium of the game?

x ≤ 5 Response Feedback: For (B, D) to be a Nash equilibrium, B must be player 1's best response to D and D must be player 2's best response to B. So we must have 7-x≥2 & 5≥4. It is sufficient to satisfy the above two inequalities if x≤5.