FIN 605 Week 8 Final Exam

FINAL EXAM

FIN 605 — Managerial Economics and Corporate Strategy

Multiple Choice (15 points) Choose the best answer for each of the following questions.

Each question is worth 3 points.

1.                  In economic terms, fixed costs are fixed with respect to changes in

A)                output.

B)                 capital expenditure.

C)                 wages.

D)                time.

2.                  A price taker is

A)                a firm that accepts different prices from different customers.

B)                 a consumer who accepts different prices from different firms.

C)                 a firm in a perfectly competitive market.

D)                a firm that cannot influence the market price.

E)                 both C and D

3.                  When a firm charges each customer the maximum price that the customer is willing to pay, the firm

A)                engages in a discrete pricing strategy.

B)                 charges the average reservation price.

C)                 engages in second-degree price discrimination.

D)                engages in first-degree price discrimination.

4.                  Monopolistically competitive firms have monopoly power because they

A)                face downward sloping demand curves.

B)                 are great in number.

C)                 have freedom of entry.

D)                are free to advertise.

5.                  You are playing a game in which a dollar bill is auctioned. The highest bidder receives the dollar in return for the amount bid. However, the second-highest bidder must pay the amount that he or she bids, and gets nothing in return. The optimal strategy is:

A)                to bid the smallest allowable increment below $1.

B)                 to bid nothing.

C)                 to bid $0.99.

D)                to bid more than a dollar.

6.                  Plastic and steel are substitutes in the production of body panels for certain automobiles. If the price of plastic increases, with other things remaining the same, we would expect the

7.                  Suppose biochemists discover an enzyme that can double the amount of ethanol that may be derived from a given amount of biomass. Based on this technological development, we expect the supply curve for ethanol to shift to the right.

.

8.                  A few sellers may behave as if they operate in a perfectly competitive market if the market

demand is highly inelastic.

9.                  To maximize profits, a monopolist should charge as high a price as it likes. FALSE, because due to maximizing profits, a monopolist can’t charge as high. To earn a maximum profit to charge where monopolist are able to charge different prices from different customers, price discrimination is utilized.

10.              In an industry with a dominant firm, the demand curve facing the dominant firm is identical to market demand.

11.              (6 points total) The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced.

a)                  (2 points) What is the total cost to produce 100 cookies? ATC = TC/Q

b)                  (4 points) What is the total cost to produce 50 cookies? MC x 50

12.              (6 points) Describe differences (if any) between equilibrium in the Stackelberg model and the Cournot model in an oligopolistic market.

13.               (9 points total) OneSource is a producer ina monopoly industry. The demand curve, total revenue curve, marginal revenue curve and total cost curve for OneSource are given as follows:

Q=160-4P TR=400 - 0.2502 MR=40-0.5Q0 TC=4Q MC=4

a)                  (3 points) How much output will Barbara produce?

b)                  (3 points) What price will OneSource charge for the output?

c)                  (3 points) How much profit will OneSource make?

14.    (5 points) OneOfFew Inc. is operating in a monopolistically competitive market faces demand and marginal revenue curves as given below:

P=10-0.1Q MR=10-0.2Q The firm's total and marginal cost curves are:

TC = - 10Q + 0.0333Q3 + 130 MC = -10 + 0.0999Q2, where P is in dollars per unit, output rate Q is in units per time period, and total cost C is in dollars.

If P= $8.68 and OneOfFew produces Q=13.17, what is the Lerner index of monopoly power for OneOfFew Inc?

15.      (5 points) In a duopoly where possible options are to retain the collusive price (collude) or to lower the price in attempt to increase the firm's market share (cut). Consider the following ayoff matrix for a game in which two firms attempt to collude under the Bertrand model: Firm B cuts | Firm B colludes Firm A cuts 6,6 24,0 Firm A colludes 0,24 12,12

16. (8 points) The inverse demand curve for product X is given by:

PX = 25 - 0.005Q + 0.15Py, where Px represents price in dollars per unit, Q represents rate of sales in pounds per week, and Py represents selling price of another product Y in dollars per unit. The inverse supply curve of product X is given by: Px = 5 + 0.004Q.

a.           (5 points) Determine the equilibrium price and sales of X when Py = $10.

b.          (3 points) Explain whether X and Y are substitutes or complements and why.

17.  (9 points total) Anderson and Kay are two individuals who one day discover a stream that flows wine cooler instead of water. Anderson and Kay decide to bottle the wine cooler and sell it. The marginal cost of bottling wine cooler and the fixed cost to bottle wine cooler are both zero. The market demand for bottled wine cooler is given as:

P=90 – 25Q where Q is the total quantity of bottled wine cooler produced and P is the market price of bottled wine cooler.

Suppose that Anderson and Kay act as Cournot duopolists, what is the reaction function for Anderson?

18.   (12 points total) American Eaglet sells surfing equipment in Los Angeles (LA) and Honolulu (Hon). The demand functions for each of these two groups are

QLA = 600 —2.5P14 QHon = 800 — 4.0PHon

where Q is the number sold and P is the price of the equipment. The cost of providing Q units of the equipment is given by

C= 10,000+50Q where Q= QHon + QLA.

a.           (5 points) What is the profit-maximizing quantity for the Honolulu market?

b. (3 points) What is the profit-maximizing price for the Honolulu market?

c. (4 points) Based on the facts above, briefly explain whether the profit-maximizing price in Los Angeles would be the same or different than the price in Honolulu (no additional calculations are necessary).

19.  (10 points) Most markets do not have a single monopolist nor a large number of firms to

make for perfect competition. Explain the similarities and differences between monopolistically competitive markets and oligopolistic markets.