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Page 14
B) advertising
C) unique product features
D) low entry barriers
3) Price searchers face downward sloping demand curves because
A) they must reduce price to sell more.
B) they have unlimited pricing discretion.
C) they have the ability to charge a high price and sell a high quantity.
D) All of the above are true.
4) Which of the following would probably not be a price searcher?
A) the local utility company
B) a Kansas wheat farmer
C) General Motors
D) a local movie theater
5) Both price searchers and price takers
A) must produce homogeneous products.
B) produce where MR = MC to maximize profits.
C) face horizontal demand curves.
D) must earn normal profits in the long run.
6) All price searchers
A) face downward sloping demand curves.
B) possess some pricing discretion.
C) must reduce price to sell more.
D) All of the above are true.
7) If a price searcher does not practice individual price discrimination, its marginal revenue
curve
A) is a horizontal straight line.
B) is generally the same as its demand curve.
C) is upward sloping.
D) lies inside its demand curve.
8) For a (non-discriminating) price searcher, marginal revenue
A) is equal to price.
B) is less than price.
C) greater than price.
D) Any of the above is possible.
9) A profit-maximizing price searcher will produce at the output where
A) marginal revenue is maximized.
B) average total cost is minimized.
C) total revenue is equal to total cost.
D) marginal revenue is equal to marginal cost.
Use the following diagram to answer the following question(s). Assume that the firm charges all
customers the same price-the firm does not practice price discrimination.
10) Based on the figure above, how many units of output will this firm produce to maximize its
profit or minimize its loss?
A) 20
B) 30
C) 35
D) 40
11) Based on the figure above, what price will this firm charge to maximize its profit or
minimize its loss?
A) $9
B) $7
C) $5
D) $3
12) Based on the figure above, how much profit (or loss) will this firm earn?
A) a profit of $140
B) a profit of $60
C) a normal profit
D) a loss of $80
Use the following information in answering the following question(s).
Demand Schedule for ABC CUSTOM BIKES
13) Based on the table above, assuming that CUSTOM BIKES charges all of its customers the
same price (does not practice price discrimination), what would be the marginal revenue gained
by selling the 3rd bike?
A) $1,600
B) $1,200
C) $400
D) $200
14) Based on the table above, again assuming that CUSTOM BIKES does not practice price
discrimination, what would be the marginal revenue gained by selling the 5th bike?
A) $1,200
B) $800
C) $400
D) $200
15) Based on the table above, suppose that the marginal cost of producing a CUSTOM bike is
$1,200 and constant. (In other words, the marginal cost curve is a horizontal line; it does not
have the "U" shape we generally expect). How many bikes should CUSTOM BIKE produce and
what price should it charge? Assume CUSTOM BIKE does not practice price discrimination.
A) It should sell 1 bike for $2,000.
B) It should sell 2 bikes for $1,800 each.
C) It should sell 3 bikes for $1,600 each.
D) It should sell 5 bikes for $1,200 each.
16) Based on the table above, assume, once again, that the marginal cost of producing a bike is
$1,200. But let's also assume that CUSTOM BIKE can practice individual price discrimination
(charging each customer a different price). How many bikes would CUSTOM BIKE produce to
maximize its profit?
A) 3 bikes
B) 4 bikes
C) 5 bikes
D) 6 bikes
Use the diagram found below in answering the following question(s).
17) Based on the figure above, if the price searcher represented in the diagram does not practice
price discrimination, it will maximize its profit (or minimize its loss) by
A) producing 100 units of output and charging a price of $5.
B) producing 100 units of output and charging a price of $8.
C) producing 100 units of output and charging a price of $11.
D) producing 150 units of output and charging a price of $8.
18) Based on the figure above, this firm will
A) incur a loss of $400.
B) incur a loss of $600.
C) earn a normal profit.
D) earn a profit of $200.
19) Based on the figure above, if this firm was able to practice individual price discrimination it
would
A) produce 100 units and charge several different prices.
B) produce between 100 and 150 units and charge several different prices.
C) produce 150 units and charge several different prices.
D) produce 150 units and charge $8 a unit.
Use the diagram found below in answering the following question(s). Assume the firm does not
practice price discrimination.
20) Based on the figure above, the firm represented is
A) incurring a loss of $13,000, and should shut down.
B) earning a profit of $8,000.
C) incurring a loss of $5,000, but should operate rather than shut down.
D) incurring a loss of $5,000, and should shut down.
21) Based on the figure above, if this firm shuts down it will incur a loss equal to the amount of
its fixed costs which are
A) $13,000.
B) $8,000.
C) $5,000.
D) $4,000.
22) Based on the figure above, if this firm operates and produces the optimal level of output, its
total variable costs will be
A) $25,000.
B) $20,000.
C) $12,000.
D) $ 8,000.
23) Based on the figure above, if this firm operates and produces the optimal level of output, its
total revenue will be
A) $25,000.
B) $20,000.
C) $12,000.
D) $ 8,000.
24) Firms should operate rather than shut down whenever
A) the loss they incur by operating is less than their fixed costs.
B) price is high enough to at least cover the average variable cost of producing a unit of output.
C) the total revenue they generate by producing is high enough to at least cover the firm's total
variable costs.
D) All of the above are true.
25) If a price searcher is operating at an output where MR exceeds MC,
A) it is producing the profit-maximizing output.
B) it is producing too much output to maximize its profit.
C) it is producing too little output to maximize its profit.
D) None of the above are true.
26) Firms that practice group price discrimination tend to
A) charge higher prices in markets where they encounter more competition.
B) charge lower prices to consumers whose demand is less elastic.
C) charge higher prices to consumers who are more price sensitive.
D) charge lower prices to consumers whose demand is more elastic.
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27) Price searchers
A) always earn economic profits in the long run.
B) never earn economic profits in the long run.
C) may earn economic profits in the long run if they are protected by significant barriers to entry.
D) always earn normal profits in the long run.
28) Economies of scale exist if
A) a firm's marginal cost curve is downward sloping.
B) a firm's long-run average total cost curve is downward sloping.
C) a firm faces a downward sloping demand curve.
D) a firm's long-run average total cost curve is upward sloping.
29) A natural monopoly exists
A) whenever an industry is served by only one firm.
B) when a market will be served most cheaply by a single firm.
C) when exclusive control over natural resources results in a monopoly.
D) whenever government is the sole provider of a good or service.
1) Product differentiation can provide a firm with market power.
2) Price searchers face downward sloping demand curves.
3) The demand curve facing a price searcher is horizontal.
4) Price searchers must reduce price to sell more.
5) If a price searcher increases the price it charges, it will lose all of its customers.
6) All price searchers have substantial market power.
7) Marginal revenue is equal to price for a price searcher.
8) If a price searcher can sell one unit of output at $100 and two units of output at $90, the
marginal revenue from the sale of the second unit would be $95.
9) Profit-maximizing price searchers produce at the output where price is equal to marginal cost.
10) Once a price searcher selects a price, it can sell any quantity of output it desires at that price.
11) If firms practice price discrimination, they charge different customers or categories of
customers different prices.
12) Firms that practice individual price discrimination charge virtually every customer a different
price.
13) Firms that practice group price discrimination tend to charge higher prices to consumer
groups with more elastic demand and lower prices to groups with less elastic demand.
14) When firms practice individual price discrimination, the marginal revenue from selling an
additional unit of output is equal to the firm's selling price.
15) Firms are more likely to practice price discrimination when it is easy for customers to resell
their product.
16) When firms practice individual price discrimination, some customers will pay a lower price
than would be charged if the firms did not discriminate.
17) Individual price discrimination is a more sensible strategy for sellers of expensive products
than for sellers of inexpensive items.
18) Firms that charge one price for senior citizens and a different price for everyone else are
practicing group price discrimination.
19) Price searchers may earn economic profits in the short run, but in the long run a normal
profit is the best that can be expected.
20) A price searcher may earn an economic profit in the long run if it is protected by barriers to
entry.
21) A cartel is a group of producers acting together to control output and the price of their
product.
22) For nondiscriminating price searchers, the marginal revenue curve lies inside the demand
curve.
23) Price searchers tend to produce more output than is socially desirable. That is, more
resources are devoted to the production of this product than is consistent with allocative
efficiency.
24) One reason that firms use the cost-plus pricing technique is because they lack sufficient
information to determine price by the MC = MR approach.
25) The markup used in the cost-plus pricing technique is influenced by the degree of
competition.
26) A major advantage of the cost-plus pricing technique is that it employs marginal analysis.
27) Price searchers are willing to produce at a loss in the short run as long as their selling price
exceeds average variable cost.
28) If a price searcher's average total cost curve intersects its demand curve, the firm must be
earning an economic profit.
29) If a price searcher's average total cost curve lies completely above its demand curve, the firm
is earning an economic profit.
30) When a price searcher's demand curve is tangent to its average total cost curve, that firm is
earning a normal profit.
31) Like price takers, price searchers must earn at least a normal profit in the long run or they
will exit the industry.
32) According to marginal analysis, when airlines evaluate the feasibility of providing flights to
additional cities, they need to be certain that those flights recoup all costs, including a share of
the airline's already existing overhead costs.
33) Product differentiation requires that producers create tangible, physical differences that
distinguish their product from that of other firms.
34) If a price searcher must lower price from $10.00 to $9.50 to increase sales from 100 to 101
units, the marginal revenue from the 101st unit would be negative.
35) If a price searcher must lower price from $5.00 to $4.99 to increase sales from 100 to 101
units, the marginal revenue from the 101st unit would be $1.99.
1) Explain why marginal revenue must be less than price for a non-discriminating price searcher.
2) Firms that practice individual price discrimination tend to produce more output than
nondiscriminating firms with the same costs. Why is this true?
3) A few years ago, the owner of the only liquor store in a small Missouri community convinced
the city council not to grant a new resident a license to sell liquor. The owner of the established
liquor store argued that because the newcomer was not acquainted with the local residents he
was more likely to sell liquor to underage consumers. Economists might offer an alternative
explanation for the liquor store owner's opposition to the granting of another license. Explain.
4) In most states, students are now required to have 150 hours of course work before they can sit
for the Uniform CPA Examination. Members of the accounting association argue that the new
requirement is necessary to prepare students for life in our complex society. Can you think of an
alternative explanation for the association's support of this requirement?
5) A Wal-Mart store in Arkansas was once accused of "unfair competition" because it sold some
medicines below full (average total) cost. Is it ever sensible for a firm to sell its products for a
price that is less than average total cost? Discuss fully.
6) Explain why price searchers are unwilling to produce the level of output that provides
allocative efficiency. Use a graph to supplement your explanation.
7) Suppose that your campus bookstore attempted to practice price discrimination by charging a
higher price to freshman students (who have yet to find the other book stores) and a lower price
to upperclassmen. Can you see any reasons why this attempt at price discrimination might be
unsuccessful? (Assume we can ignore the outrage voiced by freshmen students.)
8) When firms practice group price discrimination, a simple rule underlies all of their pricing
decisions: charge the higher price to the group with the less elastic demand. Provide a real-world
example of group price discrimination that is consistent with this rule. Be sure to explain why
you believe it is consistent with the rule.
9) Consumers increasingly seem to believe that "all computers are basically alike." Some
industry observers have even suggested that computers are becoming a "commodity" just as
corn and wheat are commodities. What implications does this trend have for the pricing
discretion of computer manufacturers? Defend your conclusion.
10) Draw the diagram necessary to show a price searcher incurring a short-run loss, but
continuing to operate. Explain why this firm is better off operating than shutting down.
11) Suppose that a restaurant owner was required to pay higher building rent. What impact
would this have on the meal prices charged by the restaurant? (Hint: Is rent a fixed cost or a
variable cost? Why is this distinction important in answering this question?)
12) Fly-By-Nite Airline serves several cities. In cities that are also served by other airlines, Fly-
By-Nite charges relatively low rates. In cities where Fly-By-Nite is the only service provider, it
charges much higher rates. Is this behavior consistent with what we have learned about firms
practicing group price discrimination? If so, explain how it is consistent. If not, explain why it is
inconsistent.
13) How should Fly-By-Nite Airlines decide whether or not to add an additional flight to another
city? What costs should it consider in making this decision? What costs should it ignore?
