# Consider A Market Characterized By The Following Inverse

5. Consider a market characterized by the following inverse demand and supplyfunctions: PX = 40 – 3QX and PX = 20 + 2QX. Compute the surplus received byconsumers and producers. a)b)c)d)\$4 and \$28, respectively\$28 and \$4, respectively\$24 and \$16, respectively\$16 and \$24, respectively8. A firm derives revenue from two sources: goods X and Y. Annual revenuesfrom good X and Y are \$10,000 and \$20,000, respectively. If the price elasticityof demand for good X is ?2. 0 and the cross-price elasticity of demand between Yand X is 3, then a 5 percent increase in the price of X will: a)b)c)d)increase total revenues from X and Y by \$2,500. decrease total revenues from X and Y by \$2,500. decrease total revenues from X and Y by \$3,500. increase total revenues from X and Y by \$3,500. 11. According to the table below, what is the average total cost of producing 145units of output?a)b)c)d)12. 0718. 9736. 2177. 5929. You are the manager of a firm that sells its product in a competitive market ata price of \$60. Your firm’s cost function is C = 50 + 5Q2. The profit-maximizingoutput for your firm is: a)b)c)d)10612230. Let the demand function for a product be Q = 90 ? 3P. The inverse demandfunction of this demand function is: a)b)c)d)Q = 90 + 3PP = 30 + 0. 33QP = 30 – 0. 33QQ = 30 + 0. 33P31. In a competitive industry with identical firms, short-run equilibrium must becharacterized by: a)b)c)d)P = ACP = MCMR = MCAll of the statements associated with this question are correct32. Monopolistically competitive and monopolistic markets share the followingattribute in long-run equilibrium: a)b)c)d)There is no market supply curveMC = MR = PThere is no excess capacityProfits are always zero33. Oligopoly is the most complicated type of market structure because: a) the actions of other firms have a profound impact on the manager’soptimal decision. b) the order in which rival firms act matters. c) There are several modelsd) All of the above34. A market is contestable if: a)b)c)d)Some rivals have better technology. Consumers respond slowly to a price change. Existing firms can respond quickly to entry by lowering their price. There are no sunk costs36. The dominant strategy for player 1 in the following game is: A) S1. B) S2. C) S1 and S2. D) None of the answers is correct. 37. Which of the following is NOT needed to sustain collusion in pricing games?A) A large number of firmsB) A small number of firmsC) Punishments for cheatingD) None of the answers is correctof a th38. You are the manager of a Mom and Pop store that can buy milk from asupplier at \$3. 00 per gallon. If you believe the elasticity of demand for milk bycustomers at your store is -2, then your profit-maximizing price is: a)b)c)d)\$4. 00\$2. 00\$1. 50\$3. 5040. Limited capacity is a necessary condition for a firm to use: a)b)c)d)Cross-subsidizationPeak-load pricingTransfer pricingTwo-part pricing41. In a price-matching strategy, firms tend attempt to set the price: a)b)c)d)At the monopoly priceAt the oligopoly price or the monopoly priceAt marginal costWhere marginal cost equals marginal revenue42. If an individual quits their job they will likely have a lower opportunity cost totheir time, so: a) They will have lower search costs, which means they will have a lowerreservation priceb) They will have lower search costs, which means they will have a higherreservation pricec) They will have higher search costs, which means they will have a lowerreservation priced) They will have higher search costs, which means they will have a higherreservation price43. You are a hotel manager considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession. Thepotential payoffs and corresponding payoffs are summarized in the followingtable. The expected value of Project A is: A)B)C)D)\$0\$125\$100None44. Asymmetric information can cause: a) moral hazard problems. b) adverse selection problems. c) the market mechanism to break down. e) all of the above statements are correct. 45. The optimal bid in an English auction with independent private values is to: a)b)c)d)Remain active until the price exceeds their value of the itemBid more than the true value of the itemBid less than the true value of the itemBid the true value of the item and more than the true value of the item, dependingUpon whether value estimates are affiliated46. According to the Department of Justice’s Horizontal Merger Guidelines,a post-merger HHI _______ is considered _____________________a)b)c)d)above 200, low resulting in a high likelihood that a merger will be blockedabove 1,000, high resulting in high likelihood that a merger will be blockedabove 2,500, high resulting in a high likelihood that a merger will be blockedbelow 2,500, low resulting in high likelihood that a merger will be allowed47. Penalties are used to prevent __________ and permits are used to prevent ________a. b. c. d. Air pollution, air pollutionBreach of contract, air pollutionAir pollution, breach of contractBreach of contract, breach of contract48. Nonrivalry and nonexclusionary are characteristics of which of the following: a) Public goodsb) Antitrust policyc) Free ridingd) All of the above49. Which of the following pieces of legislation is aimed at curbing the negativeeffects of asymmetric information?a) Robison-Patman Actb) Clayton Actc) Clean Air Acte) Truth in Lending Simplification Act50. A consequence of government intervention is: a) rent seeking. b) moral hazard. c) public goods. e) adverse selection. 51. Jaynet spends \$50,000 per year on painting supplies and storagespace. She recently received two job offers from a famous marketing firm –one offer was for \$95,000 per year, and the other was for \$115,000. However, she turned both jobs down to continue a painting career. If Jaynet sells 25 paintings per year at a price of \$8,000 each: a. What are her accounting profits?\$b. What are her economic profits?\$52. The demand curve for product X is given by QXd = 380 – 2PX. a. Find the inverse demand curve. PX = – QXdInstructions: Round your answer to the nearest penny (2 decimal places). b. How much consumer surplus do consumers receive when Px = \$45?\$c. How much consumer surplus do consumers receive when Px = \$25?\$e. In general, what happens to the level of consumer surplus as the price oa good falls?The level of consumer surplus (doesn’t change, decreases, increases)as the price of a good falls?53. You are the manager of a firm that receives revenues of \$40,000per year from product X and \$80,000 per year from product Y. The own price elasticity of demand for product X is -1. 5, and thecross-price elasticity of demand between product Y and X is -1. 8. How much will your firm’s total revenues (revenues from both products)change if you increase the price of good X by 1 percent?Instructions: Round your answer to the nearest dollar. Include a minus (-) sign if applicable. \$54. An economist estimated that the cost function of a single-product firm is: C(Q) = 80 + 30Q + 20Q2 + 5Q3. Based on this information, determine the following: a. The fixed cost of producing 10 units of output. \$b. The variable cost of producing 10 units of output. \$c. The total cost of producing 10 units of output. \$d. The average fixed cost of producing 10 units of output. \$e. The average variable cost of producing 10 units of output. \$f. The average total cost of producing 10 units of output. \$g. The marginal cost when Q = 10. \$55. Describe how a manager who derives satisfaction from bothincome and shirking allocates a 10-hour day between these activitieswhen paid an annual, fixed salary of \$130,000. Time spent working: _______ hoursTime spent shirking: ________ hoursWhen this same manager is given an annual, fixed salary of \$130,000and 5 percent of the firm’s profits—amounting to a total salary of\$165,000 per year—the manager chooses to work 9 hours and shirksfor 1 hours. Given this information, which of the compensation schemesdoes the manager prefer?1. The scheme with fixed payment of \$130,000 and a percentage ofprofits. 2. The scheme with only a fixed payment of \$130,000. 3. The manager is indifferent between the two payment schemes. 56. Suppose the own price elasticity of market demand for retail gasolineis -0. 8, the Rothschild index is 0. 4, and a typical gasoline retailer enjoyssales of \$1,950,000 annually. What is the price elasticity of demand for arepresentative gasoline retailer’s product?Instruction: Round your answer to 2 decimal places. 57. Last month you assumed the position of manager for a large cardealership. The distinguishing feature of this dealership is its “no hassle”pricing strategy, prices (usually well below the sticker price) are posted onthe windows, and your sales staff has a reputation for not negotiating withcustomers. Last year, your company spent \$6 million on advertisements toinform customers about its “no hassle” policy, and had overall sales revenueof \$30 million. A recent study from an agency on Madison Avenue indicatesthat, for each 5 percent increase in TV advertising expenditures,a car dealer can expect to sell 2 percent more cars—but that it would take a 1 percent decrease in price to generatethe same 2 percent increase in units sold. Assuming the information from Madison Avenue is correct,should you increase or decrease your firm’s level of advertising?1. The firm should decreaseadvertising. 2. The firm should decreaseadvertising. 3. The firm should not changeadvertising. 58. The manager of a local monopolyestimates that the elasticity of demandfor its product is constant and equal to-4. The firm’s marginal cost is constantat \$25 per unit. a. Express the firm’s marginal revenueas a function of its price. Instruction: Round your response to2 decimal places. MR = _________ x Pb. Determine the profit-maximizing price. Instruction: Use the rounded valuecalculated above and round yourresponse to 2 decimal places. \$_________59. Consider a Bertrand oligopolyconsisting of four firms that produce anidentical product at a marginal cost of\$240. The inverse market demand forthis product is P = 600 -2Q. a. Determine the equilibrium level ofoutput in the market. b. Determine the equilibrium marketprice. \$c. Determine the profits of each firm. \$60. Use the following normal-form gameto answer the questions below. a. Identify the one-shot Nash equilibrium. Is it : 1. 2. 3. 4. B,CA,DA,CB,Db. Suppose the players know this gamewill be repeated exactly three times. Canthey achieve payoffs that are better thanthe one-shot Nash equilibrium?c. Suppose this game is infinitelyrepeated and the interest rate is 6percent. Can the players achieve payoffsthat are better than the one-shot Nashequilibrium?d. Suppose the players do not knowexactly how many times this game willbe repeated, but they do know that theprobability the game will end after agiven play is ?. If ? is sufficiently low, canplayers earn more than they could in theone-shot Nash equilibrium?You are the manager of a monopoly that sells a product to twogroups of consumers in different parts of the country. Group 1’selasticity of demand is -5, while group 2’s is -2. Your marginal costof producing the product is \$30. a. Determine your optimal markups and prices under third-degreeprice discrimination. Instruction: Round your answers to two decimal places. Markup for group 1: Price for group 1: \$Markup for group 2: Price for group 2: \$b. Which of the following are necessary conditions forthird-degree price discrimination to enhance profits. Instructions: You may select more than one answer. 1. We are able to prevent resale between the groups. 2. At least one group has elasticity of demand greater than 1 inabsolute value. 3. There are two different groups with different(and identifiable) elasticities of demand. 4. At least one group has elasticity of demandless than one in absolute value. A risk-neutral consumer is deciding whether to purchase ahomogeneous product from one of two firms. One firmproduces an unreliable product and the other a reliable product. At the time of the sale, the consumer is unable to distinguishbetween the two firms’ products. From the consumer’sperspective, there is an equal chance that a given firm’sproduct is reliable or unreliable. The maximum amount thisconsumer will pay for an unreliable product is \$0, while she willpay \$230 for a reliable product. a Given this uncertainty, what is the most this consumer. will pay to purchase one unit of this product?\$b How much will this consumer be willing to pay for the product. includes a warranty that will protect the consumer?\$

# Consider A Market Characterized By The Following Inverse

Consider a market characterized by the following inverse demand and supply functions: PX = 30 – 3QX and PX = 10 + 2QX. Compute the number of units exchanged and the price at which those units will be exchanged when there is a \$24 per unit price floor.

# Consider a market characterized by the following inverse

Question
5. Consider a market characterized by the following inverse demand and supply
functions: PX = 40 – 3QX and PX = 20 + 2QX. Compute the surplus received by
consumers and producers.
a)
b)
c)
d)

\$4 and \$28, respectively
\$28 and \$4, respectively
\$24 and \$16, respectively
\$16 and \$24, respectively

8. A firm derives revenue from two sources: goods X and Y. Annual revenues
from good X and Y are \$10,000 and \$20,000, respectively. If the price elasticity
of demand for good X is ?2.0 and the cross-price elasticity of demand between Y
and X is 3, then a 5 percent increase in the price of X will:
a)
b)
c)
d)

increase total revenues from X and Y by \$2,500.
decrease total revenues from X and Y by \$2,500.
decrease total revenues from X and Y by \$3,500.
increase total revenues from X and Y by \$3,500.

11. According to the table below, what is the average total cost of producing 145
units of output?

a)
b)
c)
d)

12.07
18.97
36.21
77.59

29. You are the manager of a firm that sells its product in a competitive market at
a price of \$60. Your firm’s cost function is C = 50 + 5Q2. The profit-maximizing
output for your firm is:
a)
b)
c)
d)

10
6
12
2

30. Let the demand function for a product be Q = 90 ? 3P. The inverse demand
function of this demand function is:
a)
b)
c)
d)

Q = 90 + 3P
P = 30 + 0.33Q
P = 30 – 0.33Q
Q = 30 + 0.33P

31. In a competitive industry with identical firms, short-run equilibrium must be
characterized by:
a)
b)
c)
d)

P = AC
P = MC
MR = MC
All of the statements associated with this question are correct

32. Monopolistically competitive and monopolistic markets share the following
attribute in long-run equilibrium:
a)
b)
c)
d)

There is no market supply curve
MC = MR = P
There is no excess capacity
Profits are always zero

33. Oligopoly is the most complicated type of market structure because:
a) the actions of other firms have a profound impact on the manager’s
optimal decision.
b) the order in which rival firms act matters.
c) There are several models
d) All of the above

34. A market is contestable if:
a)
b)
c)
d)

Some rivals have better technology.
Consumers respond slowly to a price change.
Existing firms can respond quickly to entry by lowering their price.
There are no sunk costs

36. The dominant strategy for player 1 in the following game is:

A) S1.
B) S2.
C) S1 and S2.
D) None of the answers is correct.

37. Which of the following is NOT needed to sustain collusion in pricing games?
A) A large number of firms
B) A small number of firms
C) Punishments for cheating
D) None of the answers is correct
of a th

38. You are the manager of a Mom and Pop store that can buy milk from a
supplier at \$3.00 per gallon. If you believe the elasticity of demand for milk by
customers at your store is -2, then your profit-maximizing price is:
a)
b)
c)
d)

\$4.00
\$2.00
\$1.50
\$3.50

40. Limited capacity is a necessary condition for a firm to use:

a)
b)
c)
d)

Cross-subsidization
Peak-load pricing
Transfer pricing
Two-part pricing

41. In a price-matching strategy, firms tend attempt to set the price:
a)
b)
c)
d)

At the monopoly price
At the oligopoly price or the monopoly price
At marginal cost
Where marginal cost equals marginal revenue

42. If an individual quits their job they will likely have a lower opportunity cost to
their time, so:
a) They will have lower search costs, which means they will have a lower
reservation price
b) They will have lower search costs, which means they will have a higher
reservation price
c) They will have higher search costs, which means they will have a lower
reservation price
d) They will have higher search costs, which means they will have a higher
reservation price

43. You are a hotel manager considering four projects that yield different payoffs,

depending upon whether there is an economic boom or a recession. The
potential payoffs and corresponding payoffs are summarized in the following
table.

The expected value of Project A is:
A)
B)
C)
D)

\$0
\$125
\$100
None

44. Asymmetric information can cause:
a) moral hazard problems.
b) adverse selection problems.
c) the market mechanism to break down.
e) all of the above statements are correct.
45. The optimal bid in an English auction with independent private values is to:
a)
b)
c)
d)

Remain active until the price exceeds their value of the item
Bid more than the true value of the item
Bid less than the true value of the item
Bid the true value of the item and more than the true value of the item, depending
Upon whether value estimates are affiliated

46. According to the Department of Justice’s Horizontal Merger Guidelines,
a post-merger HHI _______ is considered _____________________
a)
b)
c)
d)

above 200; low resulting in a high likelihood that a merger will be blocked
above 1,000; high resulting in high likelihood that a merger will be blocked
above 2,500; high resulting in a high likelihood that a merger will be blocked
below 2,500; low resulting in high likelihood that a merger will be allowed

47. Penalties are used to prevent __________ and permits are used to prevent ________
a.
b.
c.
d.

Air pollution; air pollution
Breach of contract; air pollution
Air pollution; breach of contract
Breach of contract; breach of contract

48. Nonrivalry and nonexclusionary are characteristics of which of the following:
a) Public goods
b) Antitrust policy
c) Free riding
d) All of the above
49. Which of the following pieces of legislation is aimed at curbing the negative
effects of asymmetric information?
a) Robison-Patman Act
b) Clayton Act
c) Clean Air Act
e) Truth in Lending Simplification Act
50. A consequence of government intervention is:
a) rent seeking.
b) moral hazard.
c) public goods.
e) adverse selection.

51. Jaynet spends \$50,000 per year on painting supplies and storage
space. She recently received two job offers from a famous marketing firm –
one offer was for \$95,000 per year, and the other was for \$115,000.
However, she turned both jobs down to continue a painting career.
If Jaynet sells 25 paintings per year at a price of \$8,000 each:
a. What are her accounting profits?
\$
b. What are her economic profits?
\$
52. The demand curve for product X is given by QXd = 380 – 2PX.
a. Find the inverse demand curve.
PX = – QXd
Instructions: Round your answer to the nearest penny (2 decimal places).
b. How much consumer surplus do consumers receive when Px = \$45?
\$
c. How much consumer surplus do consumers receive when Px = \$25?
\$

e. In general, what happens to the level of consumer surplus as the price o
a good falls?
The level of consumer surplus (doesn’t change, decreases, increases)
as the price of a good falls?

53. You are the manager of a firm that receives revenues of \$40,000

per year from product X and \$80,000 per year from product Y.
The own price elasticity of demand for product X is -1.5, and the
cross-price elasticity of demand between product Y and X is -1.8.
How much will your firm’s total revenues (revenues from both products)
change if you increase the price of good X by 1 percent?
Instructions: Round your answer to the nearest dollar.
Include a minus (-) sign if applicable.
\$
54. An economist estimated that the cost function of a single-product firm is:
C(Q) = 80 + 30Q + 20Q2 + 5Q3.
Based on this information, determine the following:
a. The fixed cost of producing 10 units of output.
\$
b. The variable cost of producing 10 units of output.
\$
c. The total cost of producing 10 units of output.
\$
d. The average fixed cost of producing 10 units of output.
\$
e. The average variable cost of producing 10 units of output.
\$
f. The average total cost of producing 10 units of output.
\$
g. The marginal cost when Q = 10.
\$
55. Describe how a manager who derives satisfaction from both

income and shirking allocates a 10-hour day between these activities
when paid an annual, fixed salary of \$130,000.
Time spent working: _______ hours
Time spent shirking: ________ hours
When this same manager is given an annual, fixed salary of \$130,000
and 5 percent of the firm’s profits—amounting to a total salary of
\$165,000 per year—the manager chooses to work 9 hours and shirks
for 1 hours. Given this information, which of the compensation schemes
does the manager prefer?

1. The scheme with fixed payment of \$130,000 and a percentage of
profits.
2. The scheme with only a fixed payment of \$130,000.
3. The manager is indifferent between the two payment schemes.
56. Suppose the own price elasticity of market demand for retail gasoline
is -0.8, the Rothschild index is 0.4, and a typical gasoline retailer enjoys
sales of \$1,950,000 annually. What is the price elasticity of demand for a
representative gasoline retailer’s product?
Instruction: Round your answer to 2 decimal places.
57. Last month you assumed the position of manager for a large car
dealership. The distinguishing feature of this dealership is its “no hassle”
pricing strategy; prices (usually well below the sticker price) are posted on
the windows, and your sales staff has a reputation for not negotiating with
customers. Last year, your company spent \$6 million on advertisements to
inform customers about its “no hassle” policy, and had overall sales revenue
of \$30 million. A recent study from an agency on Madison Avenue indicates
that, for each 5 percent increase in TV advertising expenditures,
a car dealer can expect to sell 2 percent more cars—
but that it would take a 1 percent decrease in price to generate
the same 2 percent increase in units sold.
Assuming the information from Madison Avenue is correct,
should you increase or decrease your firm’s level of advertising?

1. The firm should decrease
advertising.
2. The firm should decrease

advertising.
3. The firm should not change
advertising.
58. The manager of a local monopoly
estimates that the elasticity of demand
for its product is constant and equal to
-4. The firm’s marginal cost is constant
at \$25 per unit.
a. Express the firm’s marginal revenue
as a function of its price.
Instruction: Round your response to
2 decimal places.
MR = _________ x P
b. Determine the profit-maximizing price.
Instruction: Use the rounded value
calculated above and round your
response to 2 decimal places.
\$_________
59. Consider a Bertrand oligopoly
consisting of four firms that produce an
identical product at a marginal cost of
\$240. The inverse market demand for
this product is P = 600 -2Q.
a. Determine the equilibrium level of
output in the market.

b. Determine the equilibrium market
price.
\$

c. Determine the profits of each firm.
\$

60. Use the following normal-form game
to answer the questions below.

a. Identify the one-shot Nash equilibrium.
Is it :
1.
2.
3.
4.

B,C
A,D
A,C
B,D

b. Suppose the players know this game
will be repeated exactly three times. Can
they achieve payoffs that are better than
the one-shot Nash equilibrium?
c. Suppose this game is infinitely
repeated and the interest rate is 6
percent. Can the players achieve payoffs
that are better than the one-shot Nash
equilibrium?
d. Suppose the players do not know
exactly how many times this game will
be repeated, but they do know that the
probability the game will end after a

given play is ?. If ? is sufficiently low, can
players earn more than they could in the
one-shot Nash equilibrium?
You are the manager of a monopoly that sells a product to two
groups of consumers in different parts of the country. Group 1’s
elasticity of demand is -5, while group 2’s is -2. Your marginal cost
of producing the product is \$30.
a. Determine your optimal markups and prices under third-degree
price discrimination.
Instruction: Round your answers to two decimal places.
Markup for group 1:
Price for group 1: \$
Markup for group 2:
Price for group 2: \$
b. Which of the following are necessary conditions for
third-degree price discrimination to enhance profits.
Instructions: You may select more than one answer.

1. We are able to prevent resale between the groups.
2. At least one group has elasticity of demand greater than 1 in
absolute value.
3. There are two different groups with different
(and identifiable) elasticities of demand.
4. At least one group has elasticity of demand
less than one in absolute value.

A risk-neutral consumer is deciding whether to purchase a
homogeneous product from one of two firms. One firm
produces an unreliable product and the other a reliable product.
At the time of the sale, the consumer is unable to distinguish
between the two firms’ products. From the consumer’s
perspective, there is an equal chance that a given firm’s
product is reliable or unreliable. The maximum amount this
consumer will pay for an unreliable product is \$0, while she will
pay \$230 for a reliable product.
a Given this uncertainty, what is the most this consumer
. will pay to purchase one unit of this product?
\$

b How much will this consumer be willing to pay for the product
. includes a warranty that will protect the consumer?
\$