Set of flashcards Microeconomics Mock Q's 1-3 (Page 2 of 3)

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Category	Micro-Economics
Level	University
Created / Updated	29.06.2021 / 22.06.2024
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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

Compute the Cournot equilibrium quantities and price in this market

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

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

Which-one(s) of the following statement(s) is/are correct?
I. Under the conditions of perfect competition, the supply function calculates the quantity a supplier is willing to produce in function of the selling price as well as the cost of the input factors needed for production.
II. Given everything else is held constant, an increase in the cost of labour leads to upward shift of the supply curve. Mathematically, this corresponds to a higher intercept.
III. An increase in the cost of the input factors has no effect on the supply curve because the market price decides, which quantity a firm is willing to supply.

Statements I and II are correct.

All three statements are correct.

Statements II and III are correct.

Which-one of the following statements is correct?
Given are the following denotations:
MPL : marginal product of labour
MPK : marginal product of capital
PL : price of labour
PK : price of capital

If a firm wants to maximise output per monetary unit of input cost, then, given a two-factor production function with labour and capital, the following condition must hold: MPL = MPK

If a firm wants to maximise output per monetary unit of input cost, then, given a two-factor production function with labour and capital, the following condition must hold: MPL/PL = MPK/PK .

If a firm wants to maximise output per monetary unit of input cost, then, given a two-factor production function with labour and capital, the following condition must hold: MPL × PL = MPK × PK

Which one of the following statements is correct?

Under the conditions of perfect competition, firms are price takers only if they must lower their price to sell more units

Under the conditions of monopolistic competition, in the absence of price discrimination, marginal revenue is not constant. It increases if more units are produced and sold at the market price

Under the conditions of perfect competition marginal revenue is equal to average revenue.

The diagram below illustrates the cost structure of a firm in a perfectly competitive market.

a) Fill in the three empty boxes in the diagram above, labelling the three curves.

b) If the thick horizontal line represents the market price, explicate the meaning of the two points M1 and M2. Further specify, whether under such a condition as presented above, the firm can make an economic profit. Substantiated your answer, explaining under which conditions a firm can make economic profit! 2 points

c) Name and explicate the vertical difference between curve A and curve B.

d) Explicate the meaning of the broken line. For a simple answer like: That is the market price, no points will be given

b) Point M1 represents the break-even point regarding variable cost, however, average fixed cost is not necessarily covered; the end the profit zone with respect to variable cost only, point M2, on the other hand, marks the quantity beyond which no profit at all (on average, neither explicit nor implicit opportunity cost is fully covered).
An economic profit is not necessarily possible, economic profit is made only if AFC is above P .

C) Curve A includes the average fixed cost and therefore represents all economic cost (implicit and explicit opportunity cost) of the firm.

d)The broken line represents the minimum price (marginal revenue) the firm must obtain in order to cover total variable cost in the short run (for at least one specific output quantity). If the price falls below that level, the firm will shut down immediately.

In your new job, you are responsible for the cost management in the production of a newly designed garden swing seat. Your predecessor has already worked on this project before you. She identified the following supply function:
QSx = –220 + 2.8Px – 10 W
QSx : quantity supplied
Px : selling price for one unit
W : wage per hour

a) Explicate the meaning of the term “+ 2.8Px “ in the above quoted supply function.

If the unit price increases by $1, then the supplier is willing to increase production by 2.8 units.

Identify the supply function for an hourly wage of $25

QSx = –220 + 2.8Px – 10 W

QSx = –220 + 2.8Px – 10 W
QSx = –220 + 2.8Px – 10 × 25 = –220 + 2.8Px – 250 = –470 + 2.8Px
QSx = –470 + 2.8Px

Given is the supply function of a specific firm:
QSx = –400 + 8Px

Px = 0.25QSx + 50

Px = 0.152QSx + 5

Px = 0.125QSx + 50

None of the above

Given is the supply function of a specific firm:
QSx = –400 + 8Px

The inverse supply function is:

QSx = –400 + 8Px
QSx + 400 = + 8Px
0.125QSx + 50 = Px
Px = 0.125QSx + 50

If the unit price is $200, how big is the quantity supplied and the corresponding producer surplus?

Quantitiy supply =1200 units

Producer surplus = (150 x 1200)/2 = 90,000

Explain the term “producer surplus”.

Producer surplus refers to the difference between total revenue sellers receive from selling a given amount of a good and the total variable cost of producing that amount.

Assume that an individual supplier has the following supply function

QSx = –200 + 4Px – 5 W
Where: QSx : quantity supplied
Px : selling price for one unit
W : wage per hour

Which of the three functions below represents the aggregate market supply curve? Assume that the wage per hour is 20, and that the market consists of 10 identical firms.

Px = 0.025QSx + 150

Px = 0.025QSx + 75

Px = 0.25QSx + 75

None of the above

Assume that an individual supplier has the following supply function:
QSx = –200 + 4Px – 5 W
Where: QSx : quantity supplied
Px : selling price for one unit
W : wage per hour
Which of the three functions below represents the aggregate market supply curve? Assume that the wage per hour is 20, and that the market consists of 10 identical firms.

QSx = 10 × (–200 + 4Px – 5 W) = –2000 + 40Px – 50 W
QSx = –2000 + 40Px – 50 × 20
QSx = –2000 + 40Px – 1000
QSx = –3000 + 40Px
Inverse supply function:
QSx + 3000 = 40Px
40Px = QSx + 3000
Px = 0.025QSx + 75

The following diagram illustrates a consumer’s optimal combination of good A and good B (given her preferences as illustrated by the indifference curve) and the budget constraint BEFORE (point P1) AND AFTER (point P2) a given price REDUCTION of good A.

a)Specify which one (effect 1 or 2) is the substitution effect and which effect is the income effect.

b)The change in the quantity consumed of good A is partly due to the substitution effect and the income effect. Explain what these two effects mean. 2

c)Identify whether good A is a normal good, an inferior good, a Giffen or a Veblen good. Substantiate your answer

d)The above diagram depicts two indifference curves. The slope of an indifference curve illustrates the so-called marginal rate of substitution MRS. Explicate the term “marginal rate of substitution” and explain, why the MRS is not constant.

b)substitution effect: The change in the amount of a good that would be consumed as the price of that good changes, holding constant all other prices and the level of utility. It is measured on the initial indifference curve/utility level.
income effect: The change in the amount of a good that a consumer would buy as purchasing power changes, holding all prices constant.

c)Because the income effect is negative, and its magnitude outweighs the substitution effect, it is a Giffen good.

d)As a consumer moves along an indifference curve, consuming different amounts of good X and Y, the marginal utilities of good X and Y are in constant change. Therefore, the MRS, which indicates how much of good Y a consumer is willing to give up for an additional unit of good X also decreases as you move to the right. (MRS = negative value of the slope of the indifference curve. As that slope is negative itself, MRS is written without a negative sign.)

I. Consumer choice theory can be defined as the branch of microeconomics that relates consumer demand curves to production and cost theory.
II. A consumption bundle, or consumption basket, is a specific combination of goods and services that a consumer would like to consume.
III. Under reasonable assumptions, it is possible to come up with a rule that translates the quantities of goods in different baskets into a number. That assignment is called the utility function of that consumer.

Statements I and II are correct.

All three statements are correct.

Statements II and III are correct.

Rowena and John both have identical bundles of good A and good B, however they are NOT on the same indifference curve.
The marginal rate of substitution MRSA for B for Rowena is 5, whereas the MRSA for B for John is 0.2 . They both agree to exchange one unit of A for one unit of B.
Which of the following statements is correct?

If Rowena gives to John one unit of B in exchange for one unit of A, they will, as a result, both end up on a higher-ranking indifference curve.

If Rowena gives to John one unit of B in exchange for one unit of A, she will, as a result, end up on a higher-ranking indifference curve. Al, however, will stay on the original indifference curve.

If Rowena gives to John one unit of A in exchange for one unit of B, they will, as a result, both end up on a higher-ranking indifference curve.

None of the above.

A travel agent (operating in imperfect competition) offering package tour holidays to Iceland is considering a price reduction of 500 francs on two-week all-inclusive vacations to Iceland from 10,000 francs to 9,500 francs. The number of monthly bookings is, as a consequence, expected to increase from 5 to 7. Therefore, the marginal revenue earned per additional booking amounts to:

16,500 francs

8,250 francs

8,500 francs

None of the above

A company introduces a new product. The product is patented, therefore they are the only supplier. Given a constant marginal cost of 10, and a price elasticity of demand of -1.11, the unit price, according the inverse elasticity pricing rule (IEPR), should be:

50

100

120

none of the above

I. Price discrimination (charging different prices for different consumers) offers a firm with market power an opportunity to capture more surplus.
II. Block pricing is an example of third-degree price discrimination. So is the splitting of the price charged to consumers into a subscription and a usage charge.
III. Price discrimination (charging different prices for different consumers) offers a firm, given certain conditions are met, an opportunity to capture more surplus. Yet, this is not true for firms that have no information about so-called reservation prices (i.e., a consumer’s maximum willingness to pay for that unit) or about how the price- elasticity of demand differs across consumers.

All statements are correct.

Only statement I is correct.

Statements I and III are correct.

None of the above

Suppose, a monopolist faces the following demand curve: P = 150 – 2Q. The monopolist has two plants, which each have different marginal cost curves. They are as follows:
Marginal cost curve of plant 1: MC1 = 8 + 16Q1
Marginal cost curve of plant 2: MC2 = 40 + 5Q2

a) Find the monopolists optimal total quantity and price.

For plant 1: Q1 = 0.0625 MC1 – 0.5
For plant 2: Q2 = 0.2 MC2 – 8
Q1 + Q2 = QT = 0.2625 MCT – 8.5
So:
MCT = 3.81QT + 32.385
NOW: MC = MR = 3.81QT + 32.385 = 150 – 4QT
7.81Q = 117.615
Q = 15.1
And P = 119.8 (rounded figure: 120)

Find the optimal division of the monopolist’s quantity between its two plants.

MCT = 3.81QT + 32.385

If Q = 15.1 then MC = 57.531 + 32.385 = 89.916
For plant 1: Q1 = 0.0625 MC1 – 0.5 = 5.11975 (rounded figure: 5)
For plant 2: Q2 = 0.2 MC2 – 8 = 9.9832 (rounded figure: 10)

Which one of the following statements is correct?

First-degree price discrimination describes the practice of charging different uniform prices to different consumer groups or segments in a market.

Third-degree price discrimination describes the practice of offering consumers a quantity discount

Screening describes a process for sorting consumers based on a consumer characteristic that (1) the firm can see (such as age or status) and (2) is strongly related to a consumer characteristic that the firm cannot see but would like to observe (such as willingness to pay or elasticity of demand)

In a “homogeneous goods” duopoly, two firms, River Inc. and Forest Inc. are fierce competitors. The inverse market demand is given by P = 200 – 0.9Q. This can be rewritten as P = 200 – 0.9Q1 – 0.9Q2 where Q1 denotes River Inc.’s output, and Q2 denotes Forest Inc.’s output. The marginal cost for each firm is 17.

Given this inverse market demand function, what is River Inc.’s profit-maximising quantity if Forest Inc. produces 60 units?

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 units

The inverse market demand is given by P = 200 – 0.9Q. This can be rewritten as P = 200 – 0.9Q1 – 0.9Q2 where Q1 denotes River Inc.’s output, and Q2 denotes Forest Inc.’s output

Determine River 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

Compute the Cournot equilibrium quantities and price in this market

Q1 = 101.67 – 0.5Q2

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

Which one of the following statements is correct?

The Cournot model pertains to a homogeneous products oligopoly. In that model, the only decision each firm needs to make is to determine the maximum level of marginal cost which is compatible with maximising profit.

The Herfindahl-Hirschman Index HHI is a useful measure to determine the share of industry sales revenue generated by the four firms with the largest sales revenue in the industry

The Cournot and Bertrand models make different predictions about the quantities, prices, and profits that will arise under oligopolistic competition. This is partly due to the fact that they make different assumptions about how a firm expects its rival to react to its competitive moves.

Which one of the following statements is correct?

A reaction function shows a firm’s best response (i.e., profit-maximising output choice) to the output level of a rival firm.

In the Cournot model, each firm’s output choice depends on the market price, and the market price depends solely on the output of the dominant, leading firm.

In homogenous products oligopoly markets, a small number of firms sell products that are substitutes for each other but also differ from each other in significant ways.

ROLEY is a high-end producer of smoothies. It is well known, and its products are truly sought-after. With respect to a box containing 10 bottles each, each of their clients has the following inverse demand function:
P = 12 – 0.5 Qd
Qd : quantity demanded
P : unit price
The marginal cost of producing one box of 10 bottles is 2. ROLEY now follows a pricing strategy based on block pricing. If the price of the first block is equal to the price charged in the absence of price discrimination, the unit price for the second block and the quantity of the second block (for each individual commercial client) are as follows:

a

b

c

d

I. A Nash equilibrium describes a situation in which there exists at least one dominant strategy for one player.
II. In a Nash equilibrium the aggregate payoff of the players is maximised.
III. At the Nash equilibrium, expected behaviour and actual behaviour converge.

Only the statements I and III are true

Only the statements II and III are true.

Only statement III is true.

None of the above

In the table below, the figures on the left-hand side represent the payoff of player A, and the figures on the right hand side represent the payoff of player B.

The game above is an example of a prisoner's dilemma.

In the game above, there is no Nash equilibrium.

In the game above, there are multiple Nash equilibria.

In a repeated prisoner’s dilemma game, the likelihood of a cooperative outcome increases if:

Cheating is hard to detect.

Interactions between players are frequent.

Players can earn a comparatively large one-time game from cheating.

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

Assume the marginal cost of the transportation of one passenger is constant and amounts to CHF 40. For the purpose of this question, neglect fixed cost (i.e. assume that there is no fixed cost).
If fixed cost is not taken into account, how much profit would AtlanticWings earn with that route?

With marginal cost at 40 and a unit price of 270 a profit of 230 is generated by each ticket sold. With a quantity of 11,500, total profit amounts to
11,500 x 230 = 2,645,000

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.

Find the profit maximising price and quantity for business class passengers.

MR = MC = 40 = 4500 – 1Q
Q = 4,460
P business = 4500 – 0.5 Q business
P business = 4500 – 2230 = 2,270

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.

Find the profit maximising price and quantity for economy class passengers

MR = MC = 40 = 333 – 0.042 Q
293 = 0.042 Q
Q = 6,976
P economy = 333 – 0.021 Q economy
P economy = 333 – 0.021 x 6,976 = 186.5

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

With marginal cost at 40 and a unit price of 270 a profit of 230 is generated by each ticket sold. With a quantity of 11,500, total profit amounts to
11,500 x 230 = 2,645,000

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

Please compare

A)With marginal cost at 40 and a unit price of 270 a profit of 230 is generated by each ticket sold. With a quantity of 11,500, total profit amounts to
11,500 x 230 = 2,645,000

B)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

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

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.

In the case of the highly risky investment project (i.e., the lottery), what is the probability that there will be no return whatsoever?

65%

Microeconomics Mock Q's 1-3

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