A two-way network that links users and in which the per-unit value of the service
increases as the size of the network increases is a:
A. positive externality known as an indirect network externality.
B. negative externality known as an indirect network externality.
C. positive externality known as a direct network externality.
D. negative externality known as a direct network externality.
In a Cournot oligopoly, a decrease in a firms marginal cost leads to:
A. reduced output and a higher price.
B. reduced output and a lower price.
C. higher output and a higher price.
D. higher output and a lower price.
Good X is a normal good and its demand is given by
. Then we know that
A. H > 0.
B. X > 0.
C. Y > 0.
D. M > 0.
An industry consists of six firms with annual sales of $300, $500, $400, $700, $600,
and $600. What is the industrys C4?
A. 0.58
B. 0.62
C. 0.74
D. 0.77
In the Wealth of Nations, Adam Smith argues that:
A. self-interest leads to the efficient allocation of resources.
B. benevolence leads to the efficient allocation of resources.
C. profits are maximized where marginal revenue equals net marginal benefits.
D. None of the statements associated with this question are correct.
A local video store estimates its average customers 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?
A. $6
B. $7
C. $8
D. $9
Suppose you are a monopolist operating two plants at different locations. Both plants
produce the same product; Q1 is the quantity produced at plant 1, and Q2 is the quantity
produced at plant 2. You face the following inverse demand function: P = 500 – 2Q,
where Q = Q1 + Q2. The cost functions for the two plants are a.
What are your marginal revenue and marginal cost functions?b. To maximize profits,
how much should you produce at plant 1? At plant 2?c. What is the price that
maximizes profits?d. What are the maximum profits?
Spot markets are an INEFFICIENT way for the firm to purchase inputs if:
A. opportunism is a problem.
B. suppliers engage in hold-up.
C. profit sharing is used to compensate managers.
D. opportunism is a problem and suppliers engage in hold-up.
Under producer-producer rivalry, individual firms want to sell the product at the
maximum price consumers will pay, but they are unable to do this because of:
A. cost considerations.
B. the scarcity of resources.
C. competition among sellers.
D. competition among buyers.
High transaction costs:
A. occur when specialized investment is not important.
B. make spot exchange an efficient way to obtain inputs.
C. may be a result of buyer opportunism.
D. may be the result of downward-sloping demand.
Suppose P = 60 – 3Q 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:
A. $144.
B. $360.
C. $504.
D. $0.
The first-order condition for maximizing net benefits is:
A. dB/dQ = 0.
B. dN/dQ = 0.
C. d2N/dQ2 = 0.
D. dC/dQ = 0.
You are the manager of We Trust, the only bank in a small town. Your boss has been
studying a report on transaction volume and has noticed a troubling trend: We Trust
does not have enough tellers to handle the banks maximum capacity, which occurs
during the lunch hour. Your boss has asked for a short report that summarizes
alternative plans for solving this problem, the pros and cons of each plan, and your
recommended course of action. Provide this report.
You are the manager of Fast & Easy Donuts. Almost all of your donut sales are derived
from the drive-through window. You know from experience that coffee is a complement
for your donuts. The morning newspaper says that a major storm has just destroyed 50
percent of this years coffee bean crop. Will this affect how much flour you order? Will
it affect how many employees you schedule? What will happen to prices?
A local dentist read an article published by the American Dental Association estimating
that the elasticity of demand for the representative dentists services is -2.5. How much
should the dentist mark up her price over marginal cost?
According to Industry Week, a shoe manufacturer recently had a production run that
resulted in 100,000 pairs of defective shoes. Workers on the production line knew the
shoes were defective as they were being produced, but did nothing to fix the problem.
Do you think a profit-sharing plan for workers would mitigate future problems?
Explain.
In 1990, Chrysler offered rebates on almost all of its cars. In May of that year it
announced that the rebate program would end on June 30. It also announced that no
further rebates would be offered for the rest of the year. Chrysler guaranteed this by
promising that if it did offer any rebates larger than those offered between May 1 and
June 30, all customers who purchased cars before the new rebate would get the full
rebate. How should this announcement have affected the pricing behavior of other car
manufacturers?
Clothing stores frequently run sales” where they discount clothing prices by as much as
25 percent. What impact, if any, would you expect these sales” to have on a store that
specializes in selling shoes produced by Rockport?
As manager of the only video store in town, you have noticed that on Thursday through
Sunday the demand for renting your movies is much higher than it is on Monday
through Wednesday. You therefore conducted a study that revealed two different market
demand curves. On weekends, your inverse demand curve is P = 10 – 0.001Q; on
weekdays, it is P = 5 – 0.01Q. The marginal cost of renting a movie is $.50 (50 cents).
Your average customer never rents more than one movie at a time. What pricing
strategy will maximize your profits?
We learned in this chapter that there are laws against price discrimination. Yet, many
firms openly engage in such practices. For instance, most hotel chains offer discounts to
senior citizens that translate into prices that are about 10 percent lower than prices
charged to other hotel guests. Why are such firms allowed to engage in such practices?
During the 1990s, several airlines were on the brink of bankruptcy. These same airlines
were giving away millions of dollars in free airline travel through their frequent-flyer
programs. Do you think it would have been a good idea for these airlines to eliminate
their frequent-flyer programs in order to earn higher profits? Explain.