ADMS 2200 Study Guide - Final Guide: Beanie Babies, Demand Curve, Marginal Revenue

5.- The floor for long-run price is called __________.

a).- profitability

b).- parquet

c).- long run average cost

d).- market skimming

6.- Sometimes firms set prices below cost, in order to generate enough cash to stay in

business in the short run. This pricing objective is called __________.

a).- survival

b).- market share leadership

c).- customer quality leadership

d).- current profit maximization

7.- What is the term we use to describe markets in which a large change in price

results in a small change in the quantity demanded?

a).- inelastic

b).- spastic

c).- elastic

d).- none of the above

8.- Consider cost-based versus value-based pricing. Which is more closely related to

the selling concept?

a).- Cost-based.

b).- Value-based.

c).- both are closely related.

d).- neither is closely related.

9.- Consumers usually perceive higher-priced products as ________.

a).- not worth the price

b).- the government’s fault

c).- being of higher quality

d).- none of the above

10.- Setting a low price for a new product in order to attract a large number of buyers

and a large market share, is called __________ pricing.

a).- programmed marketing

b).- market penetration

c).- predatory

d).- market skimming

The average revenue (demand) for product Q is given by AR = 50 - Q and the total cost of Q by:

STC = 100-4Q+2Q^2

a. Find the price function and then the TR function. See Assignment 3 or 4 for an example. Hint: another name for price is average revenue (AR).

b. Write the MR and MC functions below. Remember: MR = dTR/dQ and MC = dSTC/dQ. See Assignment 5 for a review of derivatives.

c. What positive value of Q will maximize total profit? Remember, letting MR = MC signals the objective of total profit maximization. Solve MR = MC for Q. The value of Q you get should not be zero or negative.

d. Use the price function found in (a) to determine the price per unit that will need to be charged at the Q found in (c). This will be the price you should ask for the total profit maximizing quantity.

e. What total profit will result from selling the quantity found in (c) at the price found in (d)? Hint: the profit function is found as TR – STC.

1. Alice lives in a town with only one movie rental store. Suppose Alice's demand for movie rentals per month is Q = 16 - 2P. The movie store currently charges $5 per movie but is thinking of adding a flat monthly cardholder fee and dropping the price to $2 per rental. At this new price, what is the largest cardholder fee that Alice will pay? If the rental store has a constant marginal cost of $2, which strategy is more profitable?

2. A monopolist faces a demand curve given by,

Y = 100 -  P

with the inverse demand curve equal to,

P = 100- y and MR = 100- 2y.

The monopolist's total and marginal cost functions are,

TC = 700 + 20y and MC = 20.

a) Calculate the monopoly output level, the monopoly price, and the profits of the firm.

b) Draw a diagram to illustrate your answers to part a). Calculate the deadweight loss from this monopoly. [Hint: you need to work out the perfectly competitive quantity and price. The diagram will help you work out how to calculate the DW L using the simple geometry of triangles and rectangles.]

c) Explain why this market might be considered to be a natural monopoly.

d) Illustrate and explain the problem that emerges when the government regulates the monopolist by imposing marginal cost pricing.

e) If the government regulates the monopolist by imposing average cost pricing, what will be the monopolist's price and quantity? Draw a diagram to illustrate your answers. Explain the problem that exists with this average cost pricing. [Note: this is a trickier part than the others, so don't worry if you can't do it. If this question came up in the exam, I would miss out e) and have a)-d), making you feel a bit better! To answer it, you have to set p = AC and solve for output. It requires solving a quadratic equation with 2 potential output levels and working out which output level is the one the monopolist would produce. The quadratic equation is a simple one, but if you are not comfortable with maths, even its mention probably sounds like a nightmare.