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ARE 100b MT 1 Key - i—e post ARE 1008 Spring 2008 M...

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Unformatted text preview: i—e post ARE 1008 Spring 2008 M. Whitney FIRST MIDTERM V . .~Ta4/i NAME: This exam has two sections. Section A consists of 10 multiple-choice 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) MA 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. (1. Students should receive a 75% discount. 2. A multiplant monopolist owns two factories, with cost fimctionsc. TCl = 100 + 30*q1+ 2q12 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 d . Copyright 4. Which of the following pricing strategies would likely be most difficult for a firm to implement in the real world? @First—degree (perfect) price discrimination b. Second-degree price discrimination c. Third-degree price discrimination d. Intertemporal price discrimination 5. Each year, Bonnie Airlines charges $800 for a round—trip 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. Second-degree 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 -l at the optimal solution. c. There will be no deadweight loss to society. (1. 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 Second-degree price discrimination Third-degree 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 - 4P, 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. e. 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: ng = 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 money-off coupons at locations where golfers are like y to go, such as golf courses. 0. Either a or b will be equally profitable. SECTION B. 1. 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 firrn’s cost function is TC = 10,000 + 100Q + 0.9Q2 a. (14) Find the firm’s optimal quantity, and the monopoly price. P: eoo veto VWL: (pee mac; macohmccm :7 (poo ~— 1o: 00 L l 9; 62 § 00 : éLQ [W1 (fixeoon lCZsoB $5975] b. (16) Find producer surplus, consumer surplus, and profit for this market NC: [00 + (gt-2,312) : 95—0 ’D co: Q’OO Zflb Haas l 0649 747 ~9€b>€m> + ("61192150 e. ezsoe gem :{jg‘gésfl ”we ~ weep-e 3000 6000 - - @2930 (513-00 ”(0! 000 ’- 0“ch 9732, :29 (loow+/0¢257>l4~o‘i(zsofl 2. Belvedere Chemicals, a monopolist, produces a patented enzyme cleanser. The firm owns two production plants, with the following cost functions: TCl = 3000 + 40*ql + q,2 TC2 = 2000 + 30*q2 + qf Inverse demand for this cleanser is P = 1200 - 2Q. a. (16) What is the optimal output for each plant? a-l Waterman = Max:009) : magi) 32 ‘ g ’77 4’: {Zoo 4/0 :— ”"93? [7,00,47,~L/(‘5+¢/> - 40%;” / mm ”14/ [200 way/’20 ”Vex ‘: 70fzf/ [/‘7’0 : /0 7/" (KM/Lil g2: WM “WE b. (7) What is the market price? Q :. (279,5 [2: [200.- ZCQgg) :. l$73q§ c. (7) What is the firm’s profit or loss? T:- ‘73‘1 e 13% _ [gooo Woum remit) H [2005+ 30016:»qu : [7 l ozzw 205756-— 1‘17 :[ nomad 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: qid = 150 - SF The club’s marginal cost of supplying each golf round is $14. a. (12) What price does the firm charge per round of golf, and how many games per year does the average customer play? b. (12) What is the firm’s annual membership fee? Fee _ W 3; ($éqo " 2 c. (6) What is consumer surplus for this club’s average customer? ( O i 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? P3Wm; =71>:%Z+012c $6, {L432 0 —— 02— : $PML/it9 (95:. 2W): mp—XZO 100420 : [[00 W 120: [Q20 lb % O] @ 9:6:57/é01‘1/d g: 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 long-run optimal output per firm? What is the long-run equilibrium price? How many firms will there be? ’73 WC: 3721—“ 7x(90)2: $/[email protected] 0’: [loo—51000) : 900 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’ 5 profit or loss. Wimp: ”Ll/1W0) wovOOZQ —. fitolfic; mall (wag,- 31: 901(310 refit ((0 2C 3%t%:g{: --— :@l9l%Z—c‘tg Q : 3(200) 315557 F : go _ o/(egoo) ($39 T: 5L1 eoo~ 3(gvo+moo\ 1~ Joy—)2 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) mum mack) W (m K? Lay—OO'LQ: fif‘l‘olQ 32).: ,l’AQ 42,; m (“mam ) p; @030! (gm) :W ...
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