Exam 11: Pricing Strategies for Firms With Market Power

During spring break, students have an elasticity of demand for a trip to Cancun, Mexico, of -4. How much should an airline charge students for a ticket if the price it charges the general public is $420? Assume the general public has an elasticity of -2.

If the profit-maximizing markup factor in a six-firm Cournot oligopoly is 3, what is the corresponding market elasticity of demand?

Which of the following statements about a price-matching strategy is incorrect?

Suppose a manager is interested in implementing third-degree price discrimination. The manager knows that the price elasticity of demand for Group 1 is -2 and the price elasticity of demand for Group 2 is -1.2. Based on this information alone we can conclude that the price charged to Group 2 will be:

Suppose you compete in a Cournot oligopoly market consisting of six firms. The equilibrium market price and quantity are $5 and 10 units, respectively. The marginal cost for each firm is $3. Based on this information, we know the price elasticity of the market demand is:

A firm with market power has an individual consumer demand of Q = 20 - 4P and costs of C = 4Q. What is optimal price to charge for a block of 20 units?

A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs. It faces an inverse demand function given by P = 38 - Q. Suppose fixed costs rise to $200. What will happen in the market?

The average consumer at a firm with market power has an inverse demand function of P = 10 - Q. The firm's cost function is C = 2Q. If the firm engages in optimal two-part pricing, it will earn profits of:

A monopoly produces X at a marginal cost of $20 per unit and charges a price of $50 per unit. Determine the elasticity of demand at the profit-maximizing price of $50.

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

A monopoly produces X at a marginal cost of $80 per unit and charges a price of $100 per unit. Determine the elasticity of demand at the profit-maximizing price of $100.

In a Cournot oligopoly with N firms and identical marginal costs, the relationship between the price elasticity of demand for the firm and that of the market is:

Suppose that the inverse demand for a downstream firm is P = 150 - Q. Its upstream division produces a critical input with costs of C_U(Q_d) = 5(Q_d)². The downstream firm's cost is C_d(Q) = 10Q. When there is no external market for the downstream firm's critical input, the marginal revenue for the downstream firm is:

To avoid the problem of double marginalization:

Suppose you are an analyst for the Coca-Cola Company. An individual's inverse demand for Coca-Cola is estimated to be P = 98 - 4Q (in cents). If Coca-Cola is produced according to the cost function C(Q) = 1,000 + 2Q (in cents), compute the optimal price and the number of cans to sell as a single package.

A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs. It faces an inverse demand function given by P = 38 - Q. What are the profits of the monopoly in equilibrium?

Suppose P = 20 - 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. The local monopoly tries to maximize its profits by equating MC = MR and charging a uniform price. What will be the equilibrium price and output?

Suppose you are the marketing manager for Fruit of the Loom. An individual's inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25 - 3Q (in cents). If the cost to Fruit of the Loom to produce an item of women's underwear is C(Q) = 1 + 4Q (in cents), compute the price Fruit of the Loom should charge for a package of women's underwear.

The average consumer at a firm with market power has an inverse demand function of P = 10 - Q. The firm's cost function is C = 2Q. If the firm engages in two-part pricing, what is the optimal fixed fee to charge each consumer?

Consider a Cournot oligopoly consisting of four 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 -2, determine the profit-maximizing price.