Question 1

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.

Accepted Answer

A)  $210 
B)  $280 
C)  $160 
D)  $105

Question 2

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

Accepted Answer

A)  -0.25 
B)  -1.25 
C)  0.08 
D)  None of the answers are correct.

Question 3

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

Accepted Answer

A)  It may be applied in situations besides Bertrand oligopoly. 
B)  It requires that the firms can monitor their rival's prices. 
C)  It reduces the incentive for a rival firm to initiate a price war. 
D)  It only guarantees to match prices that are advertised publicly.

Question 4

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:

Accepted Answer

A)  the same as the price charged to Group 1. 
B)  lower than the price charged to Group 1. 
C)  higher than the price charged to Group 1. 
D)  There is insufficient information to determine whether Group 2 will have a higher, lower, or the same price as Group 1.

Question 5

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:

Accepted Answer

A)  -0.417. 
B)  0.167. 
C)  -2.4. 
D)  There is insufficient information to answer this question.

Question 6

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?

Accepted Answer

A)  $18 
B)  $36 
C)  $72 
D)  $90

Question 7

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?

Accepted Answer

A)  The firm will decrease its output and lower its price. 
B)  The firm will increase the price. 
C)  The firm will shut down immediately. 
D)  The firm continues to produce the same output and charge the same price.

Question 8

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:

Accepted Answer

A)  $2. 
B)  $32. 
C)  $64. 
D)  None of the answers are correct.

Question 9

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.

Accepted Answer

A)  -0.5 
B)  -.6 
C)  .67 
D)  There is insufficient information to determine the monopoly's price elasticity of demand.

Question 10

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

Accepted Answer

A)  price discrimination. 
B)  two-part pricing. 
C)  price matching. 
D)  None of the statements is correct.

Question 11

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.

Accepted Answer

A)  -5 
B)  -0.2 
C)  -0.8 
D)  There is insufficient information to determine the monopoly's price elasticity of demand.

Question 12

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:

Accepted Answer

A)  EF = EM. 
B)  EF = NEM. 
C)  EF = EM/N. 
D)  EF = N/EM.

Question 13

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

Accepted Answer

A)  MRd(Q) = 150 - 2Q. 
B)  MRd(Q) = 150 - Q. 
C)  MRd(Q) = 140 - 2Q. 
D)  MRd(Q) = 140 - Q.

Question 14

To avoid the problem of double marginalization:

Accepted Answer

A)  transfer prices must be set that maximize the overall value of the firm rather than the profits of the upstream division. 
B)  firms should put more emphasis on vertical integration. 
C)  firms should engage in two-part pricing. 
D)  firms should engage in commodity bundling, unless it is possible to engage in either first-or second-degree price discrimination.

Question 15

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.

Accepted Answer

A)  $120 per package and 12 cans 
B)  $12 per package and 24 cans 
C)  $11.52 per package and 12 cans 
D)  $15 per package and 16.67 cans

Question 16

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?

Accepted Answer

A)  $225 
B)  $120 
C)  $345 
D)  None of the statements is correct.

Question 17

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?

Accepted Answer

A)  $6.33, 3.33 units 
B)  $6.33, 5 units 
C)  $13.33, 3.33 units 
D)  $10, 5 units

Question 18

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.

Accepted Answer

A)  $1.09 
B)  $1.02 
C)  $108.50 
D)  $136.50

Question 19

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?

Accepted Answer

A)  $2 
B)  $32 
C)  $64 
D)  None of the answers are correct.

Question 20

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.

Accepted Answer

A)  $6 per unit 
B)  $8 per unit 
C)  $10 per unit 
D)  $12 per unit

Exam 11: Pricing Strategies for Firms With Market Power