Which of the following is true regarding the relationship between the elasticity of

demand for an individual firm and the elasticity of demand for the market in a
Cournot oligopoly with five identical firms?

Multiple Choice
 EF = (1/5)EM
 EM = 5EF
 EF = (df(p)/dP) × (5Q/P)
 EF = (df(p)/dP) × (5P/Q)

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?

Multiple Choice
 $10

 $8

 $2

 $6

The average consumer at a firm with market power has an inverse demand function
of P = 10 − Q. The firm's cost function is C = 2Q. If the firm engages in two-part
pricing, what is the optimal price to charge a consumer for each unit purchased?

Multiple Choice
 $0

 None of the answers are correct.

 $1

 $4

Suppose P = 20 − 2Q is the market demand function for a local monopoly. The

marginal cost is 2Q. If fixed costs are zero and the firm engages in two-part pricing,
the most profits the firm will earn is:

Multiple Choice
  $25.

 $10.

 $50.

 $5.

A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs.
It faces an inverse demand function given by P = 38 − Q. Suppose fixed costs rise to
$200. What will happen in the market?

Multiple Choice
 The firm will decrease its output and lower its price.

 The firm will increase the price.

 The firm continues to produce the same output and charge the same price.

 The firm will shut down immediately.

If the profit-maximizing markup factor in a 10-firm Cournot oligopoly is −2, what is

the corresponding market elasticity of demand?

Multiple Choice
 −2.0

 −1.0

 −1.2

 None of the statements is correct.

Suppose that the inverse demand for a downstream firm is P = 150 − Q. Its upstream
division produces a critical input with costs of CU(Qd) = 5(Qd)2. The downstream
firm's cost is Cd(Q) = 10Q. When there is no external market for the downstream
firm's critical input, the marginal revenue for the downstream firm is:
Multiple Choice
 MRd(Q) = 150 − 2Q.
 MRd(Q) = 140 − 2Q.
 MRd(Q) = 150 − Q.
 MRd(Q) = 140 − Q.
During spring break, students have an elasticity of demand for a trip to Florida of −3.
How much should an airline charge students for a ticket if the price it charges the
general public is $360? Assume the general public has an elasticity of −2.

Multiple Choice
 $250

 $270

 $260

 $240
The average consumer at a firm with market power has an inverse demand function
of P = 10 − Q. The firm's cost function is C = 2Q. If the firm engages in two-part
pricing, what is the optimal fixed fee to charge each consumer?

Multiple Choice
 None of the answers are correct.

 $32

 $64

 $2
Which of the following pricing policies does NOT extract the entire consumer
surplus from the market?
Multiple Choice
 First-degree price discrimination

 Two-part pricing

 Block pricing

 Peak load pricing

You are the manager of a Mom and Pop store that can buy milk from a supplier at
$3.00 per gallon. If you believe the elasticity of demand for milk by customers at
your store is −4, then your profit-maximizing price is:

Multiple Choice
 $4.00.
  $2.00.

 $5.00.

 $2.50.
Suppose you compete in a Cournot oligopoly market consisting of six firms. The
equilibrium market price and quantity are $5 and 10 units, respectively. The
marginal cost for each firm is $3. Based on this information, we know the price
elasticity of the market demand is:

Multiple Choice
 −2.4.

 There is insufficient information to answer this question.

 −0.417.

 0.167.
Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal
cost, but the high equipment rental fee keeps generating big profits. Which pricing
strategy is the management using?

Multiple Choice
 Price discrimination

 Two-part pricing

 Commodity bundling

 Cross-subsidization
During spring break, students have an elasticity of demand for a trip to Las Vegas of
−5. How much should an airline charge students for a ticket if the price it charges the
general public is $660? Assume the general public has an elasticity of −3.

Multiple Choice
 $550

 $440

 $352
  $792
Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a
coat and $50 for pants. Consumers of type B will pay $75 for a coat and $75 for
pants. The firm selling suits faces no competition and has a marginal cost of zero. If
the firm charges $100 for a suit (which includes both pants and a coat), the firm will
sell a suit to:

Multiple Choice
 None of the answers are correct.

 type A consumers and type B consumers.

 type A consumers.

 type B consumers.
Which of the following is true for perfect competition but not true for monopolistic
competition and monopoly?

Multiple Choice
 P = MC and positive long run profits

 MC = MR

 P = MC

 Positive long run profits

The following table contains different consumers' values for three software titles:
PowerPoint, 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 Power Point Excel Word

Accountants $75 $100 $150
Marketing/Sales $125 $80 $135
Administrative Assitants $50 $175 $75
 
Multiple Choice
  charge $325 for the bundle of PowerPoint, Excel, and Word and permit
consumers to purchase each software title individually at $81.10 each.

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

 charge $125 for PowerPoint, $175 for Excel, and $150 for Word.

 charge $50 for PowerPoint, $80 for Excel, and $75 for Word.

If your demand for renting videos is Q = 5 − 2P, should you purchase the annual
membership from a video store that charges $0.5 per rental, plus an annual
membership fee of $12?

Multiple Choice
 Definitely no

 Cannot be decided

 Probably yes

 Definitely yes

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed
costs. It faces an inverse demand function given by P = 50 − Q. What are the profits
of the monopoly in equilibrium?

Multiple Choice
 $300

 $600

 $500

 $400
Suppose that the inverse demand for a downstream firm is P = 150 − Q. Its upstream
division produces a critical input with costs of CU(Qd) = 5(Qd)2. The downstream
firm's cost is Cd(Q) = 10Q. When there is no external market for the downstream
firm's critical input, the downstream firm should produce:
Multiple Choice
 14 units.
  15 units.

 12.5 units.

 11.67 units.

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed
costs. It faces an inverse demand function given by P = 50 − Q. The monopoly price
is:

Multiple Choice
 $20.

 $10.

 $30.

 $40.

Suppose you are the marketing manager for Fruit of the Loom. An individual's
inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25
− 3Q (in cents). If the cost to Fruit of the Loom to produce an item of women's
underwear is C(Q) = 1 + 4Q (in cents), compute the price Fruit of the Loom should
charge for a package of women's underwear.

Multiple Choice
 $136.50

 $1.09

 $1.02

 $108.50

During spring break, students have an elasticity of demand for a trip to Cancun,
Mexico, of −4. How much should an airline charge students for a ticket if the price it
charges the general public is $420? Assume the general public has an elasticity of
−2.

Multiple Choice
 $160
  $210

 $105

 $280

Suppose you are an analyst for the Coca-Cola Company. An individual's inverse
demand for Coca-Cola is estimated to be P = 98 − 4Q (in cents). If Coca-Cola is
produced according to the cost function C(Q) = 1,000 + 2Q (in cents), compute the
surplus consumers receive when Coca-Cola charges the optimal block price.

Multiple Choice
 $0

 $1,152

 $11.52

 $576

Which of the following statements is true regarding profit-maximizing markup for

a Cournot oligopoly with N identical firms?
 
Multiple Choice
 P[NEM/(1 + NEM)] = MC
 P[N(1 + EM)/NEM] = MC
 P = [NEM/(1 + NEM)]MC
 P = [(1 + NEM)/NEM]MC

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?

Multiple Choice
 $10

 $11

 $12

 $9
Which of the following statements is true?

Multiple Choice
 The more elastic the demand, the higher the profit-maximizing
markup.

 The more elastic the demand, the lower the profit-maximizing

markup.

 The higher the marginal cost, the lower the profit-maximizing

price.

 The higher the average cost, the lower the profit-maximizing

price.

Suppose P = 20 − 2Q is the market demand function for a local monopoly. The

marginal cost is 2Q. The local monopoly tries to maximize its profits by equating
MC = MR and charging a uniform price. What will be the equilibrium price and
output?

Multiple Choice
 $10, 5 units

 $6.33, 3.33 units

 $13.33, 3.33 units

 $6.33, 5 units

The special cost structure that is necessary for a firm to adopt a peak-load pricing
policy is:

Multiple Choice
 limited capacity.

 economies of scope.

 constant marginal cost.

  economies of scale.

Which of the following pricing strategies is NOT used in markets characterized by

intense price competition?

Multiple Choice
 Randomized pricing

 Price matching

 Inducing brand loyalty

 Transfer pricing
Suppose that Verizon Wireless has hired you as a consultant to determine what price
it should set for calling services. Suppose that an individual's inverse demand for
wireless services in the greater Boston area is estimated to be P = 100 − 33Q and the
marginal cost of providing wireless services to the area is $1 per minute. Compute
consumer surplus when Verizon Wireless charges an optimal two-part price.

Multiple Choice
 $0

 There is insufficient information to compute consumer surplus.

 $74.25

 $148.50

A monopoly produces X at a marginal cost of $10 per unit and charges a price of
$20 per unit. Determine the elasticity of demand at the profit-maximizing price of
$20.

Multiple Choice
 −0.333

 −2

 There is insufficient information to determine the monopoly's price elasticity

of demand.

 −0.5
Which of the following is a true statement about the process of cross-subsidization,
given that a firm is selling two products?

Multiple Choice
 The firm will sell both of its products at prices set above costs and the firm
needs cost complementarities in the production of the two goods.

 The firm needs cost complementarities in the production of the two goods.

 The two products cannot have interdependent demand functions.

 The firm will sell both of its products at prices set above costs.

Suppose you are the marketing manager for Fruit of the Loom. An individual's
inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25
− 3Q (in cents). If the cost to Fruit of the Loom to produce an item of women's
underwear is C(Q) = 1 + 4Q (in cents), compute the number of women's underwear
items that should be packaged together.

Multiple Choice
 7

 3

 4

 1

Second-degree price discrimination:

Multiple Choice
 is the practice of posting a discrete schedule of declining prices for different
ranges of quantities.

 None of the answers are correct.

 results in transfer pricing.

 eliminates the problem of double marginalization.

Suppose P = 20 − 2Q is the market demand function for a local monopoly. The
marginal cost is 2Q. If fixed costs are zero and the firm engages in two-part pricing,
the most profits the firm will earn is:

Multiple Choice
 $25.

 $10.

 $50.

 $5.

First-degree price discrimination:

Multiple Choice
 results in the firm extracting all surplus from consumers.

 occurs when a firm charges each consumer the maximum price he or she
would be willing to pay for each unit of the good purchased and results in
the firm extracting all surplus from consumers.

 None of the answers are correct.

 occurs when a firm charges each consumer the maximum price he or she
would be willing to pay for each unit of the good purchased.

If the profit-maximizing markup factor in a three-firm Cournot oligopoly is 2, what

is the corresponding market elasticity of demand?

Multiple Choice
 −2/3

 −1/2

 −2.0

 −1.0
Revenues when a firm engages in peak-load pricing based on the figure below will
be:

  

 
Multiple Choice
 (P3 × Q1) + (P4 × Q3).
 (P1 × Q1) + (P4 × Q3).
 (P4 × Q3).
 (P1 × Q2) + (P2 × Q3).

A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs.
It faces an inverse demand function given by P = 38 - Q. What are the profits of the
monopoly in equilibrium?

Multiple Choice
 $225

 None of the statements is correct.

 $120
  $345

Suppose that the inverse demand for a downstream firm is P = 150 − Q. Its upstream
division produces a critical input with costs of CU(Qd) = 5(Qd)2. The downstream
firm's cost is Cd(Q) = 10Q. When there is no external market for the downstream
firm's critical input, the downstream firm should produce:
Multiple Choice
 11.67 units.

 15 units.

 12.5 units.

 14 units.

The price elasticity of demand for senior citizens purchasing coffee from
McDonald's is −5, while non-senior citizens have a price elasticity of demand equal
to −1.25. If it costs McDonald's $0.02 to produce a coffee, the optimal price for a
cup of coffee for senior citizens and the resultant marginal cost under third-degree
price discrimination are, respectively:

Multiple Choice
 $0.10 and $0.02.

 $0.025 and $0.02.

 $0.016 and $0.20.

 $0.02 and $0.80

Which group of policies aims at extracting all consumer surplus?

Multiple Choice
 two-part pricing and block pricing.
 Price discrimination and peak load pricing.

 Cross-subsidization and brand loyalty.

 Price matching and randomized pricing.

Suppose a manager is interested in implementing third-degree price discrimination.

The manager knows that the price elasticity of demand for Group 1 is −2 and the
price elasticity of demand for Group 2 is −1.2. Based on this information alone we
can conclude that the price charged to Group 2 will be:
Multiple Choice
 higher than the price charged to Group 1.

 There is insufficient information to determine whether Group 2 will have a

higher, lower, or the same price as Group 1.

 the same as the price charged to Group 1.

 lower than the price charged to Group 1.

In a Cournot oligopoly with N firms and identical marginal costs, the relationship
between the price elasticity of market demand and that of the firm is:

Multiple Choice
 EM = EF/N.
 EM = EF.
 No deterministic relationship.

 EM = NEF.

Suppose that the inverse demand for a downstream firm is P = -82 − 2Q. Its
upstream division produces a critical input with costs of CU(Qd) = 3(Qd)2. The
downstream firm's cost is Cd(Q) = 2Q. When there is no external market for the
downstream firm's critical input, the downstream firm should produce:
Multiple Choice
 14 units.

 8 units.

 12 units.

 10 units.
Which group of policies aims at discouraging rivals from starting a price war?

Multiple Choice
 Randomized pricing, price discrimination, and cross-subsidization

 Price matching, brand loyalty, and commodity bundling

 Peak-peak pricing, two-part pricing, and price matching

 Price matching and randomized pricing

Which of the following statements about a price-matching strategy is incorrect?
Multiple Choice
 It reduces the incentive for a rival firm to initiate a price war.

 It requires that the firms can monitor their rival's prices.

 It may be applied in situations besides Bertrand oligopoly.

 It only guarantees to match prices that are advertised publicly.

Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a
coat and $50 for pants. Consumers of type B will pay $75 for a coat and $75 for
pants. The firm selling suits faces no competition and has a marginal cost of zero. If
the firm sells coats and pants for $25 each, but offers a bundle containing both a coat
and pants for $150, how many bundles will the firm sell?

Multiple Choice
 1

 0

 Insufficient information

 2
Cinemas sometimes give senior citizens discounts. What is the possible privately
motivated purpose for them to do so?

Multiple Choice
 Senior citizens have a more elastic demand for movies than ordinary
citizens.

 Purely because entrepreneurs are benevolent.

 None of the statements is correct.

 Senior citizens lack recreational activities

You are the manager of a Mom and Pop store that can buy milk from a supplier at
$3.00 per gallon. If you believe the elasticity of demand for milk by customers at
your store is −4, then your profit-maximizing price is:

Multiple Choice
 $2.50.
  $5.00.

 $4.00.

To avoid the problem of double marginalization:

Multiple Choice
 transfer prices must be set that maximize the overall value of the firm rather
than the profits of the upstream division.

 firms should engage in commodity bundling, unless it is possible to engage

in either first-or second-degree price discrimination.

 firms should engage in two-part pricing.

 firms should put more emphasis on vertical integration.

Suppose that Verizon Wireless has hired you as a consultant to determine what price
it should set for calling services. Suppose that an individual's inverse demand for
wireless services in the greater Boston area is estimated to be P = 100 − 33Q and the
marginal cost of providing wireless services to the area is $1 per minute. What is the
optimal two-part price that you would suggest to Verizon?

Multiple Choice
 Charge a fixed fee = $148.50 and a usage fee of $1 per minute.

 Charge a fixed fee = $95.5 and a usage fee of $1 per minute.

 Charge a fixed fee = $3 and a usage fee of $3 per minute.

 Charge a fixed fee = $3 and a usage fee of $0.33 per minute.

Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a
coat and $50 for pants. Consumers of type B will pay $75 for a coat and $75 for
pants. The firm selling suits faces no competition and has a marginal cost of zero. If
the firm charges $75 for pants and $75 for a coat, the firm will sell a coat to:

Multiple Choice
 None of the answers are correct.
  type B consumers.

 type A consumers.

 type A consumers and type B consumers.

The purpose of randomized pricing is to reduce:

Multiple Choice
 consumer price information only.

 both customer and competitor information about price.

 competitor price information only.

 the firm's pricing inflexibility.

Which of the following pricing policies enhances profits by creating brand-loyal

consumers?

Multiple Choice
 Beat-or-pay strategies

 Trigger strategies

 Frequent flyer programs and beat-or-pay strategies

 Frequent flyer programs

The price elasticity of demand for senior citizens purchasing coffee from
McDonald's is −5, while non-senior citizens have a price elasticity of demand equal
to −1.25. If it costs McDonald's $0.02 to produce a coffee, the optimal price for a
cup of coffee for non-senior citizens and the resultant marginal cost under third-
degree price discrimination are:

Multiple Choice
 $0.10 and $0.02.

 $0.004 and $0.02.

 $10 and $0.20.

 $0.02 and $0.80.

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?
Multiple Choice
 2

 4

 5

 3
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 each rental if it engages in optimal two-part pricing?

Multiple Choice
 $1.00

 $0.35

 $0.5

 $0.7
A monopoly producing a chip at a marginal cost of $6 per unit faces a demand
elasticity of −2.5. Which price should it charge to optimize its profits?

Multiple Choice
 $6 per unit

 $12 per unit

 $10 per unit

 $8 per unit
Which group of policies aims at extracting all consumer surplus?
Multiple Choice
 Cross-subsidization and brand loyalty.

 two-part pricing and block pricing.

 Price discrimination and peak load pricing.

 Price matching and randomized pricing.

Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a
coat and $50 for pants. Consumers of type B will pay $75 for a coat and $75 for
pants. The firm selling suits faces no competition and has a marginal cost of zero. If
the firm can identify each consumer type and can price discriminate, what is the
optimal price for a pair of pants?

Multiple Choice
 Charge type A consumers $50, and type B consumers $75.

 Charge both types $75.

 Charge type A consumers $50, and type B consumers $50.

 Charge both types $150.

Refer to the figure below. During high-peak times, what price-quantity
combination should the firm charge to maximize profit?

 
 
 
Multiple Choice
 P4 and Q3
  P1 and Q2
 P1 and Q3
 P2 and Q3
Which of the following strategies will most likely NOT enhance profits in a Bertrand
oligopoly?
Multiple Choice
 Brand loyalty

 Randomized pricing

 Two-part pricing

 Price matching
What price should a firm charge for a package of two shirts given a marginal cost of
$4 and an inverse demand function P = 8 − 2Q by the representative consumer?

Multiple Choice
 $12

 $16

 $8

 $4
Suppose you are the marketing manager for Fruit of the Loom. An individual's
inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25
− 3Q (in cents). If the cost to Fruit of the Loom to produce an item of women's
underwear is C(Q) = 1 + 4Q (in cents), compute the profit Fruit of the Loom will
earn by charging the optimal block price.
Multiple Choice
 $136.50

 $108.50

 $0.73
 $1.37
A Broadway theater sells weekday show tickets at a lower price than for a weekend
show. This is an example of:

Multiple Choice
 price discrimination.
  price discrimination or peak-load pricing.

 None of the statements is correct.

Suppose that the demand for a monopolist's product is estimated to be Qd = 100 − 2P
and its total costs are C(Q) = 10Q. Under first-degree price discrimination, the
optimal price(s), number of total units exchanged, profit, and consumer surplus are:
Multiple Choice
 P = $30; Q = 40, Π = $800; CS = $400.

 10 ≤ P ≤ 50; Q = 80, Π = $1,600; CS = $0.

 10 ≤ P ≤ 100; Q = 80; Π = $1,600; CS = $1,600.

 P = $30; Q = 40, Π = $600; CS = $0.

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed
costs. It faces an inverse demand function given by P = 50 − Q. Suppose fixed costs
rise to $400. What happens in the market?

Multiple Choice
 The firm continues to produce the same output and charge the same price.

 The firm will shut down immediately.

 The firm will reduce its output and raise price.

 The firm will raise the price.

Which of the following pricing strategies is NOT used in markets with special cost
and demand structures?

Multiple Choice
 Low-price guarantees

 Cross-subsidization

 Transfer pricing

 Peak-load pricing
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. What is the annual profit that
the video store expects to make on an average customer if it engages in optimal two-
part pricing?

Multiple Choice
 $6

 $9

 $7

 $8
The average consumer at a firm with market power has an inverse demand function
of P = 10 − Q. The firm's cost function is C = 2Q. If the firm engages in optimal
two-part pricing, it will earn profits of:

Multiple Choice
 $2.

 $64.

 None of the answers are correct.

 $32.
The idea of charging two different groups of consumers two different prices is
practiced in:

Multiple Choice
 None of the answers are correct.

 price matching.

 two-part pricing.

 commodity bundling.
A new firm successfully enters a three-firm Cournot oligopoly without changing the
demand and cost structures. The new price becomes:

Multiple Choice
 the same as the original price.
  unknown for lack of other information.

 50 percent of the original price.

 75 percent of the original price.

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed
costs. It faces an inverse demand function given by P = 50 − Q. Which of the
following is the marginal revenue function for the firm?

Multiple Choice
 MR = 60 − 2Q

 MR = 50 − 2Q

 MR = 50 − Q

 MR = 100 − Q
To engage in first-degree price discrimination, a firm must:

Multiple Choice
 All of the answers are correct.

 be able to set P > MC.

 know each consumer's maximum willingness to pay.

 prevent low-value consumers from reselling to high-value consumers.

The average consumer at a firm with market power has an inverse demand function
of P = 10 − Q. The firm's cost function is C = 2Q. If the firm engages in two-part
pricing, what is the optimal price to charge a consumer for each unit purchased?

Multiple Choice
 $1

 $4

 $0

 None of the answers are correct.