Managerial Economics & Business Strategy 9th Edition By Michael Baye – Test Bank

Chapter 11
Pricing Strategies for Firms with Market Power

Multiple Choice Questions

1. 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 −4, then your profit-maximizing price is:
A. $2.00.
B. $2.50.
C. $4.00.
D. $5.00.

Answer: C
Learning Objective: 11-01
Topic: Basic Pricing Strategies
Blooms: Apply
AACSB: Analytical Thinking
Difficulty: 02 Medium

2. You are the manager of a gas station and your goal is to maximize profits. Based on your past experience, the elasticity of demand by Texans for a car wash is −4, while the elasticity of demand by non-Texans for a car wash is −6. If you charge Texans $20 for a car wash, how much should you charge a man with Oklahoma license plates for a car wash?
A. $1.50
B. $15.00
C. $18.00
D. $20.00

Answer: C
Learning Objective: 11-01
Topic: Basic Pricing Strategies
Blooms: Apply
AACSB: Analytical Thinking
Difficulty: 03 Hard

3. Which of the following is true for perfect competition but not true for monopolistic competition and monopoly?
A. MC = MR
B. P = MC
C. Positive long run profits
D. P = MC and positive long run profits

Answer: B
Learning Objective: 11-02
Topic: Basic Pricing Strategies
Blooms: Understand
AACSB: Knowledge Application
Difficulty: 02 Medium

4. A monopoly producing a chip at a marginal cost of $6 per unit faces a demand elasticity of −2.5. Which price should it charge to optimize its profits?
A. $6 per unit
B. $8 per unit
C. $10 per unit
D. $12 per unit

Answer: C
Learning Objective: 11-01
Topic: Basic Pricing Strategies
Blooms: Apply
AACSB: Analytical Thinking
Difficulty: 02 Medium

5. A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. Which of the following is the marginal revenue function for the firm?
A. MR = 60 − 2Q
B. MR = 50 − Q
C. MR = 100 − Q
D. MR = 50 − 2Q

Answer: D
Learning Objective: 11-01
Topic: Basic Pricing Strategies
Blooms: Apply
AACSB: Analytical Thinking
Difficulty: 01 Easy

6. A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. The monopoly price is:
A. $30.
B. $20.
C. $10.
D. $40.

Answer: A
Learning Objective: 11-01
Topic: Basic Pricing Strategies
Blooms: Apply
AACSB: Analytical Thinking
Difficulty: 02 Medium

7. A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. The demand elasticity of a widget at the monopoly price and quantity is:
A. −1.5.
B. −2.
C. −2.5.
D. 2.

Answer: A
Learning Objective: 11-01
Topic: Basic Pricing Strategies
Blooms: Apply
AACSB: Analytical Thinking
Difficulty: 02 Medium

8. A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. What are the profits of the monopoly in equilibrium?
A. $300
B. $400
C. $500
D. $600

Answer: B
Learning Objective: 11-01
Topic: Basic Pricing Strategies
Blooms: Apply
AACSB: Analytical Thinking
Difficulty: 03 Hard

9. A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. Suppose fixed costs rise to $400. What happens in the market?
A. The firm will raise the price.
B. The firm will shut down immediately.
C. The firm continues to produce the same output and charge the same price.
D. The firm will reduce its output and raise price.

Answer: C
Learning Objective: 11-01
Topic: Basic Pricing Strategies
Blooms: Apply
AACSB: Analytical Thinking
Difficulty: 03 Hard

10. Which of the following is NOT a condition for a firm to engage in price discrimination?
A. Consumers are partitioned into two or more types, with one type having a more elastic demand than the other.
B. The firm has a means of identifying consumer types.
C. The consumers are sincere in revealing their true natures.
D. There is no resale market for the good.

Answer: C
Learning Objective: 11-02
Topic: Strategies That Yield Even Greater Profits
Blooms: Remember
AACSB: Knowledge Application
Difficulty: 01 Easy