question
Which of the following is the best alternative way to describe scarcity?
answer
limited resources
question
The main implication of scarcity is that
answer
decision-makers face trade-offs
question
For a rational buyer, the reservation price (RP) measures the
answer
maximum price the buyer is willing to pay for an incremental amount of a good, product, or service
question
The difference between the buyer's reservation price and the actual unit price of a transaction is referred to as
answer
consumer surplus
question
A rational buyer faces four alternative options, with reservation prices (RP) listed in the table.
Option A: 10
Option B: 6
Option C: 8
Option D: 9.5
If the prices are Pa= $4.00, Pb= $2.50, Pc= $3.00, and Pd= $3.20, which option would the rational buyer choose first?
Option A: 10
Option B: 6
Option C: 8
Option D: 9.5
If the prices are Pa= $4.00, Pb= $2.50, Pc= $3.00, and Pd= $3.20, which option would the rational buyer choose first?
answer
Option D;
A: 10-4= $6
B: 6-2.5= $3.5
C: 8-3= $5
D: 9.5-3.2= $6.3
A: 10-4= $6
B: 6-2.5= $3.5
C: 8-3= $5
D: 9.5-3.2= $6.3
question
A rational buyer faces four alternative options, with reservation prices (RP) listed in the table below:
Option A: 3.8
Option B: 7
Option C: 4.25
Option D: 6.1
If the prices are Pa= $4.00, Pb= $8.00, Pc= $4.50, and Pd= $6.50, which option would the rational buyer choose first?
Option A: 3.8
Option B: 7
Option C: 4.25
Option D: 6.1
If the prices are Pa= $4.00, Pb= $8.00, Pc= $4.50, and Pd= $6.50, which option would the rational buyer choose first?
answer
None of these options;
Option A: 3.8-4= -$0.2
Option B: 7-8= -$1
Option C: 4.25- 4.5= -$0.25
Option D: 6.1-6.5= -$0.4
Option A: 3.8-4= -$0.2
Option B: 7-8= -$1
Option C: 4.25- 4.5= -$0.25
Option D: 6.1-6.5= -$0.4
question
The lowest price at which quantity demanded equals 0 is referred to as the
answer
Choke price
question
Consider the market demand function: D(p)= 100-4p
Which of the following is the corresponding inverse demand function?
Which of the following is the corresponding inverse demand function?
answer
q= D(p), so
-q= 100-4p
-4p=100-q
-p(q)= 25-0.25p
-q= 100-4p
-4p=100-q
-p(q)= 25-0.25p
question
Which of the following is the best definition for the price elasticity of demand?
answer
The percentage change in quantity demanded from an infinitesimally small percentage increase in the price
question
Consider the demand function:
D(p)= 150-12p
What is the elasticity of demand at p=10?
D(p)= 150-12p
What is the elasticity of demand at p=10?
answer
Ed= -p/D(p) x D'(p)
-p/150-12p x (-12)
-12p/150-12p
-12(10)/150-12(10)
120/30
4, so Ed=4
-p/150-12p x (-12)
-12p/150-12p
-12(10)/150-12(10)
120/30
4, so Ed=4
question
Suppose a firm has a total cost function C(q)= 1000+10q+3q^2. Which of the following is the firms marginal cost function?
answer
Take the derivative of the cost function, so MC(q)= 10+6q
question
If marginal cost increases as q increases, then the firm exhibits
answer
decreasing returns to scale (and vice versa, if MC decreases as q increases, then it exhibits increasing returns to scale)
question
For a monopolist who wants to maximize profit, the key tradeoff it faces is that increasing its price leads to
answer
higher margin, but lower volume (and vice versa, decrease in price leads to lower margin but higher volume)
question
Given a linear demand curve,
p(q)= a-bq
where a and b are constant parameters, the marginal revenue curve is given by
p(q)= a-bq
where a and b are constant parameters, the marginal revenue curve is given by
answer
MR(q)= a - 2bq
question
Suppose a monopolist with constant marginal cost, MC(q)= 15 faces the following inverse demand equation:
p(q)= 75-2.5q
In the blank spaces below, calculate and fill in the profit-maximizing quantity q and price p
p(q)= 75-2.5q
In the blank spaces below, calculate and fill in the profit-maximizing quantity q and price p
answer
-R(q)= p(q) x q
(75-2.5q)q= 75q-2.5q^2
-MR(q)= R'(q)= 75-5q
-MR(q)=MC(q), so 75-5q=15--> q=12
-then find p, so p(q)= 75-2.5(12)= 45
-q=12 and p=45
(75-2.5q)q= 75q-2.5q^2
-MR(q)= R'(q)= 75-5q
-MR(q)=MC(q), so 75-5q=15--> q=12
-then find p, so p(q)= 75-2.5(12)= 45
-q=12 and p=45
question
Based on the Markup Formula, if a monopolist has a relative markup of 0.2 when it is maximizing profit, the elasticity of demand at the profit-maximizing price and quantity is equal to
answer
5; relative markup equals reciprocal of elasticity of demand
question
If Firm A's Lerner Index is 0.5, while Firm B's Lerner Index is 0.25, we can conclude that Firm B exercises a greater degree of market power than does Firm A.
answer
False, a greater Lerner Index indicates a greater degree of market power possessed by the monopolist
question
How do you find profit maximizing price based upon a graph?
answer
Find where MR(q) and MC(q) intersect, then travel vertically to the p(q) line. Wherever p is on this line is where you will find the profit maximizing price
question
What is the Lerner Index when the profit maximizing price is 70?
answer
-LI= (P- MC(q))/P
-70-40/70
-30/70
-0.4286
-70-40/70
-30/70
-0.4286
question
Imperfect Substitutes can be written as
answer
-f (K,L)= K^2L^0.5
-f (K,L)= 5KL
-f (K,L)= (K^0.2+L^0.2)^5
-f (K,L)= 5KL
-f (K,L)= (K^0.2+L^0.2)^5
question
Perfect Substitutes (Linear) can be written as
answer
-f (K,L)= K+L
question
Perfect Complements (Fixed Proportions) can be written as
answer
f (K,L)= min (10K, 4L)
question
What kind of production is represented by an L shaped isoquant?
answer
Fixed Proportions production function
question
The marginal rate of technical substitution (MRTS) captures
answer
the rate at which one input can be decreased if the amount of the other input used is increased by a marginal (incremental) amount, while maintaining the same level of production
question
Consider the production function:
f (K,L)= 2.5K + 10L
Which of the following is (the magnitude of) the slope of the Isoquant with K on the vertical axis and L on the horizontal axis?
f (K,L)= 2.5K + 10L
Which of the following is (the magnitude of) the slope of the Isoquant with K on the vertical axis and L on the horizontal axis?
answer
-w/r= slope
-10/2.5= 4
-Slope= 4
-10/2.5= 4
-Slope= 4
question
Consider the production function
f (K,L)= K^0.4L^0.6
Which of the following is the marginal rate of technical substitution of labor for capital for this production function?
f (K,L)= K^0.4L^0.6
Which of the following is the marginal rate of technical substitution of labor for capital for this production function?
answer
-MRTS= MPL/MPK
-MRTS= 0.6/0.4
-MRTS= 1.5
-MRTS= 1.5K/L
-MRTS= 0.6/0.4
-MRTS= 1.5
-MRTS= 1.5K/L
question
Suppose the inverse demand equation in the market for a monopolist's product is given by p(q)= 45-0.5q and suppose the monopolist mazimizes profit by setting a price p=35 and selling the quantity q=20. Calculate the total consumer surplus generated in the market
answer
-Total CS= 1/2 x b x h
-Total CS= 1/2 x 20 x (45-35)
-Total CS=1/2 x 200
-Total CS= 100
-Total CS= 1/2 x 20 x (45-35)
-Total CS=1/2 x 200
-Total CS= 100
question
Suppose a monopolist has the production function f(K,L)= 3K + L and can purchase any amount of capital K at the per unit rent r=10 and any amount of labor L at the per unit wage w=5. From this information, in order to produce q=12 units of output at minimum cost, the firm should use --- units of capital and --- units of labor.
answer
-f (K,L)= 3K + L
-f (K,L)= 3(4) + 0
-f (K,L)= 12
- That was the combination (4,0) that had the lowest cost ($40)
-f (K,L)= 3(4) + 0
-f (K,L)= 12
- That was the combination (4,0) that had the lowest cost ($40)
question
According to the equal marginal principle, a firm with an imperfect substitutes production function minimizes cost by choosing the combination of inputs at which
answer
Marginal product per dollar spent on each input is equalized
question
What are examples of 2nd degree price discrimination?
answer
- A utility company charges $0.18 per kWh of electricity used up to 1000 kWh, and $0.10 for each kWh after that
-A pizza restaurant distributes coupons offering a buy-one, get-one-50% off special
-A pizza restaurant distributes coupons offering a buy-one, get-one-50% off special
question
Consider a monopolist who sells to two segments of consumers, Group A and Group B. Suppose the monopolist can identify consumers in each group and prevent resale between groups, so that group price discrimination is possible.
If Group A's demand is more elastic than Group B's demand, then
If Group A's demand is more elastic than Group B's demand, then
answer
The monopolist should charge a higher price to Group B than to Group A
question
What pricing strategy would maximize a firm's revenue?
answer
Sell elite version for a little under the RP and sell the regular version as normal
question
A monopolist with constant marginal cost, MC=10 is maximizing profit by setting a price of p=30.
What is the price elasticity of demand at this price?
What is the price elasticity of demand at this price?
answer
-30-10/30= reciprocal of elasticity of demand
-So, 20/30--> 30/20= 3/2=1.5
-So, 20/30--> 30/20= 3/2=1.5
question
You have MPl=20, MPk=30, w=12, and r=20, what should the firm do to minimize cost?
answer
20/12=30/20
They should use less labor and more capital to minimize the cost of producing q
They should use less labor and more capital to minimize the cost of producing q
question
Demand is given by D(p)= 1000-25p
What is the price elasticity of demand at p=30?
What is the price elasticity of demand at p=30?
answer
-(p/D(p)) x D'(p)
-(30/1000-25(30)) x 25
-750/250= 3
-(30/1000-25(30)) x 25
-750/250= 3
question
MC(q)= 10 and p(q)=150-7q
Find profit-maximizing quantity q and p
Find profit-maximizing quantity q and p
answer
-p(q)= 150-7q--> MR(q)=150-14q
-M(C)= 10
-So, 150-14q=10--> q*=10
-Plug in q, so, p(10)=150-7(10)= 80; p*=80
-M(C)= 10
-So, 150-14q=10--> q*=10
-Plug in q, so, p(10)=150-7(10)= 80; p*=80
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