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Questions and Answers of Economics

A monopoly’s inverse demand function is p = 100 – Q + (5A - A2) / Q, where Q is its quantity, p is its price, and A is the level of advertising. Its marginal cost of production is constant at 10,
A monopoly’s inverse demand function is p = Q–0.25 A0.5, where Q is its quantity, p is its price, and A is the level of advertising. Its constant marginal and average cost of production is 6, and
Why are newsstand prices higher than subscription prices for an issue of a magazine?
Use a diagram similar to figure to illustrate the effect of social media on the demand for Super Bowl commercials.
A monopoly chocolate manufacturer faces two types of consumers. The larger group, the hoi polloi, loves desserts and has a relatively flat, linear demand curve for chocolate. The smaller group, the
A monopoly produces a good with a network externality at a constant marginal and average cost of 2. In the first period, its inverse demand function is p = 10 – Q. In the second period, its demand
Under what circumstances will a drug company charge more for its drug after its patent expires?
Does the Managerial Solution change if the entry of the generic causes a parallel shift to the left of the patent monopoly’s linear demand curve?
Proposals to reduce patent length for drugs are sometimes made, but some critics argue that such a change would result in even higher prices during the patent period as companies would need to
In the examples in Table 10.1, if the movie theater does not price discriminate, it charges either the highest price the college students are willing to pay or the one that the senior citizens are
As of 2013, the pharmaceutical companies Abbott Laboratories, AstraZeneca, Aventis Pharmaceuticals, Bristol- Myers Squibb Company, Eli Lilly, GlaxoSmithKline, Janssen, Johnson & Johnson, Novartis,
A jean manufacturer would find it profitable to charge higher prices in Europe than in the United States if it could prevent resale between the two countries. What techniques can it use to discourage
A monopoly currently sells its product at a single price. What conditions must be met so that it can profitably price discriminate?
Disneyland price discriminates by charging lower entry fees for children than adults and for local residents than for other visitors. Why does it not have a resale problem?
On July 12, 2012, Hertz charged $ 126.12 to rent a Nissan Altima for one day in New York City, but only $ 55.49 a day in Miami. Is this price discrimination? Explain.
If a monopoly faces an inverse demand function of p = 90 – Q, has a constant marginal and average cost of 30, and can perfectly price discriminate, what is its profit? What are the consumer
How would the answers to Q& A 10.1 and Table 10.1 change if seniors€™ reservation price was $5?
A firm is a natural monopoly. Its marginal cost curve is flat, and its average cost curve is downward sloping (because it has a fixed cost). The firm can perfectly price discriminate. a. In a graph,
To promote her platinum-selling CD Feels Like Home in 2005, singer Norah Jones toured the country for live performances. However, she sold an average of only two- thirds of the tickets available for
A firm charges different prices to two groups. Would the firm ever operate where it was suffering a loss from its sales to the low-price group? Explain.
Does a monopoly’s ability to price discriminate between two groups of consumers depend on its marginal cost curve? Why or why not?
Spenser’s Superior Stoves advertises a one- day sale on electric stoves. The ad specifies that no phone orders are accepted and that the purchaser must transport the stove. Why does the firm
According to a report from the Foundation for Taxpayer and Consumer Rights, gasoline costs twice as much in Europe as in the United States because taxes are higher in Europe. However, the amount per
A monopoly sells its good in the U.S. and Japanese markets. The American inverse demand function is pA = 100 – QA, and the Japanese inverse demand function is pJ = 80 – 2QJ, where both prices, pA
A patent gave Sony a legal monopoly to produce a robot dog called Aibo (“ eye- BO”). The Chihuahua- size pooch robot can sit, beg, chase balls, dance, and play an electronic tune. When Sony
In Q&A 10.2, calculate the firm’s profit with and without a ban against shipments between the two countries.
How would the analysis in Q& A 10.2 change if MC = 7?
A monopoly has a marginal cost of zero and faces two groups of consumers. At first, the monopoly could not prevent resale, so it maximized its profit by charging everyone the same price, p = $ 5. No
Are all the (identical) customers of the nonlinear price- discriminating monopoly in panel a of figure worse off than they would be if the firm set a single (uniform) price (panel b)? What if the
Assume that the quantity- discriminating monopoly in panel a of Figure 10.4 can set three prices, depending on the quantity a consumer purchases. The firm’s profit isp = p1Q1 + p2(Q2 - Q1) + p3(Q3
In the nonlinear price discrimination analysis in panel a of Figure, suppose that the monopoly can make consumers a take- it-or-leave-it offer. a. Suppose the monopoly sets a price, p*, and a minimum
Grocery store chains often set consumer- specific prices by issuing frequent- buyer cards to willing customers and collecting information about their purchases. Grocery chains can use that data to
Using math, show why, under two-part pricing, customers who purchase fewer units pay more on average per unit than do customers who buy more units.
Knoebels Amusement Park in Elysburg, Pennsylvania, charges an access fee, A, to enter its Crystal Pool. It also charges p per trip down the pool’s water slides. Suppose that 400 teenagers visit the
Joe has just moved to a small town with only one golf course, the Northlands Golf Club. His inverse demand function is p = 120 – 2q, where q is the number of rounds of golf that he plays per year.
Joe in Question 5.3 marries Susan, who is also an enthusiastic golfer. Susan wants to join the Northlands Club. The manager believes that Susan’s inverse demand function is p = 100 – 2q. The
As described in the Mini-Case “Available for a Song,” Shiller and Waldfogel (2011) estimated that if iTunes used two-part pricing charging an annual access fee and a low price per song, it would
A monopoly sells two products, of which any given consumer wants to buy only one (and places no value on the other good). If the monopoly can prevent resale, can it increase its profit by bundling
A computer hardware firm sells both laptop computers and printers. It has a large inventory of laptops and printers that it wants to sell, so it has no variable production cost. Through the magic of
Why do Honda service departments emphasize to customers the importance of using “genuine Honda parts” when servicing and tuning Honda cars and motorcycles? Is Honda likely to be as successful as
The inverse demand curve facing a resort hotel is p = 300 – Q during the high season and p = 100 – Q during the low season. The resort’s marginal cost is $ 50 per night in cleaning costs for
Paradise Cruises has a monopoly in renting luxury yachts for sailing in the Caribbean Sea. In winter its monthly inverse demand function is p = 200 – q. In summer the inverse demand function is p =
Based on the information in Question, determine the profit- maximizing uniform price. Does Paradise Cruises earn a higher profit under peak- load pricing or uniform pricing? Compare consumer surplus
Each week, a department store places a different item of clothing on sale. Give an explanation based on price discrimination for why the store conducts such regular sales.
In most “normal” years (years in which the market has not been disrupted by Middle East wars), at each Organization of Petroleum Exporting Countries (OPEC) meeting, Saudi Arabia, the largest oil
Many retail stores offer to match or beat the price offered by a rival store. Explain why firms that belong to a cartel might make this offer.
What are the main factors that increase the likelihood of a cartel being successful?
A market has an inverse demand curve p = 100 – 2Q and four firms, each of which has a constant marginal cost of MC = 20. If the firms form a profit-maximizing cartel and agree to operate subject to
According to Robert Guy Matthews, “Fixed Costs Chafe at Steel Mills,” Wall Street Journal, June 10, 2009, stainless steel manufacturers increased prices even though the market demand curve had
What is the homogeneous- good duopoly’s Nash- Cournot equilibrium if the market demand function is Q = 1,000 – 1,000p and each firm’s marginal cost is $ 0.28 per unit?
The state of Connecticut sets a maximum fee that bail-bond businesses can charge for posting a given-size bond (Ayres and Waldfogel, 1994). The bail-bond fee is set at virtually the maximum amount
In 2012, Southwest Airlines reported that its “cost per available seat mile” was 13.0¢ compared to 13.8¢ for United Airlines. Assuming that Southwest and United compete on a single route, use a
In a homogeneous-good Cournot model where each of the n firms has a constant marginal cost m and the market demand curve is p = a – bQ, show that the Nash-Cournot equilibrium output of a typical
A homogeneous- good duopoly faces an inverse market demand of p = 120 – Q. Firm 1 has a constant marginal cost of MC1 = 20. Firm 2’s constant marginal cost is MC2 = 30. Calculate the output of
Why does differentiating its product allow an oligopoly to charge a higher price?
In a Nash- Cournot equilibrium, does an oligopolistic firm produce at less than full capacity, at full capacity, or more than full capacity? Explain.
In 2008, cruise ship lines announced they were increasing prices from $ 7 to $ 9 per person per day because of increased fuel costs. According to one analyst, fuel costs for Carnival Corporation’s
To examine the trade- off between efficiency and market power from a merger, consider a market with two firms that sell identical products. Firm 1 has a constant marginal cost of 1, and Firm 2 has a
Duopoly quantity-setting firms face the market demandp = 150 - q1 - q2.Each firm has a marginal cost of $ 60 per unit. What is the Nash-Cournot equilibrium?
Your college is considering renting space in the student union to one or two commercial textbook stores. The rent the college can charge per square foot of space depends on the firms’ profit
How does the Nash-Cournot equilibrium change in the airline example if United Airlines’ marginal cost is $ 100 and American’s is $ 200?
Firms 1 and 2 produce differentiated goods. Firm 1’s inverse demand function is p1 = 260 – 2q1 – q2, while Firm 2’s inverse demand function is p2 = 260 – 2q2 – q1. Each firm has a
If firms produce identical products and have the same constant marginal cost, m, explain why the Nash- Bertrand equilibrium price and market quantity are the same regardless of whether there are two
In an initial Nash- Bertrand equilibrium, two firms with differentiated products charge the same equilibrium prices. A consumer testing agency praises the product of one firm, causing its demand
Suppose that identical duopoly firms have constant marginal costs of $ 10 per unit. Firm 1 faces a demand function of q1 = 100 - 2p1 + p2, where q1 is Firm 1’ s output, p1 is Firm 1’ s price, and
Solve for the Nash-Bertrand equilibrium for the firms described in Question 3.4 if Firm 1’s marginal cost is $ 30 per unit and Firm 2’s marginal cost is $ 10 per unit.
What is the effect on prices and the number of firms under monopolistic competition if a government subsidy is introduced that reduces the fixed cost of each firm in the industry?
Under monopolistic competition with identical firms, is it possible for a firm to produce at the minimum of its average cost curve?
In a monopolistically competitive market, the government applies a specific tax of $ 1 per unit of output. What happens to the profit of a typical firm in this market? Does the number of firms in the
Shows that a monopolistically competitive firm maximizes its profit where it is operating at less than full capacity. Does this result depend upon whether firms produce identical or differentiated
An incumbent firm, Firm 1, faces a potential entrant, Firm 2 that has a lower marginal cost. The market demand curve is p = 120 – q1 – q2. Firm 1 has a constant marginal cost of $20, where Firm
Show the profit matrix and explain the reasoning in the prisoners’ dilemma example where Larry and Duncan, possible criminals, will get one year in prison if neither talks, two years in jail if
Two firms compete by advertising. Given the payoff matrix to this advertising game, identify each firm€™s best response to its rival€™s possible actions. Does either firm have a
Two firms face the following profit matrix:Is it true that, given these profits, Firm 2 wants to match Firm 1€™s price, but Firm 1 does not want to match Firm 2€™s price? Does
Suppose that Toyota and GM are considering entering a market for electric automobiles and that their profits (in millions of dollars) from entering or staying out of the market areIf the firm makes
Firm 1 and Firm 2 manufacture blankets. They compete in quality. Given their payoff matrix, identify each firm€™s best response to its rival€™s actions. What is the
Modify Question 1.5 so that if Firm 1 chooses High and Firm 2 chooses Low (the upper right corner), Firm 1 receives 1 rather than 3. How does that change youranswer?
Assume the network scheduling profit matrix isHow many pure- strategy Nash equilibria does this game have? Explain.
Given the network profit matrix in Question 2.1, can cheap talk help the networks settle on a single equilibrium? Why or why not?
Given the network profit matrix in Question 2.2, can the Pareto criterion help the networks settle on a single equilibrium? Explain. 2.4.
Two firms face the following profit matrix:Given these profits, Firm 2 wants to match Firm 1’s price, but Firm 1 does not want to match Firm 2’s price. Does either firm have a dominant strategy?
Takashi Hashiyama, president of the Japanese electronics firm Maspro Denkoh Corporation, was torn between having Christie’s or Sotheby’s auction the company’s $ 20 million art collection, which
The recent recession hit young people particularly hard. In June 2010, 15.3% of 20-to 24-year-old Americans were unemployed, compared to 8.2% for older workers. As a result, more adult children moved
Show that the mixed-strategy equilibrium for the game in Table 12.7 has both firms enter with probability 1/3.
How would the analysis in Q & A 12.2 change if the payoffs to both firms are 3 in the upper left corner of the profit matrix (where both firms choose the Amazon standard) and the payoffs to both
Suppose that you and a friend play a “matching pennies” game in which each of you uncovers a penny. If both pennies show heads or both show tails, you keep both. If one shows heads and the other
Lori employs Max. She wants him to work hard rather than to loaf. She considers offering him a bonus or not giving him one. All else the same, Max prefers to loaf.If they choose actions
Suppose we have the following payoff matrix for a complementary investment game. The number in the lower left corner is the payoff to Wild and Crazy Guys (WCG). The other number is the payoff to
How do your answer to question 3.1 change if everything in the profit matrix remains the same except that Blues Brothers loses 5 (payoff is – 5) if it invests and WCG doesn’t invest (the upper
Traditionally, the Harrison Resort Hotel sponsors an annual festival, making a significant investment in marketing to attract tourists to its hotel. Julie, the manager to nearby Lakeshore Flowers,
In the used car bargaining problem in Q& A 12.3, if Bo can get only 9 elsewhere, does the Nash bargaining solution change in Jane’s favor? Why?
Oculus and Maxygen are small drug companies. Oculus has obtained a patent on a new antibiotic that is effective against an emerging superbug—a bacteria that is resistant to traditional antibiotics.
Situations of the type described in Question 4.2 are fairly common in the drug business and sales of patent rights are common. However, sometimes negotiations over such sales take a long time and
Charity events often use silent auctions. A donated item, such as a date with a movie star, is put up for bid. (See www.ecorazzi.com/2008/02/22/ebay-and-oxfam-help-you-win-a-date-with-colin-firth for
At the end of performances of his Broadway play “Cyrano de Bergerac,” Kevin Kline, who starred as Cyrano, the cavalier poet with a huge nose, auctioned his prosthetic proboscis, which he and his
Suppose that Firm 1, Firm 2, and Firm 3 are the only three firms interested in the lot at the corner of First Street and Glendon Way. The lot is being auctioned by a second-price sealed-bid auction.
In the Managerial Solution safety game, could cheap talk lead both firms to invest in safety? Why or why not? What is the minimum fine that the government could levy on firms that do not invest in
Two firms are planning to sell 10 or 20 units of their goods and face the following profit matrix:a. What is the Nash equilibrium if both firms make their decisions simultaneously? What strategy does
In the repeated-game airline example illustrated in Table 13.1, what happens if the players know the game will last only five periods? What happens if the game is played forever but the managers of
In a repeated game, how does the outcome differ if firms know that the game will be? (a) Repeated indefinitely, (b) Repeated a known, finite number of times, (c) Repeated a finite number of times but

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