FINA 3334 FINAL EXAM FALL 1996 NAME

Ramon Rabinovitch SSN

Q1. A firm in perfect competition faces a demand curve P = $11. Its variable cost function is VC = 5Q + .02Q³. Thus, it maximizes its profit by selling:

a. 0 units

b. 8 units

c. 10 units

d. 25 units

e. none of the above is correct.

Q2. The immediate consequence of a minimum wage rate increase is:

a. less quantity of labor supplied.

b. more quantity of labor demanded.

c. less quantity of labor demanded combined with less quantity of labor supplied.

d. more quantity of labor demanded combined with more of labor supplied.

e. none of the above is correct.

Q3. Assume that the farmers in the soybean industry are in perfect competition. Bad weather might push soybean prices from $7/bushel to $10/bushel. The reason for that is most likely:

a. an increase in the demand for soybean because of the bad weather.

b. an decrease in the supply of soybeans

c. an increase in the supply of soybeans

d. a horizontal aggregated demand curve for soybeans

e. none of the above is correct.

Q4. An industry in perfect competition faces the demand curve: Q_D = 750 - 500P. Its supply function is Q_S = - 150 + 1,000P. Each firm in this industry faces the demand curve:

a. P=$.60

b. P=.15+.001Q

c. P=1.5-.002Q

d. P=$1.5

e. none of the above is correct.

Q5. A monopoly faces the demand curve Q = 5,000 - 2P. The profit maximizing price is P = $2,000. At this price its marginal cost must be:

a. MC = MR = $2,000

b. MC = $1,500

c. MC Cannot be computed based on the given information

d. MC = $2,500

e. none of the above is correct.

Q6. A monopoly with the total cost function: TC = 20,000 + 625Q - 3.0125Q² + .01Q³ faces the demand curve: Q = 50,000 - 80P. The following price may be the firm's profit maximazing price:

a. $200

b. $300

c. $400

d. $700

e. $800

Q7. A monopoly faces the demand curve Q = 50,000 - 2,500P. Its profit maximizing policy is where e_p = - 4. At this point the marginal cost of producing and selling the optimal quantity is:

a. MC = $10

b. MC = $12

c. MC = $13

d. MC = $14

e. none of the above is correct.

Q8. A monopoly faces the marginal revenue function MR = 50 - .002Q. Barring zero marginal cost, the profit maximizing price

a. may be $10

b. must be no more than $25

c. must be exactly $25 so that MR = 0

d. must be at least $30

e. none of the above is correct

Q9. The total demand and supply functions for cigarettes (in million packs) are: Q_D = 750 - 500P ; and Q_S = - 150 + 500P. A new tax per pack is considered. The tax burden will be divided up between consumers and producers as follows:

a. 33% consumers , 67% producers

b. 50% consumers ; 50% producers

c. 67% consumers ; 33% producers

d. 25% consumers ; 75% producers

e. none of the above is correct

Q10. A video store, VDO, is the only video rental store in a relatively large marketing area. Its total cost function is:

TC = 1,000 + Q + .000375Q²and it faces the demand curve:

Q = 4,000 - 1,000P. The profit maximizing quantity for the store is 1090 units. Its monopolistic profit is:

a. $436.3625

b. $536.3625

c. $636.3625

d. $736.3625

e. $836.3625

Q11. Use the data in Q10. Other stores opened in the same marketing area and VDO now faces a new demand curve: Q = 4,800 - 1,600P. VDO's monopolistic profit declined to:

a. $400

b. $300

c. $200

d. $100

e. $0

Q12. Suppose that for a certain drug company "a pill cost $300 million to discover and 5 cents to manufacture." This drug company faces demand curve from "poor people on medicaid,": Q₁= 14,750,000 - 5,000,000P₁; and from "prosperous patients using private insurance,": Q₂= 4,950,000 - 1,000,000P₂. The drug company discriminates the prices to maximize its profit by selling

a. Q₁ = 7,250,000 Q₂ = 4,500,000

b. Q₁ = 6,000,000 Q₂ = 6,000,000

c. Q₁ = 6,000,000 Q₂ = 5,000,000

d. Q₁ = 7,250,000 Q₂ = 2,450,000

e. none of the above is correct

Q13. The firm in Q12 is sells the pills for:

a. P₁ = $1.5 P₂ = $2.5

b. P₁ = $1.0 P₂ = $2.0

c. P₁ = $1.5 P₂ = $1.0

d. P₁ = $1.5 P₂ = $2.0

e. none of the above is correct

Q14. A price discrimanating monopoly faces the marginal revenue function:

30 - .001Q

MR =

If its marginal cost is MC = 10 + .001Q, then the monopoly

a. sells in both markets for the same price of $2

b. sells in both markets for different prices

c. sells only in one market for $20

d. sells only in one market for $25

e. none of the above is correc

Q15. A price discriminating monopoly faces the following demand curves in two separate markets: (1) Q = 100 - 20P and (2) Q = 300 - 20P. Price discrimination between these markets:

a. Will result in selling for the same prices in both markets

b. Will necesarilly result in selling the same quantities in both markets

c. Will necesarlilly result in different prices in these markets

d. Will necesarilly result in selling different quantities in both markets

e. None of the above is correct.

Q16. A price discriminating monopoly faces the following demand curves in two separate markets: (1) Q = 100 - 20P and (2) Q = 200 - 40P. Price discrimination between these markets:

a. Will result in selling for the same prices in both markets

b. Will necesarilly result in selling the same quantities in both markets

c. Will necesarlilly result in selling in only one market

d. May yield different prices in both market

e. None of the above is correct.

Q17. The marginal cost functions of two cartel members are

MC₁ = 30 + .002Q₁ and MC₂ = 20 +.004Q₂. The cartel sells for P= $60, at the point where its MR = $40. Thus, the cartel allocates the total quantity sold as follows:

a. Q₁ = 5,000 Q₂ = 6,000

b. Q₁ = 5,000 Q₂ = 5,000

c. Q₁ = 6,000 Q₂ = 5,000

d. Q₁ = 4,000 Q₂ = 5,000

e. none of the above is correct

Q18. The demand function faced by a two-members cartel is;

Q = 144 - 2P. The cartel members marginal cost functions are:

MC₁ = 3 + 2Q₁ ; MC₂ = 1 + + 2Q₂. The optimal strategy for the cartel is such that the optimal quantities are:

a. 16 and 19, respectively

b. 18 and 17, respectively

c. 15 and 20, respectively

d. 20 and 21, respectively

e. 17 and 18, respectively

Q19. Two firms with TC₁ = FC₁ + 200Q₁ + + .001Q₁² and TC₂ = FC₂ + + 1,200Q₂ + .004Q₂² decide to form a cartel. The cartel faces the demand curve P = 3,000 - .0005Q and optimally sells 1,000,000 units. Then, the quantities allocated to each cartel member and the optimal price (Q₁,Q_2,P), are:

a. (900,000 ,500,000, $1,000)

b. (100,000 ,900,000, $2,500)

c. (900,000 ,100,000, $2,500)

d. (100,000 ,900,000, $2,000)

e. (900,000 ,100,000, $2,000)

Q20. A cartel sets its profit maximizing price so as:

a. To maximize the cartel's profit as if it was one monopoly firm

b. To maximize each one of its members' revenue

c. To force all cartel members to sell the same quantity

d. To have all cartel members selling where their respective MR = their respective MC

e. To maximize each one of its members' profit

Q21. Suppose that every cartel member has a different MC function than the other members. At the cartel's profit maximizing price:

a. All cartel members are selling at different prices

b. All cartel members are selling the same quantities

c. All cartel members receive the same $MR

d. All cartel members have different $MC

e. None of the above is correct

Q22. Boeing, the dominant firm in the aircraft industry shares the total demand for passenger airplanes, Q_T = 20,000 - .002P, with several other firms: the followers. The marginal cost function of the followers is given by MC_F = 3,000,000 + 500Q_F. The follower firms behave as if they are in perfect competition. Boeing prices itself out of the market at

a. $7,500,000

b. $6,500,000

c. $5,500,000

d. $4,500,000

e. none of the above is correct

Q23. Consider a dominant firm with passive reaction model. The total demand curve is Q_T = 20,000 - .002P; and MC_F = 3,000,000 + 500Q_F, and MC_L = 2,500,000 + 500Q. The optimal quantities in this dominant firm with passive reaction model are

a. Q_L = 4,000 Q_F = 5,000

b. Q_L = 4,000 Q_F = 4,000

c. Q_L = 5,000 Q_F = 5,000

d. Q_L = 5,000 Q_F = 4,000

e. none of the above is correct

Q24. The derived marginal revenue and the marginal cost function of the leader are MR_L = 670 - 2Q_L and MC_L = 10+31Q_L, respectively. At the optimal price, the total quantity demanded is Q_T = 45. Thus, the followers sell:

a. 15 units

b. 20 units

c. 25 units

d. 30 units

e. none of the above is correct

Q25. A large American firm obtained the exclusive rights to sell small tractors in a developing country. In this country, there is an infant industry for small tractors whose marginal cost function is: MC_F = 10,000 + .1Q_F. The American Company, is the dominant firm in this country, and its marginal cost function is: MC_L = 5,000 + .04Q_L, while the total demand for tractors in this country is Q_T = 200,000 - 2.5P. At the optimal price the total quantity sold in this market is

a. 85,000 tractors

b. 95,000 tractors

c. 105,000 tractors

d. 115,000 tractors

e. none of the above is correct

Q26. If the government of the country in Q25 imposes an import tax on the American firm in the amount of $2,000 per tractor. Then, the new price of a tractor will be

a. 17,200

b. 17,400

c. 17,800

d. 18,200

e. none of the above is correc

Use the forllowing Information in order to solve questions 27 - 31. In a model of a dominant firm with active reaction, the following data is given: The total demand for the product is given by:

Q_T = 100,000 - .0016P.

The marginal cost functions are: Q_F = - 1,000 + .0034MC_F, for the follower firms; MC_L = 200,000, for the large firm, and MC_D = 200,000 for the dominant firm.

Q27. The large firm will face the following derived (inverse) demand curve:

a. P = 20,200,000 - 200Q_L - 200Q_D

b. P = 20,200,000 - 400Q_L - 400Q_D

c. P = 10,100,000 - 200Q_L - 400Q_D

d. P = 10,100,000 - 400Q_L - 200Q_D

e. P = 20,200,000 - 200Q_L - 400Q_D

Q28. The optimal quantity sold by the large firm depends on the quantity sold by the dominant firm as follows:

a. Q_L = 30,000 - 10Q_D

b. Q_L = 40,000 - .5Q_D

c. Q_L = 50,000 - .5Q_D

d. Q_L = 50,000 - 10Q_D

e. Q_L = 60,000 - .5Q_D

Q29. The price reaction function is:

a. P = 20,200,000 - 200Q_D

b. P = 10,200,000 - 200Q_D

c. P = 20,200,000 - 100Q_D

d. P = 10,200,000 - 100Q_D

e. P = 10,200,000 - 400Q_D

Q30. The optimal price for the product in this market is:

a. $3,200,000

b. $4,200.000

c. $5,200,000

d. $6,200,000

e. $7,200,000

Q31. The optimal quantity sold by the dominant firm is:

a. 40,000

b. 50,000

c. 60,000

d. 70,000

e. 80,000

Q32. A monopoly is considering pricing its product so as to deter the entry of potential competitors. Potential entrants will not enter the market if:

a. The price is set above their ATC

b. The price is set below their minimum AVC

c. The price is set exactly at their minimum ATC

d. The price is set so that they suffer a short run loss.

e. None of the above is correct

Q33. Predatory prices, i.e., prices that are set by a monopoly in order to prevent other firms from entering a market or in order to drive a competitor from the market, are illigal in the U.S because competition benefits consumers. Relative to a monopoly, in competition

a. Consumers pay higher prices for more of the product

b. Consumers pay lower prices for less quantity

c. Consumers pay higher prices for less of the product

d. Consumers pay lower prices for more of the product

e. None of the above is correct

Q34. Consider a two-period model of a monopoly turned into a dominant firm with passive reaction. The sophisticated monopoly sets the first-period price so as:

a. To show a loss in the first period

b. To sell less units than those sold for the profit maximizing price

c. To make sure that the number of new entrants is as small as possible

d. To make sure that the profit is maximized over the two periods

e. None of the above is correct

Q35. Consider a two-period model of a monopoly turned into a dominant firm with passive reaction. The myopic monopoly sets the first-period price so as maximize its first-period's profit. Assume that the sophisticated monopoly sets the first-period price by equating its MC function to the demand curve. Then relative to the mayopic monopoly, the sophisticated monopoly

a. Sells more for a higher price and a lower profit in the first period

b. Sells more for a lower price and a higher profit in the first period

c. Sells less for a lower price and a lower profit in the first period.

d. Sells less for a higher price and a lower profit in the first period.

e. Sells more for a lower price and a lower profit in the final period.

Q36. The prices and the quantities demanded for personallized licsence plates in Texas were: P = $25, Q = 150,000 in 1986, and P = $75, Q = 60,000 in 1987. The arc price elasticity between these two points on the demand curve was -.857. This implies that in order to maximize its revenue from selling personallized plates the state should have:

a. raised the price even more than $75 so as to increase the elasticity to one

b. kept the price of $75 because it was the revenue maximizing price

c. reduce the price below $25

d. reduce the price back to $25

e. none of the above is correct

Q37. A firm finds that its revenue maximizing price is $255/unit. At this price its marginal revenue:

a. must be zero

b. cannot be computed based on the given information

c. is zero only if the demand curve is linear

d. is one only if the demand curve is linear

e. none of the above is coreect

Q38. A publisher faces the demand curve for a new encyclopedia for children ages 6-10: Q = 2,000,000 - 20,000P. The publisher will pay the author 20% of the total revenue from the sale of the book. The publisher is a profit maximizing monopoly with a fixed average variable cost per book of AVC = $40. The author will receive:

a. $5,500,000

b. $6,500,000

c. $7,500,000

d. $8,500,000

e. none of the above is correct

39. A retailer buys a lot of T-shirts for $3 each. The overhead cost per T-shirt is $.5 and the markup is 300% The shirts are sold for the cost plus price of:

a. $6

b. $7

c. $8.5

d. $10.5

e. none of the above is correct

40. A retailer buys a lot of T-shirts for $3 each. The overhead cost per T-shirt is $.5 and the markup is 200%. The retailer finds out that the T-shirts are selling for the cost-plus price at a point on the demand curve where the price elasticity is -1.4. The cost plus price

a. is the profit maximizing price

b. cannot be calculated based on the given information

c. is more than the profit maximizing price

d. is less than the profit maximizing price

e. none of the above is correct