AtlanticWings is a nationall airline that was recently granted a new route. It estimates that the aggregate annual market demand function for that route is as follows: Qdair travel = 25,000 – 50 P air travel Qd air travel : number of one-way tickets bought in one year P air travel : unit price for a one-way air ticket AtlanticWings has conducted some market research and found out that its clients can be grouped into business clients who indicate a willingness to pay extra to fly business class, and holiday travellers choosing “economy class”. The aggregate demand curve of business travellers is P business = 4500 – 0.5Q business and the aggregate demand curve of economy class passengers is P economy = 333 – 0.021 Q economy. The marginal cost for transporting both types of passengers is 40. AtlanticWings now decides to switch to third degree-price discrimination. If fixed costs are not taken into account, how much total profit would AtlanticWings make with third-degree price differentiation?

Profit made in the business class: (2,270 – 40) x 4,460 = 9,945,800 Profit made in the economy class: (186.5 – 40) x 6,976 = 1,021,984 Total profit: 10,967,784

AtlanticWings is a nationall airline that was recently granted a new route. It estimates that the aggregate annual market demand function for that route is as follows: Qdair travel = 25,000 – 50 P air travel Qd air travel : number of one-way tickets bought in one year P air travel : unit price for a one-way air ticket Please compare your answers to questions a) and b3). Comment!

10,967,784 – 2,645,000 = 8,322,784 Due to third degree price discrimination profit could be much increased (by 314%).

When we say that the perfectly competitive market equilibrium is efficient, we mean that:

There are no unrealized gains from trade.

Any consumer who is willing to pay the opportunity cost of resources is able to buy; any consumer who is not willing to pay the opportunity cost of resources does not buy.

card2brain.ch

In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only

Explicate what is meant by the term “risk premium”.

The term “risk premium” describes the necessary difference between the expected value of a lottery and the payoff of a sure thing to make a risk averse decision maker indifferent between the lottery and the sure thing. It is the amount by which the payoff of the sure thing must decrease to make the decision maker indifferent between it and the lottery.

Which-one(s) of the following statement(s) is/are correct?

I. According to the theory of comparative advantage, free trade between two countries is mutually beneficial, if each country specialises in the production of those goods where the opportunity cost of producing another unit is only marginally higher than in the other country.
II. According to the theory of comparative advantage, free trade between two countries is mutually beneficial, if each country specialises in the production of those goods where the opportunity cost of producing another unit is lower than in the other country.
III. According to the theory of comparative advantage, free trade between two countries is mutually beneficial only, if at least one country has an absolute advantage in the production of one good.

None of the statements is correct.

Only statement II is correct.

Statements II and III are correct.

None of the statements is correct.

Only statement II is correct.

Statements II and III are correct.

1. Which of the following statements is true?

More is Better implies that indifference curves have a negative slope.

Transitivity implies that indifference curves have a negative slope.

Completeness implies that indifference curves cannot cross.

Transitivity implies that indifference curves must be convex to the origin.

More is Better implies that indifference curves have a negative slope.

Transitivity implies that indifference curves have a negative slope.

Completeness implies that indifference curves cannot cross.

Transitivity implies that indifference curves must be convex to the origin.

Suppose that a consumer has utility function U = .1h + f. Which of the following is true?

The marginal utility of h is .1

The marginal utility of h is decreasing.

The marginal rate of substitution between h and f is .1.

The marginal utility of h is .1

The marginal utility of h is decreasing.

The marginal rate of substitution between h and f is .1.

A utility function written as U = Axy, where x and y are goods and and are constants represents:

quasilinear preferences.

Perfect complements.

Perfect substitutes.

Cobb-Douglas preferences.

quasilinear preferences.

Perfect complements.

Perfect substitutes.

Cobb-Douglas preferences.

Suppose that the price of good A is $4, the price of good B is $2 and the consumer's
income is $60. Which of the following baskets is not on the consumer's budget line?

A = 20, B = 5

A = 10, B = 10

A = 5, B = 20

A = 15, B = 0

A = 20, B = 5

A = 10, B = 10

A = 5, B = 20

A = 15, B = 0

At a consumer's interior optimum solution, which of the following will not necessarily
hold true when the consumer can purchase goods x and y?

MUx = MUy

MUx/MUy = Px/Py

MRSx,y = MUx/MUy

MRSx,y = Px/Py

MUx = MUy

MUx/MUy = Px/Py

MRSx,y = MUx/MUy

MRSx,y = Px/Py

Identify the statement that is false:

An increase in the amount of income changes the intercepts of the budget constraint but not the slope.

An increase in the price of good x changes both the x-intercept and the slope of the budget constraint.

An increase in the price of good x and an equal percentage increases in the price of good y changes the x-intercept, the y-intercept and the slope of the budget constraint.

An increase in the price of good x and an increase in the price of good y may or may not change the slope of the budget constraint.

An increase in the amount of income changes the intercepts of the budget constraint but not the slope.

An increase in the price of good x changes both the x-intercept and the slope of the budget constraint.

An increase in the price of good x and an equal percentage increases in the price of good y changes the x-intercept, the y-intercept and the slope of the budget constraint.

An increase in the price of good x and an increase in the price of good y may or may not change the slope of the budget constraint.

Economists describe consumer choice as a constrained optimization problem. What is the
consumer trying to do?

Maximize income subject to the budget constraint.

Maximize the budget constraint.

Maximize utility subject to the budget constraint.

Maximize utility.

Maximize income subject to the budget constraint.

Maximize the budget constraint.

Maximize utility subject to the budget constraint.

Maximize utility.

Which of the following is NOT a characteristic of a perfectly competitive market?

All firms have equal access to technology in the long run.

All consumers have perfect information about prices.

All firms must be identical.

ach buyer's purchases must have an imperceptible effect on market price.

All firms have equal access to technology in the long run.

All consumers have perfect information about prices.

All firms must be identical.

ach buyer's purchases must have an imperceptible effect on market price.

Which of the following statements could be true for a perfectly competitive industry?

Exit and entry occur only in the short run.

Exit and entry may occur in either the short or the long run.

The firm's supply curve is flat in the long run.

The industry's supply curve is flat in the long run.

Exit and entry occur only in the short run.

Exit and entry may occur in either the short or the long run.

The firm's supply curve is flat in the long run.

The industry's supply curve is flat in the long run.

A firm's total cost function is: TC = 100 + q. What is the shut-down condition of this
firm?

P> AVC(q)

P > ANSC(q)

P ³> AC(q)

P> AVC(q)

P > ANSC(q)

P ³> AC(q)

Each firm in a perfectly competitive industry has the total cost curve: TC(q) = q2 + 100.
The associated marginal cost is MC = $2q. What is the short run firm supply curve for this
industry?

P = 2q above PS = $20

P= 2q above PS = $0

P = $100 + q2 above PS = $20

P = 2q above PS = $20

P= 2q above PS = $0

P = $100 + q2 above PS = $20

Is the following true or false? "It is not possible for consumers' surplus and producers'
surplus to rise and for a deadweight loss to occur, simultaneously."

Ans: False
Response: Consider the case of a subsidy. In this case, you can see from the diagram that
producers' surplus and consumers' surplus rise, but a deadweight loss is created because
production past the point where the willingness to pay of consumers equals the opportunity
cost of resources. For units between Q* and Q2, the subsidy causes consumers to demand the
product even though their willingness to pay falls below the opportunity cost. [Image:
Fig10001.gif] Another way to think of the problem is the following: while total surplus is
producers' surplus plus consumers' surplus, we must also factor in the cost of the program
that is put in place. Here, the deadweight loss occurs because the government must pay
consumers to purchase past the equilibrium point and this money must come from
somewhere. The deadweight loss occurs because the cost of this program exceeds its benefits
by causing a misallocation of resources towards purchase of this product.
Section: 10.4 Subsidies

The equilibrium conditions in a perfectly competitive market where a subsidy, T, is paid
to producers are:

QD = QS

QD = QS and PD - T = PS.

QD = QS and PD + T = PS

PD + T = PS.

QD = QS

QD = QS and PD - T = PS.

QD = QS and PD + T = PS

PD + T = PS.

Consider a perfectly competitive market with market supply QS = 5P and QD = 200 - 5P.
What is consumer surplus in this market?

100

1000

2000

100

1000

2000

Consider a perfectly competitive market with market supply QS = 10P and market demand
QD = 420 – 60P. What is total surplus in this market?

420

120

210

420

120

210

Which of the following statements is false?

With a price floor, the market will not clear.

With a price floor, consumers will buy less of the good than they would in a free market.

With a price floor, producer surplus will always increase.

With a price floor, there will be excess supply.

With a price floor, the market will not clear.

With a price floor, consumers will buy less of the good than they would in a free market.

With a price floor, producer surplus will always increase.

With a price floor, there will be excess supply.

For any particular good, an increase in the price of a complement would most likely
result in?

A movement along the demand curve to the right

A shift in the demand curve to the left

A shift in the demand curve to the right

Commandes clavier:

= tourner,

= avant/arrière,

= faire défiler

A movement along the demand curve to the right

A shift in the demand curve to the left

A shift in the demand curve to the right

Consider the following statements:
Statement I: If close substitutes are easily available for a particular good, the price
elasticity of demand for that good cannot be identified.
Statement II: If a relatively large proportion of a person’s income is spent on a
particular good, the price elasticity of demand for that good is most likely
relatively high.
Which of the following is true?

Both statements are incorrect.

Both statements are correct.

Only one statement II is correct

Commandes clavier:

= tourner,

= avant/arrière,

= faire défiler

Both statements are incorrect.

Both statements are correct.

Only one statement II is correct

Consider the following statements:
Statement I: If the price elasticity of demand for a good equals -1.25, an increase in
price will result in a decrease in total revenue.
Statement II: If a decrease in price leads to a decrease in total revenue, demand for
the good is price elastic.
Which of the following is true?

Only Statement I is correct.

Only Statement II is correct.

Both Statements are incorrect.

Commandes clavier:

= tourner,

= avant/arrière,

= faire défiler

Only Statement I is correct.

Only Statement II is correct.

Both Statements are incorrect.

When a rent ceiling (maximum price) is imposed below the equilibrium market
price, which of the following is most likely?

The unit price falls while quantity supplied increases

The unit price rises while quantity demanded falls

The unit price falls and the quantity supplied also falls.

Commandes clavier:

= tourner,

= avant/arrière,

= faire défiler

The unit price falls while quantity supplied increases

The unit price rises while quantity demanded falls

The unit price falls and the quantity supplied also falls.

Which of the following is least likely regarding indifference curves?

For a given consumer, the slope of one indifference curve changes along the indifference curve.

The indifference curves for two consumers can never intersect.

indifference curves are convex when viewed from the origin.

Commandes clavier:

= tourner,

= avant/arrière,

= faire défiler

For a given consumer, the slope of one indifference curve changes along the indifference curve.

The indifference curves for two consumers can never intersect.

indifference curves are convex when viewed from the origin.

Robert’s MRSxy is given by 2.5. If Good Y is on the y axis and Good X is on the x axis,
the slope of the indifference curve is closest to?

2.5

-2.5

-0.4

Commandes clavier:

= tourner,

= avant/arrière,

= faire défiler

2.5

-2.5

-0.4

This question addresses the budget constraint: The amount of Good A that a
consumer would have to give up in order to consume 1 more unit of Good B is given
by:

The ratio of the price of Good A to Good B

The marginal rate of substation of Good B for Good A

The ratio of the price of Good B to Good A

Commandes clavier:

= tourner,

= avant/arrière,

= faire défiler

The ratio of the price of Good A to Good B

The marginal rate of substation of Good B for Good A

The ratio of the price of Good B to Good A

For any particular good, an decrease in the price of a complement would most likely result in?

A movement along the demand curve to the right

A shift in the demand curve to the left

A shift in the demand curve to the right

Commandes clavier:

= tourner,

= avant/arrière,

= faire défiler

A movement along the demand curve to the right

A shift in the demand curve to the left

A shift in the demand curve to the right

Consider the following statements:
Statement I: The availability of close substitutes for a particular good A has no effect on the price elasticity of demand for that good A.
Statement II: If a comparatively small proportion of a person’s income is spent on a particular good, the price elasticity of demand for that good is comparatively high (i.e. very elastic).
Which of the following is most likely true?

Both statements are incorrect.

Both statements are correct.

Only one statement is correct

Commandes clavier:

= tourner,

= avant/arrière,

= faire défiler

Both statements are incorrect.

Both statements are correct.

Only one statement is correct

Consider the following statements:
Statement I: If the price elasticity of demand for a good equals -2.5, an increase in price will result in a decrease in total revenue.
Statement II: If a decrease in price leads to an increase in total revenue, the demand for that good is price elastic.
Which of the following is most likely true?

Only Statement I is incorrect.

Only Statement II is incorrect.

Both Statements are incorrect.

Commandes clavier:

= tourner,

= avant/arrière,

= faire défiler

Only Statement I is incorrect.

Only Statement II is incorrect.

Both Statements are incorrect.

When a price floor is imposed above the equilibrium market price, which of the following is most likely true?

Price falls while quantity supplied increases

Price rises while quantity demanded falls

Price and quantity supplied both fall

Price falls while quantity supplied increases

Price rises while quantity demanded falls

Price and quantity supplied both fall

Which of the following statements is most likely true??

The indifference curves for two different consumers cannot intersect.

For a given consumer, the slope of one indifference curve changes along the indifference curve.

Total utility enjoyed by a consumer changes along one given indifference curve.

The indifference curves for two different consumers cannot intersect.

For a given consumer, the slope of one indifference curve changes along the indifference curve.

Total utility enjoyed by a consumer changes along one given indifference curve.

Peter’s MRSxy is given by 1.5. If Good Y is on the y axis and Good X is on the x axis, the slope of the indifference curve is closest to?

1.5

-0.67

-1.5

1.5

-0.67

-1.5

This question addresses the budget constraint: The amount of Good A that a consumer would have to give up in order to consume one more unit of Good B is given by:

The ratio of the price of Good A to Good B

The marginal rate of substitution of Good B for Good A

The ratio of the price of Good B to Good A

The ratio of the price of Good A to Good B

The marginal rate of substitution of Good B for Good A

The ratio of the price of Good B to Good A

Which one of the following statements is correct?

If a monopolist faces the inverse demand function P = 50 - 5Q, which of the following statements is true?
I. The equation of the average revenue curve is AR(Q) = 50 – 5Q.
II. The marginal revenue curve is twice as steep as the average revenue curve.
III. For outputs less than 5, marginal revenue is positive, for outputs more than 5, marginal revenue is negative.

Only the statements I and II are true.

Only the statements II and III are true.

All three statements, I, II, and III are true

Only the statements I and II are true.

Only the statements II and III are true.

All three statements, I, II, and III are true

Suppose that a monopolist faced demand P = 120 - 4Q and has constant marginal cost MC = 30. If this monopolist engages in first degree price discrimination, total output will equal?

11.25

30

22.5

11.25

30

22.5

In a “homogeneous goods” duopoly, two firms, Rooler Inc. and AFG are fierce competitors. The market demand is given by P = 200 – 0.9Q1 – 0.9Q2. Q1 denotes Rooler Inc.’s output, and Q2 denotes AFG’s output. The marginal cost of each firm is 17.

a) Given this market demand function, what is Rooler Inc.’s profit-maximising quantity if AFG produces 60 units (in 1,000s)?

Q2 = 60
P = 200 – 0.9Q1 – 0.9 × 60 = 146 – 0.9Q1
The corresponding marginal revenue is:
MR = 146 – 1.8Q1
17 = 146 – 1.8Q1
129 = 1.8Q1
Q1 = 71.67 = 71,667 units

In a “homogeneous goods” duopoly, two firms, Rooler Inc. and AFG are fierce competitors. The market demand is given by P = 200 – 0.9Q1 – 0.9Q2. Q1 denotes Rooler Inc.’s output, and Q2 denotes AFG’s output. The marginal cost of each firm is 17.

Determine Rooler Inc.’s so-called “reaction function”.

P = (200 – 0.9Q2) – 0.9Q1
Therefore:
MR = (200 – 0.9Q2) – 1.8Q1 = 17
183 – 0.9 Q2 = 1.8 Q1
Q1 = 101.67 – 0.5Q2

In a “homogeneous goods” duopoly, two firms, Rooler Inc. and AFG are fierce competitors. The market demand is given by P = 200 – 0.9Q1 – 0.9Q2. Q1 denotes Rooler Inc.’s output, and Q2 denotes AFG’s output. The marginal cost of each firm is 17.

Compute the Cournot equilibrium quantities and price in this market.

Q2 = 101.67 – 0.5Q2
1.5Q2 = 101.67
Q2 = 67.78 = 67,778 units
P = 200 – 0.9 × 67.78 – 0.9 × 67.78
P = 78

Your employer, a pharmaceutical company, has a patent on a specific antibiotic. The inverse demand function for that drug is as follows: P = 800 – 4Q. Marginal cost is constant and equal to 100.
Use the inverse elasticity pricing rule IEPR to determine the profit maximising price and quantity. Clearly indicate your method and approach to the solution.

P = 800 – 4Q
Q = 200 – 0.25P
Therefore:
= – 0.25 x (P/Q) = – 0.25P/(200 – 0.25P )
since Q = 200 – 0.25P we obtain:
(P – 100) / P = -1 / [ – 0.25P/(200 – 0.25P ) ]
P – 100 = (200 – 0.25P ) / 0.25
0.25P – 25 = 200 – 0.25P
0.5P = 225
P = 450
Now we substitute P = 450 into the demand function:
Q = 200 – 0.25P = 200 – 0.25 x 450 = 200 – 112.5
Q = 87.5