Please only answer Question 5 10 and 11

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School of Business

Economics for Successful Firm Management BMGT 603

Final Exam

Question 1. Select the correct statement for each of the following questions. There is only one correct statement for each question.

(a) Which of the following sets of economic data is minimizing the cost of producing a given level of output?

(A) MPL = 20, MPK = 40, w = $16, r = $32.

(B) MPL = 20, MPK = 40, w = $32, r = $16.

(D) MPL = 40, MPK = 40, w = $16, r = $32.

(b) The manager institutes an incentive structure to ensure:

(A) workers are in fact working at the expected potential.

(B) workers are in fact working at their utility-maximizing effort level.

(D) the firm produces above the production function.

(A) A monopolist produces on the inelastic portion of its demand.

(B) A monopolist always earns an economic profit.

(D) In the short run, a monopoly will shut down if P < AV C.

(d) A local video store estimates its average customer’s demand per year is Q = 7 − 2P , and it knows the marginal cost of each rental is $0.5. How much should the store charge for an annual membership in order to extract the entire consumer surplus via an optimal two-part pricing strategy?

(A) $9

(B) $10

(D) $12

(e) What price should a firm charge for a package of two shirts given a marginal cost of $2 and an inverse demand function P = 6 − 2Q by the representative consumer?

(A) $2

(B) $6

(D) $10

(f) A campus auditorium sells tickets at half price to students during the last 30 minutes before a concert starts. This is an example of:

(A) price discrimination.

(B) peak-load pricing.

(D) none of the statements is correct.

(g) A firm with market power has an individual consumer demand of Q = 20 − 4P and costs of C = 4Q. What is the optimal amount of this product to package in a single block?

(A) 2

(B) 3

(D) 5

(h) The following table contains different consumers’ values for three software titles: Pow- erPoint, Excel, and Word. Suppose there are 100 consumers of each type. It costs Microsoft $5 to produce each piece of software. If Microsoft wants to devise a pricing strategy that is incentive compatible between consumer types and will maximize its profit, then it should:

Consumer Types PowerPoint Excel Word Accountants $75 $100 $150 Marketing/Sales $125 $80 $135 Administrative Assistants $50 $175 $75

(A) charge $50 for PowerPoint, $80 for Excel, and $75 for Word.

(B) charge a single price of $300 for the bundle of PowerPoint, Excel, and Word.

(D) charge $325 for the bundle of PowerPoint, Excel, and Word and permit consumers to purchase each software title individually at $81.10 each.

(i) Which of the following measures market structure?

(A) Four-firm concentration ratio

(B) Lerner index

(D) All of the choices may be used to make inferences about market structure.

(j) If a monopolistically competitive firm’s marginal cost increases, then in order to max- imize profits, the firm will:

(A) reduce output and increase price.

(B) increase output and decrease price.

(D) reduce both output and price.

(k) Which of the following industries is best characterized as monopolistically competitive?

(A) Crude oil

(B) Agriculture

(D) Local telephone service

(l) A monopoly has produced a product with a patent for the last few years. The patent is going to expire. What will happen after the patent expires?

(A) The incumbent will leave the market.

(B) The incumbent will retain its status as a monopoly but produce at a lower price.

(D) None of the answers is correct.

Question 2. You are the manager of a firm that receives revenues of $175,000 per year from product X and $50,000 per year from product Y . Both products have similar production costs. The own price elasticity of demand for product X is -1.5, and the cross-price elasticity of demand between product Y and X is 1.6. The end of the quarter is approaching and your boss is feeling pressured to increase the firm’s revenues. To that end, he suggests a 2 percent price increase to product X, since that is the most successful product in the firm.

a. Are products X and Y substitutes? Complements?

b. Do you think your boss’ suggestion will have the desired effect?

Question 3. You are the manager of a firm that sells a “commodity” in a market that resembles perfect competition, and your cost function is C(Q) = 40Q + 5Q2 (so MC = 40 + 10Q). Unfortunately, due to production lags, you must make your output decision prior to knowing for certain the price that will prevail in the market. You believe that there is a 80 percent chance the market price will be $400 and a 20 percent chance it will be $600.

a. Calculate the expected market price.

b. What output should you produce in order to maximize expected profits?

c. What are your expected profits?

Question 4. Consider a homogeneous-product duopoly where each firm initially produces at a constant marginal cost of $1200 and there are no fixed costs. Determine what would happen to each firm’s equilibrium output and profits if firm 2’s marginal cost increased to a constant $1250 but firm 1’s marginal cost remained constant at $1200 in each of the following settings:

a. Cournot duopoly.

b. Sweezy oligopoly.

c. Bertrand oligopoly.

Question 5. You are the manager of a firm with demand and cost functions that are given by P = 1200 − 5Q and C(Q) = 1, 500 + 10Q2, respectively. Your marginal cost function is MC(Q) = 20Q.

a. What is the total revenue as a function of the quantity produced?

b. If Marginal Revenue is MR = 1200−10Q, what price-quantity combination maximizes your firm’s profits?

c. Calculate the maximum profits.

d. Is demand elastic, inelastic, or unit elastic at the profit-maximizing price-quantity combination?

e. What price-quantity combination maximizes revenue?

f. Calculate the maximum revenues.

g. Is demand elastic, inelastic, or unit elastic at the revenue-maximizing price-quantity combination?

h. What do you anticipate for the long run with respect to profits, other firms, prices, and output if

i. Your firm is a monopoly.

ii. Your firm is in a monopolistic competitive market.

Question 6. Manufacturers of laundry detergent and dishwashing soap reinvest a relatively large percentage of their sales revenues on advertising campaigns. Most of these advertise- ments that appear on television stress the fact that their product is ”New and Improved.” Why?

Question 7. Regardless of the economic environment, every firm will maximize profits by operating at the minimum point of its average total cost curves. Is this statement true or false? Explain.

Question 8. U.S. Airways experienced huge losses for several years in the 1990s, yet it continued to operate its fleets. Why didn’t U.S. Airways shut down its operations to avoid the losses?

Question 9. Would you expect the demand for a monopolistically competitive firm’s prod- uct to be more or less elastic than that for a monopolist’s product? Explain.

Question 10. Based on Figure 1 (which summarizes the demand, marginal revenue, and rel- evant costs for your product), determine your firm’s optimal price, output, and the resulting profits for each of the following scenarios:

a. You charge the same unit price to all consumers.

b. You engage in first-degree price dis- crimination.

c. You engage in two-part pricing.

d. You engage in block pricing.

0 10 20 30 40 50 $0

$20

$40

$60

$80

$100

$120

$140

$160

DMR

MC=AC

Quantity

P ri ce

Figure 1

Question 11. You are the manager for a monopoly with costs, demand, and marginal revenue as in the graph at the top on Figure 2.

a. Does the fact that you operate in a monopoly always guarantee that you can achieve higher profits by increasing the price? Explain.

b. Draw the area representing the profits on the top graph on Figure 2.

c. Suppose one of your suppliers just announced an increase in prices for a specific part that your product requires. What should the impact be to each of the curves on the top graph of Figure 2? Explain carefully.

d. Suppose economic conditions change in such a way that the demand curve for your company shifts left.

i. Draw a demand curve on the bottom graph on Figure 2 that leads to zero economic profits.

ii. Draw a demand curve on the bottom graph on Figure 2 such that any further leftward demand shift will cause you to shutdown.

AFC

AVC

ATC

Demand

AFC

AVC

ATC

Demand

Figure 2: Demand, and costs for a monopolist.