36) When a firm prices its goods below the marginal cost to drive away competitors, it is referred
as
A) price skimming.
B) limit pricing.
C) penetration pricing.
D) predatory pricing.
37) A firm uses ________ for goods which the consumer takes pride in owning.
A) price skimming
B) prestige pricing
C) penetration pricing
D) predatory pricing
38) If a monopolist sets a low price to discourage potential competitors from entering the market,
it is referred as
A) price skimming.
B) predatory pricing.
C) penetration pricing.
D) limit pricing.
8
Analytical Questions
1) Why does each of the following facilitate the creation and stability of a cartel?
a. High barriers to entry
b. An identical product
c. Similar costs
2) Industry demand is given by:
QD = 1000 – P
All firms in the industry have identical and constant marginal and average costs of $50/unit.
a. If the industry is perfectly competitive, what will industry output be? What will be the
equilibrium price? What profit will each firm earn?
b. Now suppose that there are five firms in the industry, and that they collude to set price. What
price will they set? What will be the output of each firm? What will be the profit of each firm?
3) Why do cartels tend to break up?
4) A monopolist sells to two consumer groups, students and non-students.
Demand for students: Q = 500 – 1/2P
Demand for non-students: Q = 750 – 2P
MC = 20
Find the profit-maximizing price/quantity combination in each market if the groups can be
separated.
5) McDonald’s charges a higher price for a Big Mac in New York City than it does in a small
town in Iowa. Is this an example of third-degree price discrimination? Explain.
6) Some charge that third-degree price discrimination is unfair or that it reduces social welfare.
Why does charging one group a lower price hurt anyone?
7) Firms that make game systems like Playstation and Nintendo typically charge a price close to
average cost on the game system itself, and do not change that price even when the systems are
scarce or demand increases. Why might this be a profit-maximizing strategy?
8) In the Sunday newspaper, there are usually coupons that you can clip and take to the store to
save money on products. Anyone can buy a newspaper, and the value of the coupons easily
exceeds the price of the newspaper for most consumers. Is this an example of price
discrimination? Explain.
9) Would it ever make sense for a firm to charge a price at or below the cost of the product?
10) Superstar actors typically get contracts that specify that they get a percentage of “the gross,”
the total revenues that the movie brings in. Why might actors want contracts structured that way?
Why might producers be willing to agree to that, and how does this make the goals of actors and
producers different?
11) A firm in an oligopolistic industry has the following demand and total cost equations:
P = 600 – 20Q and TC = 700 + 160Q + 15Q2
Calculate:
a. quantity at which profit is maximized
b. maximum profit
c. quantity at which revenue is maximized
d. maximum revenue
e. maximum quantity at which profit will be at least $580
f. maximum revenue at which profit will be at least $580
12) A monopolistic firm operates in two separate markets. No trade is possible between market A
and market B. The firm has calculated the demand functions for each market as follows:
Market A p = 15 – Q; Market B p = 11 – Q
The company estimates its total cost function to be TC = 4Q. Calculate:
a. quantity, total revenue and profit when the company maximizes its profit and charges the
same price in both markets
b. quantity, total revenue and profit when the company charges different prices in each market
and maximizes its total profit
13) Briefly describe the conditions under which cartels will be formed.
14) Explain the reasons firms might follow the Baumol model of maximizing revenue subject to
achieving a minimum level of profits.
15) Describe the circumstances under which a producer of joint products in fixed proportions
might not sell all of one of the available joint products at the profit-maximizing level of
operations.