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07-02-2019

Product code Economics-PH348

 

Managerial Economics

 

Multiple Choice

 Firms A and B are the only firms in an oligopoly market. These firms compete primarily on the basis of changes in product quality and can introduce style changes either annually or semi- annually. The possible profit outcomes are given in the matrix below:

 

Firm B

 

Semi-Annual                           Annual

 

 

 

Firm A

 

Semi-Annual               300, 300                                 800, 100

 

Annual                         100, 800                                 500, 500

 

 

 

  1. When the two firms act non-cooperatively, the outcome that is stable is given by the payoffs

 

a.         300, 300

b.         800,100

c.         500, 500

d.         100,800

  1. When the two firms collude successfully, firm A will earn profits of a. 300

b.         100

c.         800

d.         500

 

 

  1. Which of the following makes it more likely that firms A and B will be able to collude successfully?

 

  1. stable demand curve for theproduct
  2. many rounds of the above strategicinteraction
  3. technological advancement that allows style changes to be madequarterly
  4. (a) and (b)
  5. (b) and (c)

In Questions 4 and 5, use the following data:

 

Price

Quantity Demanded

$8

2,000

7

3,000

6

4,000

5

5,000

4

6,000

3

7,000

2

8,000

 

  1. If price is reduced from $5 to $4, totalrevenue

 

  1. will decline
  2. will increase
  3. will remainunchanged
  4. it is impossible to determine what will happen to totalrevenue.
  1. At approximately what level of output (sales) would marginal revenue be equal to zero? a.      1000

b.         2000

c.         3000

d.         4000

e.         5000

 

 
 
 

 

 

 

  1. Which of the following is NOT a characteristic of a monopolymarket?

 

  1. a single firm
  2. a unique product
  3. free entry and exit
  4. (a) and (b)
  5. (a) and (c)

 

  1. The demand function facing a pure monopolistis

 

  1. perfectly elastic
  2. perfectlyinelastic
  3. the market demandcurve
  4. a horizontal line
  5. a vertical line

 

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 4 QUESTIONS.

 

A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:

 

Q = 200- 2P                            MR = 100 -Q

TC=5Q                                    MC =5

 

  1. What level of output maximizes totalrevenue?

 

  1. 0

b.         90

c.         95

d.         100

e.         none of the above.

  1. What is the profit maximizing level ofoutput?
    1. 0

b.         90

c.         95

d.         100

e.         none the above.

  1. Suppose that a tax of $5 for each unit produced is imposed by state government. What is the profit maximizing level ofoutput?
    1. 0

b.         90

c.         95

d.         100

e.         none of the above.

  1. Suppose that in addition to the tax a business license is required to stay in business. The license costs $1000. What is the profit maximizing level ofoutput?
    1. 0

b.         90

c.         95

d.         100

e.         none of the above.

 

  1. Which of the following is not conducive to the successful operation of acartel?

 

  1. market demand for the good is relativelyinelastic
  2. the cartel supplies all of the world's output of thegood
  3. cartel members have substantial cost advantages over non-memberproducers
  4. the supply of non-cartel members is very priceelastic.

 

 

  1. Which of the following is NOT associated with a high degree of marketpower?

 

  1. An inelastic demand curve for thefirm
  2. A small number of firms in themarket
  3. Significant price rivalry among firms in themarket
  4. Significant barriers to entry.

 

 

  1. The monopolist that maximizesprofit

 

  1. imposes a cost on society because the selling price is above marginalcost
  2. imposes a cost on society because the selling price is equal to marginalcost
  3. does not impose a cost on society because the selling price is above marginal cost
  4. does not impose a cost on society because price is equal to marginalcost.

 

  1. As the manager of a firm you calculate the marginal revenue of your output as-$152.

You should

 

  1. immediately expand output until marginal revenue becomespositive
  2. do nothing without information about yourcosts
  3. reduce output
  4. none of the above.

 

 

 

 

 

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 3 QUESTIONS.

You are a producer in a monopoly industry. Your demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows:

 

Q = 120 - 2P   TR = 60Q-.5Q2            MR = 60 - Q TC =4Q

 

  1. How much output will youproduce?

 

  1. 0

b.         12

c.         56

d.         102

e.         none of the above.

  1. The price of your product will be                   .
    1. 0
    2. 4

c.         32

d.         64

e.         128

 

  1. How much profit will youmake?

 

a.         -996                                                     d.         1,568

  1. -256                                                     e.         none of the above
  2. 0

 

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 2 QUESTIONS.

 

 

Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows:

 

P = 30 - Q

 

The marginal cost to produce this new drink is $3.

 

  1. What price would this new drink sell for if it sold in a competitivemarket?

 

  1. 0
  2. $3

c.         $12

d.         $16.50

e.         $30

 

 

  1. What is the monopoly price of this newdrink?

 

  1. 0
  2. $3

c.         $12

d.         $16.50

e.         $30

 

  1. Consider the following payoffmatrix:

 

Firm Y

Advertise                    Don'tAdvertise

 

 

Advertise

11, 6

 

16, 0

Firm X

Don't Advertise

5, 7

 

21, 3

 

 

If Firm Y follows a dominant strategy and Firm X realizes this, which outcome will result?

 

a.         21, 3

b.         16, 0

c.         5, 7

d.         11, 6

 

 

  1. Two firms are considering the introduction of new brands of roller-blade skates. The market can only support one new brand. The pay-off matrix is asfollows:

 

 

 

 

 

 

 

 

Firm 1

 

 

 

 

Introduce

 

 

Don't Introduce

 

Firm 2

 

-10, -10

50, 0

0, 50

0, 0

 

Introduce                     Don'tIntroduce

 

 

 

 

 

 

Unfortunately for Firm 2, Firm 1 already produces a similar product and can probably bring the new product to market more quickly. What is the most likely outcome in this situation?

 

a.         -10, -10

b.         0, 50

c.         50, 0

d.         0, 0

e.         none of the above are Nash equilibria.

 

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 4 QUESTIONS (23-26)

 

Estimated demand for a new computer game, The Pokeman Nightmare, is given by QD = 150 - 5P - 0.1PC - 0.5PS + 0.2A

Where P = price of Pokeman game PC = price of a computer

PS = price of essential software to run the game A = advertising expenditure

 

  1. From this demand, one can inferthat:

 

  1. higher income shifts demandout
  2. computers and essential software aresubstitutes
  3. computers and essential software arecomplements
  4. higher advertising expenditures increases quantity via a movement along the demandcurve
  5. none of the above
  1. Suppose that P = 10, PC = 100, PS = 2, and A = 5. What is the price elasticity of demand? a.  - 1/2

b.         - 5/9

c.         - 1

d.         - 9/5

e.         none of the above

 

  1. From the demand curve above we can infer that, when P = 10, PC = 100, PS = 2, and A =5,

 

  1. Pokeman game and essential software aresubstitutes
  2. Pokeman game is not a luxurygood
  3. Pokeman game is a luxurygood
  4. Demand for Pokeman game is elastic (with respect to its ownprice)
  5. Demand for Pokeman game is inelastic (with respect to its ownprice)

 

  1. Suppose again that P = 10, PC = 100, PS = 2, and A = 5. In addition, suppose that the unit cost of production is equal to 6. Then the firm producing the newgame

 

  1. Can increase its profit by decreasing its price from$10
  2. Can increase its profit by increasing its price from$10
  3. Can increase its revenue by decreasing its price from$10
  4. Achieves its maximum profit at the price P =$10

 

Problem 1. Teatro alla Scala (La Scala) is a famous opera house in Milan, Italy. They have been experimenting with ticket choices and prices they offer. Your company has been hired as consultant for the design of ticket packages. The cost of the opera house can be regarded as fixed: given that an opera will be performed, the marginal cost of serving one more customer is zero. Thus, you focus on maximizing revenue.

 

From data on past ticket sales and survey information, you conclude that there are essentially two kinds of opera consumers: A and B. The B types are more passionate about opera and willing to pay more for tickets than the A types. The consumers’ willingness to pay and their associated marginal values are recorded in the following tables:

 

VB

50

95

133

160

 

MVB

50

45

38

27

VA

30

45

55

62

 

MVA

30

15

10

7

Q

1

2

3

4

 

Q

1

2

3

4

 

where Q denotes the number of tickets. The two groups of consumers are of equal size.

(When setting prices, assume that any consumer who is pushed to "indifference" will behave as you desire.)

 

  1. Suppose La Scala offers a single price of P = 15 for a ticket. This means each consumer can purchase as many tickets as they desire at a unit price of$15.

 

How many tickets will each type A consumer buy? How many tickets will each type B consumer buy? What is the total profit (revenue) for La Scala?

  1. If La Scala offers only a single unit price, what is the profit-maximizingchoice?

 

What is the demand and the resulting consumer surplus for each type of consumer at this price?

 

QA=          QB=           CSA=           CSB=          

 

  1. You see an opportunity for a pricing strategy in the form of ticket bundles. Suppose La Scala offers a one-ticket bundle at a price of $30 and a four-ticket bundle at the price of $140.

 

NOTE: In parts C and D of this problem, you should assume that a buyer (whether of type A or

B) can choose one, and only one, of the offers made available by the seller. So, in this case, a buyer can choose to: i) buy nothing, ii) buy the 1-ticket bundle, or iii) buy the 3-ticket bundle. A buyer cannot choose to buy multiple tickets at a price of $30. (This is different from an offer to sell individual tickets in any desired quantity, as in part A.)

 

Calculate La Scala’s revenue and the consumer surplus of each group generated by this pricing scheme.

 

Revenue=          CSA=           CSB=          

 

  1. New market research suggests that an advertising campaign can move the total and marginal willingness to pay of group A to the values in the following table:

 

VA

40

65

80

90

 

MVA

40

25

15

10

Q

1

2

3

4

 

Q

1

2

3

4

The campaign would leave the values of all type B consumers unchanged. Compare the following two pricing schemes:

  1. La Scala offers a one-ticket bundle at a price of $30 and a four-ticket bundle at the price of $140.
  2. La Scala offers a two-ticket bundle at a price of $65 and a four-ticket bundle at the price of $130.

 

Which pricing scheme does La Scala prefer?

 

Assuming La Scala chooses its preferred pricing scheme, by how much does La Scala’s revenue increase as a result of the advertising campaign?

 

How are type B consumers affected by the campaign?

 

  1. Mitchell Electronics produces a home video game that has become very popular with children. Mitchell's managers have reason to believe that Wright Televideo Company is considering entering the market with a competing product. Mitchell must decide whether to set a high price to accommodate entry or a low, entry deterring price. The payoff matrix below shows the profit outcome for each company under the alternative price and entry strategies. Mitchell's profit is entered before the comma, Wright's is after the comma.

 

Wright Televideo

Enter                      Don'tEnter

 

 

High Price

*          60, 25

85, 0

Mitchell

Low Price

*          30, -20

60, 0

 

 

  1. Does Mitchell have a dominant strategy? Explain.

 

  1. Does Wright have a dominant strategy? Explain.

 

  1. Mitchell's managers have vaguely suggested a willingness to lower price in order to deter entry. Is this threat credible in light of the payoff matrixabove?

 

  1. If the threat is not credible, what changes in the payoff matrix would be necessary to make the threat credible? What business strategies could Mitchell use to alter the payoff matrix so that the threat iscredible?

[Note: You should read Section 13.6 in P&R before answering this question.]

 

Problem 3

 

In many regions, local governments offer customized automobile license plates, also called "vanity tags.” In these programs, a driver can choose to pay an additional fee over and above the basic annual fee charged to register a vehicle and, in return, the driver is allowed to choose the letter and number combination for their automobile license plate.

 

North Carolina (NC) provides a specific example of how these programs work. By law, every motor vehicle must be registered with the state and issued a license plate by the Department of Motor Vehicles (DMV). There is a basic annual charge to register/renew a vehicle. The number/letter combination on these plates is issued more or less at random by the DMV. For an added fee, however, a vehicle owner can choose the number/letter combination of their plates; for example, by paying the added fee an individual can enjoy driving a car with license plates exhibiting highly coveted letter combinations such as “EcoProf.”

 

In recent years, NC experimented with the pricing structure of the vanity tag program. Initially, call it year 1, the price of a vanity tag was 30$ and 80 thousand vanity tags were sold. Then, in year 2, the price was increased to 40$ and 41 thousand vanity tags were purchased.

 

Your consulting firm has been hired to analyze the results and make recommendations. In answering the questions that follow, you are allowed to make one assumption: the price and quantity observations in year 1 and year 2 correspond to points on the (linear) demand curve for vanity tags.

 

  1. Assess the demand price elasticity for vanity tags. (Use year 1 as thebase.)

 

  1. Assess the revenue implications of the year 1 to year 2 pricechange.

 

  1. Do you recommend further price increases or do you propose pricedecreases?

 

  1. Offer some price discrimination strategies. [Hint: think of the basic annual fee and also what is observable to the seller.
Download Questions

Multiple Choice Firms A and B are the only firms in an oligopoly market. These firms compete primarily on the basis of changes in product quality and can introduce style changes either annually or semi- annually. The possible profit outcomes are given in the matrix below: Firm B Semi-Annual Annual Firm A Semi-Annual 300, 300 800, 100 Annual 100, 800 500, 500 1. When the two firms act non-cooperatively, the outcome that is stable is given by the payoffs a. 300, 300 b. 800,100 c. 500, 500 d. 100,800

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