Lahore School of Economics



Lahore School of Economics

Microeconomics II

BSc 2 – Section B

Quiz 2B – Total Points: 40

Name:

An electric power company uses block pricing for electricity sales. Block pricing is an example of

a. first-degree price discrimination.

b. second-degree price discrimination.

c. third-degree price discrimination.

d. Block pricing is not a type of price discrimination.

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing

a. first-degree price discrimination.

b. second-degree price discrimination.

c. third-degree price discrimination.

d. fourth-degree price discrimination.

e. fifth-degree price discrimination.

A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). Having sold all of its output it discovers that the marginal revenue in the local market is $20 while its marginal revenue on the internet auction site is $30. To maximize profits the firm should

a. have sold more output in the local market and less at the internet auction site.

b. do nothing until it acquires more information on costs.

c. have sold less output in the local market and more on the internet auction site.

d. sell less in both markets until marginal revenue is zero.

e. sell more in both markets until marginal cost is zero.

You are the producer of stereo components. There are two markets, foreign and domestic. The two groups of consumers cannot trade with one another. If your firm practices third-degree price discrimination, when you have maximized profits, the marginal revenue

a. in the foreign market will equal the marginal cost.

b. in the domestic market will equal the marginal cost.

c. in the domestic market will equal the marginal revenue in the domestic market.

d. all of the above.

e. none of the above

In third-degree price discrimination a firm faces two markets. In the first market the firm charges $30 per unit, and in the second market it charges $22 per unit. Which of the following represents the ratio of elasticities of demand in the two markets?

a. E2 = (21/29)E1.

b. E2 = (29/21)E1

c. E2 = E1.

d. E2 = (22/30)E1.

e. none of these.

When a monopolist engages in perfect price discrimination,

a. the marginal revenue curve lies below the demand curve.

b. the demand curve and the marginal revenue curve are identical.

c. marginal cost becomes zero.

d. the marginal revenue curve becomes horizontal.

In peak load pricing,

a. marginal revenue is equal in both periods.

b. marginal revenue in the peak period is greater than in the off-peak period.

c. marginal revenue in the peak period is less than in the off-peak period.

d. the sum of the marginal revenues is greater than the sum of the marginal costs.

The price of on-campus parking from 8:00 AM to 5:00 PM, Monday through Friday, is $3.00. From 5:00 PM to 10:00 PM, Monday through Friday, the price is $1.00. At all other times parking is free. This is an example of

a. bundling.

b. second-degree price discrimination.

c. a two-part tariff.

d. tying.

e. none of the above.

A firm setting a two-part tariff with only one customer should set the entry fee equal to

a. marginal cost.

b. consumer surplus.

c. marginal revenue.

d. price.

A local restaurant sells strawberry pie for $3.00 per slice. However, if you order the prime rib dinner, you can get a slice of pie for only a dollar. This is an example of

a. bundling.

b. second-degree price discrimination.

c. a two-part tariff.

d. tying.

e. none of the above.

Bundling raises higher revenues than selling the goods separately when

a. demands for two goods are highly positively correlated.

b. demands for two products are mildly positively correlated.

c. demands for two products are negatively correlated.

d. there is a perfect positive correlation between the demands for two goods.

e. the goods are complementary in nature.

One Guy's Pizza advertising expenditures are $1,200 and sales are $30,000. When advertising increases to $1,400, sales increase to $32,000. The arc advertising elasticity of demand is approximately

a. 0

b. 0.1

c. 0.4

d. 2.5

e. 12.5

Use the following statements to answer this question.

I. To maximize profit, a firm will increase its advertising expenditures until the last dollar of advertising just brings forth an additional dollar of revenue.

II. The full marginal cost of advertising is the sum of the dollar spent directly on advertising and the marginal production cost that results form the increased sales that advertising brings about.

a. Both I and II are true.

b. I is true, and II is false.

c. I is false, and II is true.

d. Both I and II are false.

Which of the following is NOT regarded as a source of inefficiency in monopolistic competition?

a. the fact that price exceeds marginal cost.

b. excess capacity.

c. product diversity.

d. the fact that long-run average cost is not minimized.

e. all of the above.

What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter?

a. It shifts right.

b. It shifts left.

c. It becomes horizontal.

d. New entrants will not affect an incumbent firm's demand curve.

Which of the following is true of the output level produced by a firm in long run equilibrium in a monopolistically competitive industry?

a. It produces at minimum average cost.

b. It does not produce at minimum average cost, and average cost is increasing.

c. It does not produce at minimum average cost, and average cost is decreasing.

d. Either (b) or (c) could be true.

Question 1

Cinegold cinema charges Rs 150 per ticket for children under 12 years of age and Rs 300 per ticket for anyone 12 years of age or older. The firm has estimated that the price elasticity of demand for tickets by those 12 years of age or older is -1.5. Calculate what the elasticity of demand for tickets must be for children under 12 years of age if prices are optimal. (4 points)

300/150 = (1 + 1/E2 ) / (1 + 1/- 1.5)

E2= - 3

Question 2

The local zoo has hired you to assist them in setting admission prices. The zoo's managers recognize that there are two distinct demand curves for zoo admission. One demand curve applies to those ages 12 to 64, while the other is for children and senior citizens. The two demand and marginal revenue curves are:

PA = 9.6 - 0.08QAs

PCS = 10 - 0.05QCS

where PA = adult price, PCS = children’s/senior citizen’s price, QA = daily quantity of adults, and QCS = daily quantity of children and senior citizens. Crowding is a major problem at the zoo, so the managers consider marginal cost to be 5 + [(QA + QCS)/10]

a. If the zoo decides to price discriminate, what should the price and quantity be in each market? Calculate total revenue in each sub-market. (8 points)

b. What is the elasticity of demand at the quantities calculated in (a) for each market. Are these elasticities consistent with your understanding of profit maximization and the relationship between marginal revenue and elasticity? (Use MR and Ed formula) (4 points)

a.

MRA = 9.6 – 0.16QA = MC = 5 + 0.1QA + 0.1QCS ( (1)

MRCS = 10 – 0.1QCS = MC = 5 + 0.1QA + 0.1QCS

From (1)

9.6 – 0.16QA = 5 + 0.1QA + 0.1QCS

4.6 – 0.26QA = 0.1QCS

QA = (4.6 – 0.1QCS)/0.26

QA = 17.69 – 0.385QCS

10 – 0.1QCS = 5 + 0.1QA + 0.1QCS

5 – 0.2QCS = 0.1(17.69 – 0.385QCS)

5 – 0.2QCS = 1.769 – 0.0385QCS

3.231 = 0.1615QCS

QCS = 20

QA = 17.69 – 0.385QCS = 17.69 – 0.385 (20)

QA = 10

b. MR = P(1 + 1/ED)

P = 9.6 - 0.08QA = 9.6 – 0.08(10) = 9.6 – 0.8 = 8.8

MRA = 9.6 – 0.16(10) = 8

8 = 8.8 ( 1 + 1/E) ( E = 1 / [(8/8.8) – 1] = -11

P = 10 - 0.05QCS = 10 – 0.05(20) = 9

MRCS = 10 – 0.1(20) = 8

8 = 9 ( 1 + 1/E) ( E = 1/ [(8/9) – 1)] = -9

Yes. The management is charging higher price to the relatively inelastic demand curve

Question 3

Customers attending football games at LSE must pay for parking on the grounds and then pay for a ticket needed to enter the arena. If the arena manager knows that the customers' identical demands can be expressed collectively as

P = 25 – 0.000625Q

How much of a parking fee could the management collect if the marginal cost of providing entertainment were a constant MC = $10 per seat? (8 points)

Consider the parking fee to be the first part of a two-part tariff. The parking fee for the arena would be the entire consumer surplus.

Find the quantity at which the marginal cost curve intersects the demand curve:

Set 10 = 25 – 0.000625 Q

Then Q = 24,000

CS = (0.5)(24,000)(25 – 10) = 180,000

Then CS/Q = 180,000/24,000 = 7.50 which is the parking fee per customer.

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24,000 40,000 Q

MC

D

25

10

P

•

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