question
The short run is:
answer
a time period in which at least one input is fixed.
Short run is when there is at least one fixed input.
Short run is when there is at least one fixed input.
question
A firm produces autos following the production function q =F(K,L)= 5KL, where q is the number of autos assembled in a day, K is the number of robots used on the assembly line (capital) and L is the number of workers hired per hour (labor). Then with K= 10 robots and L = 10, the maximum number of autos that can be produced is
answer
500
The production function allows the firm to efficiently produce 51010=500 units of output.
The production function allows the firm to efficiently produce 51010=500 units of output.
question
A firm produces autos following the production function q =F(K,L)= 5KL, where q is the number of autos assembled in a day, K is the number of robots used on the assembly line (capital) and L is the number of workers hired per hour (labor). If we use K = 10 robots and L = 10 workers in order to produce q = 450 autos per shift, then we know that production is:
answer
technically feasible and inefficient.
The production function allows the firm to efficiently produce 51010=500 unit of output. Producing 450 is feasible, i.e., technically allowed. However, this is not the efficient output level.
The production function allows the firm to efficiently produce 51010=500 unit of output. Producing 450 is feasible, i.e., technically allowed. However, this is not the efficient output level.
question
Suppose the production function is given by F(K,L)=10K0.5L0.5. The capital level is fixed at K=1. The expression of average product of labor is given by APL=__________.
answer
10L^-0.5
When K=1, F(K,L)=10K0.5L0.5 can be simplified into F(L)=10L0.5. The average product of labor is APL=F(L)/L=10L0.5/L=10L-0.5.
When K=1, F(K,L)=10K0.5L0.5 can be simplified into F(L)=10L0.5. The average product of labor is APL=F(L)/L=10L0.5/L=10L-0.5.
question
Suppose the production function is given by F(K,L)=10K0.5L0.5. The capital level is fixed at K=1. The expression of marginal product of labor is given by MPL=__________.
answer
5L^-0.5
When K=1, F(K,L)=10K0.5L0.5 can be simplified into F(L)=10L0.5. The marginal product of labor is MPL=F'(L)=10*0.5L-0.5=5L-0.5.
When K=1, F(K,L)=10K0.5L0.5 can be simplified into F(L)=10L0.5. The marginal product of labor is MPL=F'(L)=10*0.5L-0.5=5L-0.5.
question
When labor (L) is on the horizontal axis and capital (K) is on the vertical axis, which is NOT a correct definition/description of the marginal rate of technical substitution:
answer
the ratio of the prices of the inputs.
The absolute value of the slope of an isoquant is the graphical definition of MRTS. The ratio of the marginal products of the inputs is the mathematical definition of MRTS. The amount of K can be reduced when L is increased by 1, so that output remains constant, is the economic definition of MRTS. The definitions are equivalent but stated differently.
The absolute value of the slope of an isoquant is the graphical definition of MRTS. The ratio of the marginal products of the inputs is the mathematical definition of MRTS. The amount of K can be reduced when L is increased by 1, so that output remains constant, is the economic definition of MRTS. The definitions are equivalent but stated differently.
question
Consider the following graph of a production function when capital is constant.
Denote by APL(K, L)=F(K, L)/L the so-called average product of labor (here F is the production function of the firm). From the graph we know that for the corresponding K:
Denote by APL(K, L)=F(K, L)/L the so-called average product of labor (here F is the production function of the firm). From the graph we know that for the corresponding K:
answer
APL(K,L1)<MPL(K,L1)
APL(L,K) is the slope of the line that interpolates the production function (for K fixed) and the origin; for L1, this line is flatter than the tangent to the production function at L1; thus, APL(K, L1)<MPL(K, L1); none of the other relations are true.
APL(L,K) is the slope of the line that interpolates the production function (for K fixed) and the origin; for L1, this line is flatter than the tangent to the production function at L1; thus, APL(K, L1)<MPL(K, L1); none of the other relations are true.
question
Consider the following graph of a production function when capital is fixed
From the graph we know that for the fixed capital level K:
From the graph we know that for the fixed capital level K:
answer
MPL(K, L1)>MPL(K, L2)
The marginal product of labor is the slope of total product curve when capital is fixed; in this case the slope is higher at L1 than at L2, and is higher at L2 than at L3; the only true relation from the possible answers is MPL(K, L1)>MPL(K, L2).
The marginal product of labor is the slope of total product curve when capital is fixed; in this case the slope is higher at L1 than at L2, and is higher at L2 than at L3; the only true relation from the possible answers is MPL(K, L1)>MPL(K, L2).
question
The following total product curve satisfies the law of diminishing marginal return.
answer
False
False, because the slope of the total product curve is becoming steeper and steeper.
False, because the slope of the total product curve is becoming steeper and steeper.
question
The following total product curve satisfies the law of diminishing marginal return.
answer
True
True, because the slope of the total product curve is eventually becoming flatter and flatter.
True, because the slope of the total product curve is eventually becoming flatter and flatter.
question
Suppose a production function has MRTS = K/(2L) with capital (K) on the vertical axis of the isoquant map. Suppose L=100 and K=400 at the current level of output. How much capital can be reduced if we increase labor by 1 unit to maintain the same output level?
answer
2
We can compute MRTS=400/(2*100)=2. This means that if we reduce the capital by 2 units and increase the labor by 1 unit, we can maintain the same level of production.
We can compute MRTS=400/(2*100)=2. This means that if we reduce the capital by 2 units and increase the labor by 1 unit, we can maintain the same level of production.
question
A firm uses labor (L) and capital (K) to produce outputs. The following graph shows the iso-quant curves. The firm's production function is most likely to exhibit ___.
answer
constant return to scales.
Double input leads to twice the output
Double input leads to twice the output
question
In the following isoquant map, the production function exhibits:
answer
increasing returns to scale
An example is Figure 6.10 (b) in the textbook. When inputs double from (2,4) to (4,8), the output is more than twice as before. Hence, the technology exhibits increasing return to scale.
An example is Figure 6.10 (b) in the textbook. When inputs double from (2,4) to (4,8), the output is more than twice as before. Hence, the technology exhibits increasing return to scale.
question
In the following isoquant map, the production function exhibits:
answer
decreasing returns to scale
An example is Figure 6.10 (b) in the textbook. When inputs double, the output is less than twice as before. Hence, the firm has decreasing return to scale.
An example is Figure 6.10 (b) in the textbook. When inputs double, the output is less than twice as before. Hence, the firm has decreasing return to scale.
question
The following production function satisfies increasing returns to scale:
F(K,L)=10L+20K.
F(K,L)=10L+20K.
answer
False
F(2K,2L)=10(2L)+20(2K)=20L+40K=2F(K,L). Then, F(2K,2L)=2F(K,L). Hence, the production function exhibits constant return to scale.
F(2K,2L)=10(2L)+20(2K)=20L+40K=2F(K,L). Then, F(2K,2L)=2F(K,L). Hence, the production function exhibits constant return to scale.
question
Decreasing returns to scale" and "diminishing returns to a factor of production" are two phrases that mean the same thing.
answer
False
To determine returns to scale, all inputs have to change. However, diminishing return to a factor of product only describes the change in one input
To determine returns to scale, all inputs have to change. However, diminishing return to a factor of product only describes the change in one input
question
Consider a production function F(K,L)= ALaKb, where A, a and b are positive constants. Then, F has increasing returns to scale if:
answer
a+b>1
Notice that F(2K,2L)= A(2L)a(2K)b=2a+bALaKb and 2F(K, L)= 2ALaKb. Hence, F satisfies increasing returns to scale if and only if a+b>1, decreasing return to scale if and only of a+b<1, constant return to scale if and only if a+b=1.
Notice that F(2K,2L)= A(2L)a(2K)b=2a+bALaKb and 2F(K, L)= 2ALaKb. Hence, F satisfies increasing returns to scale if and only if a+b>1, decreasing return to scale if and only of a+b<1, constant return to scale if and only if a+b=1.
question
A firm's total cost function is given by C(q)=4000+5q+10q2. Please match fixed cost with the correct expression respectively. (To find fixed cost, think about the cost when 0 unit of output is produced.)
answer
4000
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
question
A firm's total cost function is given by C(q)=4000+5q+10q2. Please match average fixed cost with the correct expression respectively.
answer
4000/q
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
question
A firm's total cost function is given by C(q)=4000+5q+10q2. Please match variable cost with the correct expression respectively.
answer
5q+10q^2
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
question
A firm's total cost function is given by C(q)=4000+5q+10q2. Please match average variable cost with the correct expression respectively.
answer
5+10q
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
question
A firm's total cost function is given by C(q)=4000+5q+10q2. Please match average total cost with the correct expression respectively.
answer
(4000/q)+5+10q
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
question
A firm's total cost function is given by C(q)=4000+5q+10q2. Please match marginal cost with the correct expression respectively.
answer
5+20q
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
Fixed cost FC is 4000, which is there no matter the firm produces something or not. Total cost (TC) -fixed cost (FC)= variable cost (VC). AVC=VC/q, AFC=FC/q, AC=TC/q. Marginal cost is the incremental in total cost or variable cost. Mathematically, MC is the slope/derivative of TC or VC, and hence 5+20q.
question
Consider a firm with production function F(K, L)=3L1/3K2/3. Assume that capital is fixed at K=1. Then, the amount of labor necessary to produce q units is _____.
answer
L(q)=q^3/27
If q=3L1/3K2/3 and K=1, then q=3L1/3K2/3. Solve L. Then L=q3/27.
If q=3L1/3K2/3 and K=1, then q=3L1/3K2/3. Solve L. Then L=q3/27.
question
Assume that capital is fixed at K=1 and the rental rate (price) of capital is r=5. The amount of labor that is necessary to produce q unit of output is given by L(q)=q3/27 and the wage rate (price) of labor w=3. The cost of production is the total expenditure on capital (fixed cost) and labor (variable cost). Then the cost of producing q units is ___.
answer
C(q)=5+(q^3/9).
L(q)=q3/27. The expenditure on labor is given by wL(q)=3q3/27= q3/9. The expenditure of capital is given by rK=5*1=5. Since total cost is the sum of the two, we know that C(q)=5+(q3/9).
L(q)=q3/27. The expenditure on labor is given by wL(q)=3q3/27= q3/9. The expenditure of capital is given by rK=5*1=5. Since total cost is the sum of the two, we know that C(q)=5+(q3/9).
question
Consider a firm with production function F(K, L)=3L+8K. Assume that capital is fixed at K=12. Then, the amount of labor necessary to produce q units of output is ___.
answer
L(q)= (q/3)-32
If q=3L+8K and K=12, then q=3L+L=(q/3)-32
If q=3L+8K and K=12, then q=3L+L=(q/3)-32
question
Consider a firm with production function F(K, L)=3L+8K. Assume that capital is fixed at K=12. Assume also that the rental rate (price) of capital r=10 and the wage rate (price) of labor w=3. The cost of production is the total expenditure on capital and labor. Then the cost of producing q units is __?
Hint: you need to compute first the total amount of labor necessary to produce q units of output.
Hint: you need to compute first the total amount of labor necessary to produce q units of output.
answer
C(q)=24+q
If q=3L+8K and K=12, then L=(q/3)-32. The expenditure on labor is given by wL(q)=3((q/3)-32)= q-96. If K=12, then the expenditure on capital is given by rK=120. Then, C(q)=120+(q-96)=24+q.
If q=3L+8K and K=12, then L=(q/3)-32. The expenditure on labor is given by wL(q)=3((q/3)-32)= q-96. If K=12, then the expenditure on capital is given by rK=120. Then, C(q)=120+(q-96)=24+q.
question
Suppose isoquant curves are smooth and bend in towards the origin. When an isocost line is just tangent to an isoquant, we know that:
answer
output is being produced at minimum cost.
This is the condition for cost minimization. There is only one output but two inputs.
This is the condition for cost minimization. There is only one output but two inputs.
question
Suppose isoquant curves are smooth and bend in towards the origin and the cost minimization point is determined by the tangent of the isocost lines and the isoquant. Except ____, all the other options characterize the cost minimization input bundle. (If a condition characterizes the cost minimization input bundle, the condition holds only at the cost minimization input bundle.)
answer
MRTS = MPL /MPK
MRTS = MPL /MPK is the analytical definition of MRTS. It holds no matter the firm is minimizing cost or not. All the other expressions are cost minimizing condition.
MRTS = MPL /MPK is the analytical definition of MRTS. It holds no matter the firm is minimizing cost or not. All the other expressions are cost minimizing condition.
question
A firm's expansion path is:
answer
a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices.
A expansion path traces the cost-minimizing input combinations needed to produce each level of output for given input prices.
A expansion path traces the cost-minimizing input combinations needed to produce each level of output for given input prices.
question
Suppose the isoquants are right angles and the kinks are on the K=2L line. The expansion path will:
answer
follow K=2L.
When the isoquants are L-shaped lines, the cost-minimizing input bundles always fall on the kinks. Hence, the expansion path is the increasing straight line that kinks are on.
When the isoquants are L-shaped lines, the cost-minimizing input bundles always fall on the kinks. Hence, the expansion path is the increasing straight line that kinks are on.
question
A firm uses labor (L) and capital (K) to produce outputs. The following graph shows the iso-quant curves and iso-cost curves facing this firm. The iso-quant curves are the L-shaped curves. Suppose the wage rate of labor is $200 (per day) and the rental rate of capital is $100 (per day). What is the cost of producing 20 units of output (per day) when both labor and capital are variable inputs? Notice that both inputs are variable.
answer
800
To produce 20 units of output, the cost minimization input bundle is (L=2, K=4). The cost is wL+rK=2002+1004=800.
To produce 20 units of output, the cost minimization input bundle is (L=2, K=4). The cost is wL+rK=2002+1004=800.
question
Both capital and labor are variable inputs. Suppose the wage rate of labor is 16 (per hour) and the rental price of capital is 20 (per hour). The downward sloping smooth curves that bend in towards the origin are a firm's isoquants. The downward sloping straight lines are isocost lines. If the firm plans to produce 20 units of output (per hour), its minimized cost is ____.
answer
164
The cost minimizing input bundle is (L=4, K=5). Wage rate is 16 and rental rate of capital. Hence, the total cost is 416+520=164.
The cost minimizing input bundle is (L=4, K=5). Wage rate is 16 and rental rate of capital. Hence, the total cost is 416+520=164.
question
Suppose that a firm's cost function is given by: C(q)=1+3q2. Then, the expression for this firm's profit function is? (Assume the market is perfectly competitive)
answer
Profit(q)=pq-1-3q^2.
Profit(q)=pq-C(q)=pq-(1+3q2)= pq-1-3q2.
Profit(q)=pq-C(q)=pq-(1+3q2)= pq-1-3q2.
question
At the profit-maximizing level of output q>0, which of the statement is wrong
answer
marginal profit is maximized.
Marginal profit is zero when total profit is maximized
Marginal profit is zero when total profit is maximized
question
The demand curve facing a perfectly competitive firm is
answer
perfectly horizontal.
For a competitive firm, when charging a price higher than market price, it faces zero demand. When charging a price lower than market price, it faces the demand of the entire market. When charging a price equal to market price, it may sell any unit of output. Hence, the demand facing a perfectly competitive firm is infinitely elastic. This means that the demand curve is horizontal.
For a competitive firm, when charging a price higher than market price, it faces zero demand. When charging a price lower than market price, it faces the demand of the entire market. When charging a price equal to market price, it may sell any unit of output. Hence, the demand facing a perfectly competitive firm is infinitely elastic. This means that the demand curve is horizontal.
question
Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The average variable cost is $3.95 per meal; the average fixed cost is $1.25 per meal. Bette should:
answer
continue producing in the short run, but plan to go out of business in the long run.
The price is higher than AVC, and thus the firm produces a positive amount in the short run. However, the profit is negative. Hence, in the long run, the firm chooses to exit the industry.
The price is higher than AVC, and thus the firm produces a positive amount in the short run. However, the profit is negative. Hence, in the long run, the firm chooses to exit the industry.
question
When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that:
answer
the minimum value of the firm's average variable cost lies between $5 and $10.
The discontinuity in the supply curve happens at the lowest point of the AVC curve, which is between $5 and $10 in this problem.
The discontinuity in the supply curve happens at the lowest point of the AVC curve, which is between $5 and $10 in this problem.
question
Ronny's Pizza House operates in the perfectly competitive local pizza market. If the price of cheese increases, what is the expected impact on Ronny's profit-maximizing output decision?
answer
Output decreases because the marginal cost curve shifts upward
An increase in the price of input changes the cost lines. In particular, the marginal cost line shifts up. Hence, the q such that MC(q)=p decreases.
An increase in the price of input changes the cost lines. In particular, the marginal cost line shifts up. Hence, the q such that MC(q)=p decreases.
question
If the output price is equal to $16, then the firm maximizes profits by producing q=_____.
answer
100
Solution: The horizontal line at p=16 intersects MC when q=100. At q=100, we have that p=AVC(q). Thus the firm produces q=100 (or q=0 is equivalently good).
Solution: The horizontal line at p=16 intersects MC when q=100. At q=100, we have that p=AVC(q). Thus the firm produces q=100 (or q=0 is equivalently good).
question
If the output price is equal to $12, then the firm maximizes profits by producing _____.
answer
0 units
The horizontal line at p=12 intersects MC when q<100. But at q, such that p<AVC(q). Thus the firm produces q=0.
The horizontal line at p=12 intersects MC when q<100. But at q, such that p<AVC(q). Thus the firm produces q=0.
question
If the output price is equal to $16, then the firm's maximal profits is _____.
answer
-$1800
The horizontal line at p=16 intersects MC at an output q=100. In this case, price is weakly higher than AVC, so produce a positive output level is optimal (although producing zero is optimal as well). Profit=pq-AC(q)q=16100-34100=-1800.
The horizontal line at p=16 intersects MC at an output q=100. In this case, price is weakly higher than AVC, so produce a positive output level is optimal (although producing zero is optimal as well). Profit=pq-AC(q)q=16100-34100=-1800.
question
If the output price is equal to $30, then the firm's maximal profits is _____.
answer
$0
The horizontal line at p=30 intersects MC when q=120. At q=120, we have that p>AVC(q). Thus the firm produces q=120. Profit(q)=q(p-AC(q))=120(30-30)=0.
The horizontal line at p=30 intersects MC when q=120. At q=120, we have that p>AVC(q). Thus the firm produces q=120. Profit(q)=q(p-AC(q))=120(30-30)=0.
question
The demand curve facing a perfectly competitive firm is ___________.
answer
perfectly horizontal
The demand curve facing a perfectly competitive firm is perfectly elastic, so flat. This is because each firm is too small to affect the market price and can only treat the price as given.
The demand curve facing a perfectly competitive firm is perfectly elastic, so flat. This is because each firm is too small to affect the market price and can only treat the price as given.
question
Refer to the figure below. Notice that the highlighted curve has two disjoint parts. What does the highlighted curve represent?
answer
the entire short-run supply curve of the firm.
The highlighted curve on the graph represents the firms' short run supply curve. It has two parts. The part of MC that is above AVC represents producing positive output levels when price is higher than the minimum of AVC. The part on the vertical axis represents shutting down when price is lower than the minimum of AVC. We can tell this is a short-run supply curve because AC is not equal to AVC.
The highlighted curve on the graph represents the firms' short run supply curve. It has two parts. The part of MC that is above AVC represents producing positive output levels when price is higher than the minimum of AVC. The part on the vertical axis represents shutting down when price is lower than the minimum of AVC. We can tell this is a short-run supply curve because AC is not equal to AVC.
question
Refer to the figure below. What does the highlighted curve represent?
answer
A firm's short run supply curve
This is a firm's supply curve. It is a short run curve because AC is not equal to AVC (Fixed Cost exists).
This is a firm's supply curve. It is a short run curve because AC is not equal to AVC (Fixed Cost exists).
question
Suppose the market price is equal to 10. When a firm has the following cost function when capital is fixed: C(q)=100+4q2. What is the profit maximization output choice level?
answer
1.25
MC(q)=8q. AVC(q)=4q. If there exists q>0 such that p=MC(q) and p>=AVC(q), then the firm produces q. Otherwise, the firm produces 0. The q such that 10=MC(q)=8q is q=1.25. In this case, AVC(1.25)=4*1.25<10. Hence, the output level is 1.25.
MC(q)=8q. AVC(q)=4q. If there exists q>0 such that p=MC(q) and p>=AVC(q), then the firm produces q. Otherwise, the firm produces 0. The q such that 10=MC(q)=8q is q=1.25. In this case, AVC(1.25)=4*1.25<10. Hence, the output level is 1.25.
question
Suppose the market price is equal to 10. When a firm has the following cost function when capital is fixed: C(q)=100+4q2. What is the firm's maximized profit level?
answer
-93.75
MC(q)=8q. AVC(q)=4q. If there exists q>0 such that p=MC(q) and p>=AVC(q), then the firm produces q. Otherwise, the firm produces 0. The q such that MC(q)=8q=10 is q=1.25. AVC(1.25)=41.25<10. Hence, the output level is 1.25. Profit(q)=pq-C(q). Hence, profit at q=1.25 is equal to 101.25-(100+41.25*1.25)=-93.75
MC(q)=8q. AVC(q)=4q. If there exists q>0 such that p=MC(q) and p>=AVC(q), then the firm produces q. Otherwise, the firm produces 0. The q such that MC(q)=8q=10 is q=1.25. AVC(1.25)=41.25<10. Hence, the output level is 1.25. Profit(q)=pq-C(q). Hence, profit at q=1.25 is equal to 101.25-(100+41.25*1.25)=-93.75
question
Suppose the cost function for an orange juice producer is C(q)=100+4q2. The firm's supply curve is?
answer
S(p)=0.125p
The optimal quantity for a single firm with cost C(q)=100+4q2 is given by q>0 that satisfies p=MC(q) and p greater than or equal to AVC(q). Since, MC(q)=8q, then p=8q implies that q=0.125p. AVC(q)=4q. Since p=8q is weakly higher than AVC(q)=4q, then p is greater than or equal to AVC(q). Hence, producing q>0 is optimal. Notice that q*=0.125p. Then S(p)=0.125p.
The optimal quantity for a single firm with cost C(q)=100+4q2 is given by q>0 that satisfies p=MC(q) and p greater than or equal to AVC(q). Since, MC(q)=8q, then p=8q implies that q=0.125p. AVC(q)=4q. Since p=8q is weakly higher than AVC(q)=4q, then p is greater than or equal to AVC(q). Hence, producing q>0 is optimal. Notice that q*=0.125p. Then S(p)=0.125p.
question
Suppose that the cost function for an orange juice producer is C(q)=10+0.1q2. The firm's supply curve is?
answer
S(p)=5p
The optimal quantity for a single firm with cost C(q)=10+0.1q2 is given by q that satisfies p=MC(q) and p greater than or equal to AVC(q). Since MC(q)=0.2q, then p=0.2q implies that q=5p. AVC(q)=0.1q. Since p=0.2q is always greater than or equal to 0.1q, then p is greater than or equal to AVC(q). Hence, producing q=5p is optimal. Then S(p)=5p
The optimal quantity for a single firm with cost C(q)=10+0.1q2 is given by q that satisfies p=MC(q) and p greater than or equal to AVC(q). Since MC(q)=0.2q, then p=0.2q implies that q=5p. AVC(q)=0.1q. Since p=0.2q is always greater than or equal to 0.1q, then p is greater than or equal to AVC(q). Hence, producing q=5p is optimal. Then S(p)=5p
question
Suppose that the cost function for an orange juice producer is C(q)=10+0.1q2. If there are 100 identical orange juice producers in the market, the market supply curve is?
answer
S(p)=500p
The optimal quantity for a single firm with cost C(q)=10+0.1q2 is given by q that satisfies p=MC(q) and p greater than or equal to AVC(q). Since MC(q)=0.2q, then p=0.2q implies that q=5p. AVC(q)=0.1q. Since, 0.2q is always greater than or equal to 0.1q, then p is greater than or equal to AVC(q). Hence, producing q*=5p is optimal. Then Si(p)=5p for each individual firm indexed by i. Since, there are 100 firms in the market. The market supply curve becomes S(p)=100Si(p)=500p.
The optimal quantity for a single firm with cost C(q)=10+0.1q2 is given by q that satisfies p=MC(q) and p greater than or equal to AVC(q). Since MC(q)=0.2q, then p=0.2q implies that q=5p. AVC(q)=0.1q. Since, 0.2q is always greater than or equal to 0.1q, then p is greater than or equal to AVC(q). Hence, producing q*=5p is optimal. Then Si(p)=5p for each individual firm indexed by i. Since, there are 100 firms in the market. The market supply curve becomes S(p)=100Si(p)=500p.
question
Suppose there are two firms in a market. Firm 1 has supply curve S1(p)=100p. Firm 2 has supply curve S2(p)=150p. Then the market supply curve should be ______.
answer
S(p)=250p
S(p)=100p+150p=250p.
S(p)=100p+150p=250p.
question
The following figure shows the supply function of a firm. What is the quantity that maximizes the firm's profits when price is 12?
answer
300
The horizontal line at level p=12 intersects S at q=300. This means that when market price is 12, the firm produces 300. The firm's supply function shows the relationship between market price and profit maximizing output level. Hence, then the optimal production of the firm is 300.
The horizontal line at level p=12 intersects S at q=300. This means that when market price is 12, the firm produces 300. The firm's supply function shows the relationship between market price and profit maximizing output level. Hence, then the optimal production of the firm is 300.
question
In a competitive market, the demand and supply curves are Q(p)=12-p and S(p) = 3p respectively. What is the price in a competitive equilibrium in this economy?
answer
3
Set Q(p)=S(p). Then 12-p=3p. Hence 12=4p, which gives that p=3. Hence, Q(p*)=12-3=9.
Set Q(p)=S(p). Then 12-p=3p. Hence 12=4p, which gives that p=3. Hence, Q(p*)=12-3=9.
question
In a competitive market, the demand and supply curves are Q(p)=12-p and S(p)=3p respectively. What is the output level in a competitive equilibrium in this economy?
answer
9
Set Q(p)=S(p). Then 12-p=3p. Hence, 12=4p, which gives that p=3. Q(p*)=12-3=9.
Set Q(p)=S(p). Then 12-p=3p. Hence, 12=4p, which gives that p=3. Q(p*)=12-3=9.
question
Suppose that the market is competitive. Each firm's cost function is C(q)=10q. The market demand is Q(p)=200-5p. The equilibrium price level is equal to _____.
answer
10
MC=AC is flat at the level of $10. Thus, supply is flat at the level of $10. The competitive equilibrium is determined by the intersection of Q and a flat supply curve at p=$10.
MC=AC is flat at the level of $10. Thus, supply is flat at the level of $10. The competitive equilibrium is determined by the intersection of Q and a flat supply curve at p=$10.
question
Suppose that the market is competitive. Each firm's cost function is C(q)=10q. The market demand is Q(p)=200-5p. The equilibrium output level is equal to ________.
answer
150
MC=AC is flat at the level of $10. Thus, supply is flat at the level of $10. The competitive equilibrium is determined by the intersection of Q and a flat supply curve at p=$10. That is, Q(p)=200-5*10=150. Thus 150 units are produced and sold at p=$10.
MC=AC is flat at the level of $10. Thus, supply is flat at the level of $10. The competitive equilibrium is determined by the intersection of Q and a flat supply curve at p=$10. That is, Q(p)=200-5*10=150. Thus 150 units are produced and sold at p=$10.
question
The following figure shows the demand and supply in a market. When the government imposes a per unit tax rate of $11.9, which area represents the size of the government revenue?
answer
b+c
The per unit tax rate is equal to the difference between 28.6 and 16.7. In this case, 20 units of output are sold. Hence, b+c measures the magnitude of government revenue. In addition, CS=a, PS=d, DWL=e+f.
The per unit tax rate is equal to the difference between 28.6 and 16.7. In this case, 20 units of output are sold. Hence, b+c measures the magnitude of government revenue. In addition, CS=a, PS=d, DWL=e+f.
question
The following figure shows the demand and supply in a market. When the government imposes a per unit tax rate of $11.9, which area represents the size of the consumer surplus?
answer
a
The per unit tax rate is equal to the difference between 28.6 and 16.7. In this case, 20 units of output are sold. Hence, CS=a, PS=d, Government Revenue=b+c. Total welfare = a+b+c+d. At efficient output level 30, Total Welfare=a+b+c+d+e+f. This means that DWL=e+f.
The per unit tax rate is equal to the difference between 28.6 and 16.7. In this case, 20 units of output are sold. Hence, CS=a, PS=d, Government Revenue=b+c. Total welfare = a+b+c+d. At efficient output level 30, Total Welfare=a+b+c+d+e+f. This means that DWL=e+f.
question
The following figure shows the demand and supply in a market. When the government imposes a per unit tax rate of $11.9, which area represents the size of the producer surplus?
answer
d
The per unit tax rate is equal to the difference between 28.6 and 16.7. In this case, 20 units of output are sold. Hence, CS=a, PS=d, Government Revenue=b+c. Total welfare=a+b+c+d. At efficient output level 30, Total Welfare =a+b+c+d+e+f. This means that DWL=e+f.
The per unit tax rate is equal to the difference between 28.6 and 16.7. In this case, 20 units of output are sold. Hence, CS=a, PS=d, Government Revenue=b+c. Total welfare=a+b+c+d. At efficient output level 30, Total Welfare =a+b+c+d+e+f. This means that DWL=e+f.
question
The following figure shows the demand and supply in a market. When the government imposes a price ceiling of $16.7, what is the size of producer surplus?
answer
d
The price stays at $16.7, and 20 units of output are sold. Hence, PS=d. In addition, CS= a+b+c, DWL=e+f.
The price stays at $16.7, and 20 units of output are sold. Hence, PS=d. In addition, CS= a+b+c, DWL=e+f.
question
The following figure shows the demand and supply in a market. When the government imposes a price floor of $28.6, what is the size of deadweight loss?
answer
e+f
The price stays at $28.6, and 20 units of output are sold. Hence, CS=a, PS=b+c+d, Total welfare=a+b+c+d. At efficient output level 30, Total Welfare =a+b+c+d+e+f. This means that DWL=e+f.
The price stays at $28.6, and 20 units of output are sold. Hence, CS=a, PS=b+c+d, Total welfare=a+b+c+d. At efficient output level 30, Total Welfare =a+b+c+d+e+f. This means that DWL=e+f.
question
Refer to the figure below. When the monopoly maximizes profit, how much is the amount of profit?
answer
$15.60
Need to make MR=MC. Hence, q=8. In this case, p=$6.5. ATC=$4.55. Hence, profit=(p-ATC)*q=15.6.
Need to make MR=MC. Hence, q=8. In this case, p=$6.5. ATC=$4.55. Hence, profit=(p-ATC)*q=15.6.
question
Suppose that the market demand is given by Q(p)=200-5p. Let p(q) be the maximal price at which the agents would buy q units, i.e., the inverse demand function. Then?
answer
p(q)=40-0.2q
Let q=200-5p. Solve p, we have p=(200-q)/5=40-0.2q.
Let q=200-5p. Solve p, we have p=(200-q)/5=40-0.2q.
question
Suppose that a monopolist faces the market demand Q(p)=200-5p. Then its marginal revenue function MR(q) is?
answer
MR(q)=40-0.4q
Let q=200-5p. Solve p, we have p=(200-q)/5=40-0.2q. Hence,𝑅(𝑞)=𝑝(𝑞)∗𝑞=(40−0.2𝑞)∗𝑞=40𝑞−0.2𝑞2R(q)=p(q)∗q=(40−0.2q)∗q=40q−0.2q2. Hence, MR(q)=40-0.4q
Let q=200-5p. Solve p, we have p=(200-q)/5=40-0.2q. Hence,𝑅(𝑞)=𝑝(𝑞)∗𝑞=(40−0.2𝑞)∗𝑞=40𝑞−0.2𝑞2R(q)=p(q)∗q=(40−0.2q)∗q=40q−0.2q2. Hence, MR(q)=40-0.4q
question
A monopolist faces a demand Q(p)=200-5p and have total costs C(q)=10q. What is the monopolists's choice of output level?
answer
75
Let q=200-5p. Solve p, we have p=(200-q)/5=40-0.2q. Hence, 𝑅(𝑞)=𝑝(𝑞)⋅𝑞=40𝑞−0.2𝑞2R(q)=p(q)⋅q=40q−0.2q2. Hence, MR(q)=40-0.4q. By setting MR(q)=MC(q), we have 40-0.4q=10. Hence, 30=0.4q, which implies that q=75.
Let q=200-5p. Solve p, we have p=(200-q)/5=40-0.2q. Hence, 𝑅(𝑞)=𝑝(𝑞)⋅𝑞=40𝑞−0.2𝑞2R(q)=p(q)⋅q=40q−0.2q2. Hence, MR(q)=40-0.4q. By setting MR(q)=MC(q), we have 40-0.4q=10. Hence, 30=0.4q, which implies that q=75.
question
A monopolist faces a demand Q(p)=200-5p and has total costs C(q)=10q. What is the price level in this market when the firm maximizes profit?
answer
25
Let q=200-5p. Solve p, we have p=(200-q)/5=40-0.2q. Hence, 𝑅(𝑞)=𝑝(𝑞)⋅𝑞=40𝑞−0.2𝑞2R(q)=p(q)⋅q=40q−0.2q2. Hence,
Hence, MR(q)=40-0.4q. By setting MR(q)=MC(q), we have 40-0.4q=10. Hence, 30=0.4q, which implies that q=75. Plug quantity to the inverse demand curve, we have 75=200-5p. Hence, p=25.
Let q=200-5p. Solve p, we have p=(200-q)/5=40-0.2q. Hence, 𝑅(𝑞)=𝑝(𝑞)⋅𝑞=40𝑞−0.2𝑞2R(q)=p(q)⋅q=40q−0.2q2. Hence,
Hence, MR(q)=40-0.4q. By setting MR(q)=MC(q), we have 40-0.4q=10. Hence, 30=0.4q, which implies that q=75. Plug quantity to the inverse demand curve, we have 75=200-5p. Hence, p=25.
question
A monopolist faces a demand Q(p)=200-5p and have total costs C(q)=10q. What is the monopolist's maximum profit?
answer
1125
Let q=200-5p. Solve p, we have p=(200-q)/5=40-0.2q. Hence, 𝑅(𝑞)=𝑝(𝑞)⋅𝑞=40𝑞−0.2𝑞2R(q)=p(q)⋅q=40q−0.2q2. Hence, MR(q)=40-0.4q. By setting MR(q)=MC(q), we have 40-0.4q=10. Hence, 30=0.4q, which implies that q=75. Plug quantity to the inverse demand curve, we have 75=200-5p. Hence, p=25. In this case, profit=pq-C(q)=2575-1075=1125.
Let q=200-5p. Solve p, we have p=(200-q)/5=40-0.2q. Hence, 𝑅(𝑞)=𝑝(𝑞)⋅𝑞=40𝑞−0.2𝑞2R(q)=p(q)⋅q=40q−0.2q2. Hence, MR(q)=40-0.4q. By setting MR(q)=MC(q), we have 40-0.4q=10. Hence, 30=0.4q, which implies that q=75. Plug quantity to the inverse demand curve, we have 75=200-5p. Hence, p=25. In this case, profit=pq-C(q)=2575-1075=1125.
question
A monopolist maximizes profits by
answer
by setting MR(q)=MC(q) at a q for which p(q) is at least AVC(q)
The monopolist maximizes profits by setting marginal profit equal to 0 (equivalent to setting MR=MC) and then make sure that at this output level p is weakly higher than AVC.
The monopolist maximizes profits by setting marginal profit equal to 0 (equivalent to setting MR=MC) and then make sure that at this output level p is weakly higher than AVC.
question
For a monopoly, marginal revenue is less than price because:
answer
the firm must lower price if it wishes to sell more output.
Marginal revenue is less than price because a monopolist faces a downward-sloping demand function. Hence, to sell one extra unit of output, the monopolist has to decrease price
Marginal revenue is less than price because a monopolist faces a downward-sloping demand function. Hence, to sell one extra unit of output, the monopolist has to decrease price
question
Suppose that the market demand is given by Q(p)=1000-2p. Let p(q) be the maximal price at which the agents would buy q units, i.e., the inverse demand function. Then
answer
p(q)=500-0.5q
p(q)=500-0.5q; it is calculated from Q(p)=1000-2p, by finding p in terms of q.
p(q)=500-0.5q; it is calculated from Q(p)=1000-2p, by finding p in terms of q.
question
Suppose that a monopolist faces the market demand Q(p)=1000-2p. Then its marginal revenue function MR(q) is?
answer
MR(q)=500-q
we know that P(q)=500-0.5q; thus revenue is 𝑅(𝑞)=𝑝(𝑞)∗𝑞=(500−0.5𝑞)∗𝑞=500𝑞−0.5𝑞2R(q)=p(q)∗q=(500−0.5q)∗q=500q−0.5q2. Thus, MR(q)=500-q.
we know that P(q)=500-0.5q; thus revenue is 𝑅(𝑞)=𝑝(𝑞)∗𝑞=(500−0.5𝑞)∗𝑞=500𝑞−0.5𝑞2R(q)=p(q)∗q=(500−0.5q)∗q=500q−0.5q2. Thus, MR(q)=500-q.
question
A monopoly faces a demand function Q(p)=50-p/2. Suppose that it has a constant marginal cost of 16 and no fixed costs. What is this monopoly's profit-maximizing quantity?
answer
21
Since p(q)=100-2q, then 𝑅(𝑞)=𝑝(𝑞)∗𝑞=(100−2𝑞)∗𝑞=100𝑞−2𝑞2R(q)=p(q)∗q=(100−2q)∗q=100q−2q2. Then MR(q)=100-4q. Since MC is constant and equal to 16, then MC(q)=MR(q) implies 100-4q=16. Thus, q=21. Thus, p(21)=58.
Since p(q)=100-2q, then 𝑅(𝑞)=𝑝(𝑞)∗𝑞=(100−2𝑞)∗𝑞=100𝑞−2𝑞2R(q)=p(q)∗q=(100−2q)∗q=100q−2q2. Then MR(q)=100-4q. Since MC is constant and equal to 16, then MC(q)=MR(q) implies 100-4q=16. Thus, q=21. Thus, p(21)=58.
question
A monopoly faces a demand function Q(p)=50-p/2. Suppose that it has a constant marginal cost of 16 and no fixed costs. What is this monopoly's profit-maximizing price?
answer
58
Since p(q)=100-2q, then R(q) = p(q)q=(100-2q)q=100q-2q2. Then MR(q)=100-4q. Since MC is constant and equal to 16, then MC(q)=MR(q) implies 100-4q=16. Thus, q=21. Thus, p(21)=58.
Since p(q)=100-2q, then R(q) = p(q)q=(100-2q)q=100q-2q2. Then MR(q)=100-4q. Since MC is constant and equal to 16, then MC(q)=MR(q) implies 100-4q=16. Thus, q=21. Thus, p(21)=58.
question
A monopoly faces a demand function Q(p)=50-p/2. Suppose that it has a constant marginal cost of 16 and no fixed costs. What is this monopoly's profit?
answer
882
Since p(q)=100-2q, then $R(q)=p(q)q=(100-2q)q=100q-2q2 . Then MR(q)=100-4q. Since MC is constant and equal to 16, then MC(q)=MR(q) implies 100-4q=16. Thus, q=21. Thus, p(21)=58. Profit=Revenue-Cost=5821-1621=882.
Since p(q)=100-2q, then $R(q)=p(q)q=(100-2q)q=100q-2q2 . Then MR(q)=100-4q. Since MC is constant and equal to 16, then MC(q)=MR(q) implies 100-4q=16. Thus, q=21. Thus, p(21)=58. Profit=Revenue-Cost=5821-1621=882.
question
A monopolist
answer
produces less than the competitive outcome.
A monopolist (1) produces less than the competitive outcome, (2) sells at a price higher than the competitive price, (3) sells at a price higher than its marginal cost at q and (4) has higher profits than what would have in a competitive market (q is different from the competitive quantity).
A monopolist (1) produces less than the competitive outcome, (2) sells at a price higher than the competitive price, (3) sells at a price higher than its marginal cost at q and (4) has higher profits than what would have in a competitive market (q is different from the competitive quantity).
question
A monopolist ___.
answer
sells at a price higher than the competitive price.
A monopolist (1) produces less than the competitive outcome, (2) sells at a price higher than the competitive price, (3) sells at a price higher than its marginal cost at q and (4) has higher profits than what would have in a competitive market (q is different from the competitive quantity).
A monopolist (1) produces less than the competitive outcome, (2) sells at a price higher than the competitive price, (3) sells at a price higher than its marginal cost at q and (4) has higher profits than what would have in a competitive market (q is different from the competitive quantity).
question
A monopolist
answer
sells at a price higher than its marginal cost at q*.
A monopolist (1) produces less than the competitive outcome, (2) sells at a price higher than the competitive price, (3) sells at a price higher than its marginal cost at q and (4) has higher profits than what would have in a competitive market (q is different from the competitive quantity).
A monopolist (1) produces less than the competitive outcome, (2) sells at a price higher than the competitive price, (3) sells at a price higher than its marginal cost at q and (4) has higher profits than what would have in a competitive market (q is different from the competitive quantity).
question
The following graph shows equilibrium in a monopoly market. What is the consumer surplus?
answer
A+E
A monopolist chooses an output level at which MR=MC. Hence, the quantity is 𝑄1Q1. By going back to the demand curve, the corresponding price is𝑃3P3 . Consumer surplus is the part below the demand curve and above the price level up to the quantity being produced. Hence A+E is the consumer surplus.
A monopolist chooses an output level at which MR=MC. Hence, the quantity is 𝑄1Q1. By going back to the demand curve, the corresponding price is𝑃3P3 . Consumer surplus is the part below the demand curve and above the price level up to the quantity being produced. Hence A+E is the consumer surplus.
question
The following graph shows equilibrium in a monopoly market. What is the producer surplus?
answer
B+C+D+F+G
A monopolist chooses an output level at which MR=MC. Hence, the quantity is 𝑄1Q1. By going back to the demand curve, the corresponding price is 𝑃3P3. Producer surplus is the part above the MC curve and below the price level up to the quantity being produced. Hence B+C+D+F+G is the consumer surplus.
A monopolist chooses an output level at which MR=MC. Hence, the quantity is 𝑄1Q1. By going back to the demand curve, the corresponding price is 𝑃3P3. Producer surplus is the part above the MC curve and below the price level up to the quantity being produced. Hence B+C+D+F+G is the consumer surplus.
question
The following graph shows equilibrium in a monopoly market. What is deadweight loss?
answer
I+J
A monopolist chooses an output level at which MR=MC. Hence, the quantity is 𝑄1Q1. By going back to the demand curve, the corresponding price is𝑃3P3. Total surplus is equal to A+B+C+D+E+F+G. The efficient output level is such that demand =MC, i.e., 𝑄2Q2 , where the efficient level of social welfare is equal to A+B+C+D+E+F+G+I+J. Hence, the deadweight loss of a monopolist market is equal to I+J.
A monopolist chooses an output level at which MR=MC. Hence, the quantity is 𝑄1Q1. By going back to the demand curve, the corresponding price is𝑃3P3. Total surplus is equal to A+B+C+D+E+F+G. The efficient output level is such that demand =MC, i.e., 𝑄2Q2 , where the efficient level of social welfare is equal to A+B+C+D+E+F+G+I+J. Hence, the deadweight loss of a monopolist market is equal to I+J.
question
Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. This ______.
answer
is a practice of price discrimination.
Charging different consumers differently is a practice of price discrimination. The purpose of this practice is to turn CS into PS.
Charging different consumers differently is a practice of price discrimination. The purpose of this practice is to turn CS into PS.
question
The following graph shows equilibrium in a monopoly market. Suppose the monopolist engages in first-degree price discrimination. In this case, what is the producer surplus?
answer
A+B+C+D+E+F+G+I+J
When the monopolist practices first-degree price discrimination, the monopolist charges each consumer his/her willingness to pay, produces 𝑄2Q2 , and capture the entire social welfare: A+B+C+D+E+F+G+I+J.
When the monopolist practices first-degree price discrimination, the monopolist charges each consumer his/her willingness to pay, produces 𝑄2Q2 , and capture the entire social welfare: A+B+C+D+E+F+G+I+J.
question
The following graph shows equilibrium in a monopoly market. Suppose the monopolist engages in first-degree price discrimination. In this case, the size of the deadweight loss is equal to?
answer
O
When the monopolist conducts first degree price discrimination, the monopolist charges each consumer his/her willingness to pay, produces 𝑄2Q2 , and capture the entire social welfare: A+B+C+D+E+F+G+I+J. Consumer surplus is equal to zero. This is no deadweight loss.
When the monopolist conducts first degree price discrimination, the monopolist charges each consumer his/her willingness to pay, produces 𝑄2Q2 , and capture the entire social welfare: A+B+C+D+E+F+G+I+J. Consumer surplus is equal to zero. This is no deadweight loss.
question
Which of the following statements is WRONG?
answer
Under the first-degree price discrimination, social welfare is minimized.
Under the first-degree price discrimination, CS=0, PS is maximized, DWL=0, and social welfare is maximized.
Under the first-degree price discrimination, CS=0, PS is maximized, DWL=0, and social welfare is maximized.
question
A tennis coach charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. This can be viewed as a practice of ______.
answer
Third-degree price discrimination
Such a practice charges different prices for groups of consumers with different demand, and thus is a practice of third-price discrimination.
Such a practice charges different prices for groups of consumers with different demand, and thus is a practice of third-price discrimination.
question
When a firm charges each customer the maximum price that the customer is willing to pay, the firm:
answer
engages in first-degree price discrimination.
Charging each consumer his/her willingness to pay is the definition of first-degree price discrimination.
Charging each consumer his/her willingness to pay is the definition of first-degree price discrimination.
question
In a local grocery store, avocado is priced "$1 each, 3 for $2". This can be viewed as a practice of ______.
answer
Second-degree price discrimination
Such a practice charges different prices for different quantities of the same good. It is a practice of second-price discrimination.
Such a practice charges different prices for different quantities of the same good. It is a practice of second-price discrimination.
question
Suppose an accountant offers personalized prices for different customers for the essentially the same tax preparation service. The price is based on each customer's income level, family situation, asset level, etc, so that the price is close to the customer's willingness to pay. This can be viewed as a practice of ______.
answer
First-degree price discrimination
Such a practice charges each individual his/her willingness to pay. It is a first-degree price discrimination.
Such a practice charges each individual his/her willingness to pay. It is a first-degree price discrimination.
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