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Unformatted text preview: l~e peel“ ARE IOOB Spring 2008
M. Whitney w. I FIRST MIDTERM ,a . ~ g" (W
l i WWW/i / WM NAME:
This exam has two sections. Section A consists of 10 multiplechoice questions, each worth 10 points.
Total possible points in Section A = 100. Section B consists of 5 problems each worth 30 points. Partial credit is given for correct approach
even if ﬁnal answer is incorrect, so show your work! Total possible points in Section B = 150. Total points in this exam: 250 (25% of total grade) Section A 1. Sherman is a marketing analyst for a movie theater chain. He estimates that students have a price
elasticity of demand for movies of 4, while other customers’ price elasticity of demand is 2.
Marginal costs are the same for each type of customer. What policy should he recommend to
improve the theater’s proﬁts?
a Students should receive a 25% discount.
Students should receive a 33% discount.
0. Students should receive a 50% discount.
d. Students should receive a 75% discount. 2. A multiplant monopolist owns two factories, with cost functions;
TCl = 100 + 30*ql + 2qu
TC2 = 100+ 20"‘q2 + qz2
Suppose you observe that both plants are operating. What does this imply?
a. Marginal revenue must be between $20 and $30.
@Plant 1 must be producing less than plant 2.
c. Both a and b.
d. Neither a nor b. 3. What is the main source of market power for leading ﬁrms in the pharmaceutical (drug) industry?
a. Economies of scale
b. Control of scarce inputs to production @ Patents
(1 . Copyright 4. Which of the following pricing strategies would likely be most diﬁicult for a ﬁrm to implement
in the real world?
@First—degree (perfect) price discrimination
b. Seconddegree price discrimination
c. Thirddegree price discrimination
d. Intertemporal price discrimination 5. Each year, Bonnie Airlines charges $800 for a roundtrip ﬂight to Maui in December, but $500
for the same ﬂight when scheduled in May. What type of pricing system might this reﬂect?
Peak load pricing
b. Intertemporal price discrimination
c. Seconddegree price discrimination
d. Two—part tariff 6. Suppose annual inverse demand for a collectible doll is P = 400  .5*Q. If these dolls are
produce by a monopolist who sells at a single monopoly price, what does this imply?
The ﬁrm will produce less than 400 dolls per year.
b. Elasticity of demand will be between 0 and —1 at the optimal solution.
c. There will be no deadweight loss to society.
d. All of the above.
6. None of the above. 7. Which of the industries below often appears to practice intertemporal price discrimination when
selling its output? a. Electric utilities b. Diamond producers c Video game producers (1. Grocery stores, as when selling milk.
e. All of the above. 8. In recent years, many US citizens have been purchasing pharmaceutical drugs in Canada or
Mexico, to avoid the higher prices charged in the US for the same products. What type of pricing
practice does this suggest drug manufacturers are using?
a. Two—part tariff
b. Perfect price discrimination
c Seconddegree price discrimination
Thirddegree price discrimination 9. Donovan is an artist who has a studio on the California coast, where he sells his paintings. He
does not post prices on each artwork. Instead, he charges each customer his or her reservation price.
If annual demand for his paintings is Qd = 8000 — 4F, and if his cost function is: TC = 100,000 + 1500 Q, what do you conclude? a. . He charges between $1500 and $2000 dollars per painting, depending on the customer’s willingness to pay.
b. He sells 2000 paintings per year.
c. His proﬁt is $400,000 per year.
All of the above.
6. None of the above. 10. Sunbird Lodge is an Arizona motel that caters to two kinds of customers: golfers, and hikers.
Their demand functions are: Q‘g = 200,000 Pg "'5 and th = 400,000 Ph ‘1‘2 Currently the ﬁrm charges a single monopoly price for all its rooms. What strategy could the ﬁrm
use to enhance its proﬁts?
a. Set the optimal price for golfers, then offer money—off coupons at locations where hikers
are likely to go, such as stores that sell camping and hiking gear.
Set the optimal price for hikers, then offer moneyoff coupons at locations where golfers
are like y to go, such as golf courses.
c. Either a or b will be equally proﬁtable. SECTION B. l. Chico Instruments has patented a unique device to measure bone density in athletes. Due to its
patent, it can price as a monopolist. Demand for these instruments is: Qd = 6000 — 10P The ﬁrm’s cost function is TC = 10,000 + 100Q + 0.9Q2 a. (14) Find the ﬁrm’s optimal quantity, and the monopoly price.
Pr (poo vow? WKKZGOO 1,24)
matmzmctQ) :7 (poo 3162 2 [00 L 1095 Q
€00 ": 1Q (ﬁeoo MwICLSC‘D “Ill? 5‘75} b. (16) Find producer surplus, consumer surplus, and proﬁt for this market
[ML.100 14302513) “— 95—0 @oo ~S7S) 2579 2, pg :(57‘7‘ “9%)(150) { #100 225:) z
:. om» 9792573 0%”: 6000 éngo mrooo : 5 2W 2. Belvedere Chemicals, a monopolist, produces a patented enzyme cleanser. The ﬁrm owns two
production plants, with the following cost functions: Tc, = 3000 + 40*q, + q,2 Tc2 = 2000 + 30*q2 + q; Inverse demand for this cleanser is P = 1200  20. a. (16) What is the optimal output for each plant? i‘l loom arm/cw WHQVWCIQ/l 3 “Mg/t.) ({OFZQAL: '30+Q%Z
221:. [071'le ‘52 " g *7“ .4200 “#6? 1 [/0 fﬂgr [Zoo’s/7;" W3” 77/) : gafzﬂ
/ 0114 MC} [200 nay/’20 “7?; ‘: 70f2f/
[/‘7’0 2 /0 i,» f2 3 [NH/‘7 “:1”
b. (7) What is the market price? & L p: moo. 202%") : [$7343 c. (7) What is the ﬁrm’s proﬁt or loss? T: 7sq e 1%  [gooo Woum mull)
M [2005+ zomqwumﬂ :t7 1022;« 205%— W7 VIDOI'YZ‘SAE 5’ 3. Travertine Heights Country Club offers rounds of golf to members only. The ﬁrm charges an
annual membership fee, plus an additional fee per round of golf. The typical customer’s demand for golf rounds is: q‘1 = 150 — 5P
The club’s marginal cost of supplying each golf round is $14. a. (12) What price does the ﬁrm charge per round of golf, and how many games per year does the
average customer play? ? b. (12) What is the ﬁrm’s annual membership fee? F€Q .1: l$équ T Z c. (6) What is consumer surplus for this club’s average customer? ( O l 9/ ‘ 4. Recently, a new resort village was built along the Mexican coast. At present, two ﬁrms supply
leather handbags to this market. Each ﬁrm’s cost function is:
TCi= 810+82qi+0.1qi2 Demand for these handbags is Qd = 1100 — 2P. a (15) Suppose the two ﬁrms are perfectly competitive. In the short run, what is the optimal price
of handbags? What is the total market output, and the output of each ﬁrm? Ptmci 5'7 "p:<€7a+012¢
igs,‘ P—32
0 oz : §P~L//0 (9%: 24¢): ma—gzo [OP’YZO2 HOOUQP
rm .2 [920 [E’Cr— wool
“94; 7:3: §(Zéol"L//() 2/3908 b. (15) Now suppose that in the long run, the number of ﬁrms will adjust until proﬁts are zero.
(Assume all ﬁrms have the identical cost function as shown above.) What is the longrun optimal
output per ﬁrm? What is the longrun equilibrium price? How many ﬁrms will there be? 5. Inverse demand for pizzas in Sharptowne is P = 40  .01 Q
Originally, there were 3 pizza restaurants in this town, each with TCi = 500 + 8 q i+ .05 qi 2
However, recently all three restaurants were purchased by a single monopolist. a. (18) First, assume the monopolist continues to operate all three restaurants as a multiplant
monopoly. Find the optimal output per plant, total output, market price, and the ﬁrm’s proﬁt or loss. WHEN 10%de
Llo—,O'2_Q ; saw; (Mot (wag, 89~ ‘1 3H0 ﬁg J, ‘2 s.
@th, 3Z9: pi’fgaﬂ
(32:3czoo):_£éoo? P: L/o ~,O/[éoo) 77: “SLIOQOO” 3(§DO+?§(ZOO\ movcaoof') 21$ 31002 b. (12) Now assume that instead, the monopolist closes 2 of the restaurants, and operates only a
single plant. Find the optimal output at the remaining plant, and the market price. (Okay to round
Q to the nearest whole number) wuch : mCUSU um cc; 3Q HO—OO’LQ: (6“f0lGl
31: ,kﬁQ (yam l (“FEM
Pf; QOWOOI (267)1W ...
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This note was uploaded on 05/03/2008 for the course ARE 100B taught by Professor Whitney during the Spring '08 term at UC Davis.
 Spring '08
 WHITNEY

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