question
Versioning is a form of _____ price discrimination because _____.
a) third-degree; the firm can directly determine which customers should buy which version of the product before the sale is made
b) first-degree; the firm can identify its customers' types of demand curves before they buy, allowing the firm to select the profit-maximizing version of the product
c) perfect; each customer buys a unique version of the product that is priced to eliminate all consumer surplus
d) second-degree; the firm cannot identify its customers' types of demand curves before they buy, so the firm produces various versions of the product in hopes that customers will self-select the appropriate product
a) third-degree; the firm can directly determine which customers should buy which version of the product before the sale is made
b) first-degree; the firm can identify its customers' types of demand curves before they buy, allowing the firm to select the profit-maximizing version of the product
c) perfect; each customer buys a unique version of the product that is priced to eliminate all consumer surplus
d) second-degree; the firm cannot identify its customers' types of demand curves before they buy, so the firm produces various versions of the product in hopes that customers will self-select the appropriate product
answer
second-degree; the firm cannot identify its customers' types of demand curves before they buy, so the firm produces various versions of the product in hopes that customers will self-select the appropriate product
question
When a firm has market power but cannot prevent its customers from reselling the product, the firm will:
a) engage in first-degree price discrimination
b) produce a quantity of output at which marginal revenue equals marginal cost.
c) engage in second-degree price discrimination
d) produce a quantity of output at which price equals marginal cost.
a) engage in first-degree price discrimination
b) produce a quantity of output at which marginal revenue equals marginal cost.
c) engage in second-degree price discrimination
d) produce a quantity of output at which price equals marginal cost.
answer
produce a quantity of output at which marginal revenue equals marginal cost.
question
A golf course has frequent players whose demand is Qf = 24 - 0.3P and infrequent players whose demand is Qi = 10 - 0.1P. The marginal cost and average total cost of providing a round of golf are $20. If the golf course practices third-degree price discrimination, it will charge frequent players and infrequent players a price of _____ and _____, respectively.
a) $50, $60
b) $30, $40
c) $60, $50
d) $40, $30
a) $50, $60
b) $30, $40
c) $60, $50
d) $40, $30
answer
$50, $60
question
The practice of bundling necessitates that a firm:
a) have market power and sell two products in which consumers' demand for one product is positively correlated with their demand for the other product.
b) have market power, prevent arbitrage, and sell two products in which consumers' demand for one product is negatively correlated with their demand for the other product.
c) ignore arbitrage and sell two products in which consumers' demand for one product is negatively correlated with their demand for the other product.
d) set price equal to marginal cost for each consumer whose demand can be identified after the purchase of the product.
a) have market power and sell two products in which consumers' demand for one product is positively correlated with their demand for the other product.
b) have market power, prevent arbitrage, and sell two products in which consumers' demand for one product is negatively correlated with their demand for the other product.
c) ignore arbitrage and sell two products in which consumers' demand for one product is negatively correlated with their demand for the other product.
d) set price equal to marginal cost for each consumer whose demand can be identified after the purchase of the product.
answer
have market power, prevent arbitrage, and sell two products in which consumers' demand for one product is negatively correlated with their demand for the other product.
question
(Table)
This table shows the willingness to pay of the only three potential customers of a firm that runs both a weight room and an indoor swimming pool. The weight room and pool each have a constant marginal cost of $20 per month. Which of the following pricing strategies yields the highest producer surplus?
a) $60 for the weight room, $140 for the pool, or $185 for both
b) $60 for the weight room, $140 for the pool, or $175 for both
c) $25 for the weight room, $50 for the pool, or $70 for both
d) $50 for the weight room, $125 for the pool, or $165 for both
This table shows the willingness to pay of the only three potential customers of a firm that runs both a weight room and an indoor swimming pool. The weight room and pool each have a constant marginal cost of $20 per month. Which of the following pricing strategies yields the highest producer surplus?
a) $60 for the weight room, $140 for the pool, or $185 for both
b) $60 for the weight room, $140 for the pool, or $175 for both
c) $25 for the weight room, $50 for the pool, or $70 for both
d) $50 for the weight room, $125 for the pool, or $165 for both
answer
$60 for the weight room, $140 for the pool, or $175 for both
question
Two firms, A and B, each with a marginal cost of $50, form an oligopoly whose market demand is P = 650 − 10Q. If the firms are able to collude successfully, what quantity will each produce and what price will they charge?
a) a quantity of 30 each and a price of $350
b) a quantity of 20 each and a price of $250
c) a quantity of 15 each and a price of $350
d) a quantity of 30 each and a price of $50
a) a quantity of 30 each and a price of $350
b) a quantity of 20 each and a price of $250
c) a quantity of 15 each and a price of $350
d) a quantity of 30 each and a price of $50
answer
a quantity of 15 each and a price of $350
question
The Cournot model is an example of a _____ game, and the Bertrand model is an example of a _____ game.
A) simultaneous; sequential
B) sequential; sequential
C) simultaneous; simultaneous
D) sequential; simultaneous
A) simultaneous; sequential
B) sequential; sequential
C) simultaneous; simultaneous
D) sequential; simultaneous
answer
simultaneous; simultaneous
question
(Graph)
(Figure 11.2) The graph depicts the market demand curve for a two-firm industry with no fixed costs. Suppose that the two firms are colluding by acting like a monopolist, with each firm producing half the market output. If one of the firms cheats on the cartel agreement and produces an additional unit of output, its profits will rise from:
a) $24 to $32.
b) $8 to $12.
c) $32 to $36.
d) $16 to $18.
(Figure 11.2) The graph depicts the market demand curve for a two-firm industry with no fixed costs. Suppose that the two firms are colluding by acting like a monopolist, with each firm producing half the market output. If one of the firms cheats on the cartel agreement and produces an additional unit of output, its profits will rise from:
a) $24 to $32.
b) $8 to $12.
c) $32 to $36.
d) $16 to $18.
answer
$16 to $18.
question
(Table)
(Table 12.12) Firm 1's dominant strategy ____. Firm 2's dominant strategy _____.
a) is A; is A
b) is B; is B
c) does not exist; is A
d) does not exist; is B
(Table 12.12) Firm 1's dominant strategy ____. Firm 2's dominant strategy _____.
a) is A; is A
b) is B; is B
c) does not exist; is A
d) does not exist; is B
answer
does not exist; is B
question
(Table)
(Table 12.12) If Firm 1 follows a maximin strategy while Firm 2 follows its dominant strategy, the outcome of this game is:
a) (-1, 10)
b) (20, 20)
c) (8, 8)
d) (-20, 15)
(Table 12.12) If Firm 1 follows a maximin strategy while Firm 2 follows its dominant strategy, the outcome of this game is:
a) (-1, 10)
b) (20, 20)
c) (8, 8)
d) (-20, 15)
answer
(-1, 10)
question
(Table)
(Table 12.12) The Nash Equilibrium is/are:
a) (8,8) and (20,20)
b) (-20,15) and (-1,10)
c) (8,8)
d) (20,20)
(Table 12.12) The Nash Equilibrium is/are:
a) (8,8) and (20,20)
b) (-20,15) and (-1,10)
c) (8,8)
d) (20,20)
answer
(20,20)
question
A company is considering extracting natural gas from one of its properties. The initial extraction cost is $8 million, and all of the gas will be extracted in two years. The profits from selling the natural gas will be $6 million in year 1 and $5 million in year 2. What is the net present value of this investment at 12%?
a) $1,020,645
b) $800,780
c) $2.5 million
d) $1,343,112
a) $1,020,645
b) $800,780
c) $2.5 million
d) $1,343,112
answer
$1,343,112
question
(Table)
(Table 12.15) The table shows the strategies of two players playing prisoner's dilemma. What is player A's strategy?
a) tit-for-tat
b) grim trigger
c) uncertain
(Table 12.15) The table shows the strategies of two players playing prisoner's dilemma. What is player A's strategy?
a) tit-for-tat
b) grim trigger
c) uncertain
answer
tit-for-tat
question
(Table)
(Table 14.10) Suppose the person's utility function is given by U = I 0.5, where I is income. What guaranteed income level would offer the same expected utility level as that from the uncertain income (i.e., find the certainty equivalent)?
a) $448,900
b) $432,600
c) $457,000
d) $464,400
(Table 14.10) Suppose the person's utility function is given by U = I 0.5, where I is income. What guaranteed income level would offer the same expected utility level as that from the uncertain income (i.e., find the certainty equivalent)?
a) $448,900
b) $432,600
c) $457,000
d) $464,400
answer
$448,900
question
A company is considering investing $100 million today to bring a weight loss pill to the market. At the end of one year, the firm will know the payoff: there is a 0.20 probability that the pill will sell at a high price and generate $30 million per year of profit forever and a 0.80 probability that the pill will sell at a low price and generate $5 million per year of profit forever. The interest rate is 10%. What is the expected net present value of this investment?
a) $100million
b) $60 million
c) $40 million
d) $0 million
a) $100million
b) $60 million
c) $40 million
d) $0 million
answer
$0 million
question
Mark is considering spending $25,000 on a farm tractor that will increase his crop yield and bring additional revenues of $4,000 for each of the next 7 years. Mark should:
a) not buy the tractor because the payback period extends beyond three years.
b) use present discounted value analysis to decide whether the tractor is a good investment.
c) buy the tractor because its benefits of $28,000 outweigh its costs of $25,000.
d) buy the tractor because inflation will reduce the value of future cash flows.
a) not buy the tractor because the payback period extends beyond three years.
b) use present discounted value analysis to decide whether the tractor is a good investment.
c) buy the tractor because its benefits of $28,000 outweigh its costs of $25,000.
d) buy the tractor because inflation will reduce the value of future cash flows.
answer
use present discounted value analysis to decide whether the tractor is a good investment.
question
(Graph)
(Figure 10.9) Suppose Walmart offers the first 100 holiday cards for sale at 25 cents each, then offers as many as 25 more cards at a per-unit price of 20 cents each and offers the next 50 cards, up to the 175th photo card, for 10 cents each. Walmart's producer surplus is ___.
a) A+B+C+D+E
b) A+C+E
c) B+D
d) A
(Figure 10.9) Suppose Walmart offers the first 100 holiday cards for sale at 25 cents each, then offers as many as 25 more cards at a per-unit price of 20 cents each and offers the next 50 cards, up to the 175th photo card, for 10 cents each. Walmart's producer surplus is ___.
a) A+B+C+D+E
b) A+C+E
c) B+D
d) A
answer
A+C+E
question
Two producers, A and B, each with a marginal cost of $20, form an oligopoly whose market demand is P = 220 − 10Q. If the firms attempt to collude and firm B produces 2 gallons, what is firm A's optimal quantity?
a) 10
b) 9
c) 8
d) 7
a) 10
b) 9
c) 8
d) 7
answer
9
question
Relative to standard monopoly pricing, first-degree price discrimination results in:
a) higher consumer surplus, higher producer surplus, and higher total surplus.
b) lower consumer surplus, higher producer surplus, and higher total surplus.
c) lower consumer surplus, higher producer surplus, and lower total surplus.
d) lower consumer surplus, lower producer surplus, and lower total surplus.
a) higher consumer surplus, higher producer surplus, and higher total surplus.
b) lower consumer surplus, higher producer surplus, and higher total surplus.
c) lower consumer surplus, higher producer surplus, and lower total surplus.
d) lower consumer surplus, lower producer surplus, and lower total surplus.
answer
lower consumer surplus, higher producer surplus, and higher total surplus.
question
There is an 70% probability that Ben will be in good health during the year and incur only $100 in medical expenses, but there is a 30% probability that he will be ill and incur $10,000 in medical expenses. If an insurance company charged Ben an actuarially fair premium, how much would Tom pay for health insurance?
a) $3,460
b) $3,070
c) $4,000
d) $3,840
a) $3,460
b) $3,070
c) $4,000
d) $3,840
answer
$3,070
question
(Table)
A risk-averse person _____. A risk-neutral person ____.
a) prefers gamble A to gamble B; prefers gamble B to gamble A;
b) prefers gamble B to gamble A; prefers gamble A to gamble B;
c) prefers gamble A to gamble B; regards gamble A and gamble B as indifferent.
d) prefers gamble B to gamble A; regards gamble A and gamble B as indifferent.
A risk-averse person _____. A risk-neutral person ____.
a) prefers gamble A to gamble B; prefers gamble B to gamble A;
b) prefers gamble B to gamble A; prefers gamble A to gamble B;
c) prefers gamble A to gamble B; regards gamble A and gamble B as indifferent.
d) prefers gamble B to gamble A; regards gamble A and gamble B as indifferent.
answer
prefers gamble A to gamble B; regards gamble A and gamble B as indifferent.
question
What's the difference between direct and indirect price discrimination? What's the difference between 1st and 3rd degree price discrimination?
answer
Price discrimination represents the practice of charging different prices to different customers for the same product. Suppose the firms's customers have different demand curves. The firm has market power and can prevent resale.
If the firm can identify its customers' demands before they buy, it can practice direct price discrimination. Both 1st and 3rd degree price discriminations are direct price discrimination. However, if the firm can identify its customers' differing demands only after they make a purchase, it can try indirect price discrimination.
If the firm has complete information about every consumer, then the firm is able to practice first-degree price discrimination --- charges each customer exactly his willingness to pay. Under first-degree price discrimination, the consumer's surplus is zero and the firm gains the entire welfare. What's more, the deadweight loss is zero, thus efficient.
However, if the firm only has information about groups of consumers, the firm can practice third-degree discrimination --- charges different prices to different groups of customers based on the identifiable attributes of the groups. The firm regards different groups as different markets and sets prices such that MR=MC in each market to maximize the total profits. The consumer's surplus is positive, and producer's surplus is less than the entire welfare. The deadweight loss is larger than zero.
If the firm can identify its customers' demands before they buy, it can practice direct price discrimination. Both 1st and 3rd degree price discriminations are direct price discrimination. However, if the firm can identify its customers' differing demands only after they make a purchase, it can try indirect price discrimination.
If the firm has complete information about every consumer, then the firm is able to practice first-degree price discrimination --- charges each customer exactly his willingness to pay. Under first-degree price discrimination, the consumer's surplus is zero and the firm gains the entire welfare. What's more, the deadweight loss is zero, thus efficient.
However, if the firm only has information about groups of consumers, the firm can practice third-degree discrimination --- charges different prices to different groups of customers based on the identifiable attributes of the groups. The firm regards different groups as different markets and sets prices such that MR=MC in each market to maximize the total profits. The consumer's surplus is positive, and producer's surplus is less than the entire welfare. The deadweight loss is larger than zero.
question
The inverse demand curve for a firm with market power is P = 120 -0.5 Q, and its marginal cost is given by MC = 2Q. What's the deadweight loss for the monopoly (the firm has to choose a unique price for all consumers)? What is the deadweight loss if the firm decides to practice first-degree price discrimination?
answer
(i) Monopoly: (Graph)
From the inverse demand curve, we know that MR=120-
Q;
To maximize profit, the firm chooses equilibrium quantity such that MR=MC:120-Q=2Q Q*=40;
Hence, the equilibrium price P=120-0.5Q=100;
The marginal cost when Q=Q: MC=2Q=80
The quantity when marginal cost curve interacts with the inverse demand curve: MC=P: 2Q=120- 0.5Q Q'=48
Hence, the deadweight loss is: 0.5(100-80)(48-40)=80
(ii) Under the first-degree price discrimination, the deadweight loss=0
From the inverse demand curve, we know that MR=120-
Q;
To maximize profit, the firm chooses equilibrium quantity such that MR=MC:120-Q=2Q Q*=40;
Hence, the equilibrium price P=120-0.5Q=100;
The marginal cost when Q=Q: MC=2Q=80
The quantity when marginal cost curve interacts with the inverse demand curve: MC=P: 2Q=120- 0.5Q Q'=48
Hence, the deadweight loss is: 0.5(100-80)(48-40)=80
(ii) Under the first-degree price discrimination, the deadweight loss=0
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