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UNIVERSITY OF PITTSBURGH

Katz Graduate School of Business

BECN 2401 Stanko Racic

SAMPLE FINAL EXAM

This examination is worth a total of 100 points. You may chose between problem II and III, but you have to do problems IV and V. Please write your answers to the multiple choice questions in the provided answer sheet. Please write your answers to the problems on the exam itself. Please write legibly and show work for partial credit. If I cannot read it, it is wrong.

I. There are 35 multiple choice questions worth 2 points each for a total of 70 points.

1. Which of the following is true in the long run under perfect competition?

a. marginal cost = average cost

b. marginal cost = price.

c. average cost = price.

^ d. all of the above.

2. For a perfectly competitive firm, if P = $10 and the firm's total costs are given by TC = 10 + 2Q + Q2, the profit maximizing rate of output in the short run will be

a. 10

b. 8

c. 0

^ d. 4

3. In the short run, managers will if price is expected to remain below average total cost, but remain above the firm's average variable cost.

a. shut down.

^ b. continue operating, but earn less than a normal profit.

c. continue operating, but earn zero economic profit.

d. none of the above.

4. Monopolistic competition is characterized by

a. few firms selling identical products.

b. few firms selling differentiated products.

c. many firms selling identical products.

^ d. many firms selling differentiated products.

5. A profit maximizing monopolistically competitive firm in long-run equilibrium will

a. face a perfectly elastic demand curve.

^ b. produce where price is greater than marginal cost.

c. produce more than a perfectly competitive firm would.

d. produce at minimum average total cost.

6. Which of the following describes the assumptions of the kinked demand model?

a. a price increase by one producer is matched by other producers.

b. a price cut by one producer is not matched by other producers.

^ c. a price cut by one producer is matched by other producers.

d. none of the above.

7. The kinked demand curve is

^ a. highly elastic for price increases and less elastic for price cuts.

b. highly inelastic for price increases and more elastic for price cuts.

c. highly elastic for both price increases and decreases.

d. infinitely elastic for price increases.

8. The kinked demand curve model is used to illustrate why

^ a. oligopolists may tend to change prices infrequently.

b. there are no economic profits in the long run in monopolistic competition.

c. the demand curve is inelastic for price increases.

d. collusion is unlikely in oligopolies.

9. The firm's break even point is achieved when:

a. MC = AVC.

b. MC = AFC.

c. MC = MR.

^ d. TC = TR.

10. In the long run, managers will if price remains below average cost.

^ a. shut down.

b. continue operating, but earn less than a normal profit.

c. continue operating, but earn zero economic profit.

d. none of the above.

11. If marginal revenue is less than marginal cost, increasing output would

^ a. reduce profits.

b. increase profits.

c. have no impact on profits.

d. reduce the rate of growth in profits.

12. It will be rational for a firm to use more and more of a single variable input as long as what it yields in additional revenue

a. is less than the amount paid for the input.

^ b. exceeds the additional cost associated with using it.

c. is greater than its marginal product.

d. does not change fixed cost.

13. 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.

14. A firm in monopolistic competition differs from one in perfect competition because

^ a. it faces a downward sloping demand curve.

b. it always has increasing returns to scale.

c. entry into its market is severely limited.

d. it has no concept of marginal cost.

15. All of the following are characteristics of monopolistic competition except

a. the use of advertising to differentiate products.

b. a relative large number of sellers.

c. each seller is not particularly concerned with other competitors.

^ d. a few sellers.

16. Cournot's duopoly model makes the following assumption

a. each firm assumes its competitor keeps its price constant.

b. each firm assumes its competitor will match any price decrease.

^ c. each firm assumes its competitor will keep its output constant.

d. each firm assumes its competitor will keep its profits constant.

17. Which of the following statements is true?

a. The more elastic the demand, the higher is the profit-maximizing markup.

^ b. The more elastic the demand, the lower is the profit-maximizing markup.

c. The higher the marginal cost, the lower the profit-maximizing price.

d. The higher the average cost, the lower the profit-maximizing price.

18. During spring break, students have an elasticity of demand for a trip to Florida of -3. How much should an airline charge students if the general public has an elasticity of -2 and is charged $360?

a. $240

b. $250

c. $260

^ d. $270

19. A perfectly competitive firm faces:

^ a. a perfectly elastic demand function.

b. a perfectly inelastic demand function.

c. a demand function with unitary elasticity.

d. none of the above.

20. The special demand structure that induces a firm to use a cross subsidization is:

a. perfect substitution among products.

b. imperfect substitution among products.

c. independent demand for products.

^ d. interdependent demand for products.

21. Which of the following is true?

a. a monopolist produces on the inelastic portion of its demand.

b. a monopolist always earns an economic profit.

c. the more inelastic the demand, the closer marginal revenue is to price.

^ d. in the short run a monopoly will shutdown if P < AVC.

22. A finitely repeated game differs from an infinitely repeated game in that:

a. the former need a lower interest rate to support collusion than the latter needs.

^ b. there is an "end-of-period" problem for the former.

c. in a finitely repeated game with a certain end period, collusion is likely because effective punishment can be used during any time period.

d. in an infinitely repeated game, collusion is always a Nash equilibrium.

23. Oligopoly differs from monopoly as follows

^ a. oligopoly involves a few firms, monopoly involves a single firm.

b. oligopoly does use advertisement, monopoly does not use advertisement.

c. oligopoly involves free entry, monopoly involves no free entry.

d. both a and c.

24. In perfect competition, which is not true?

^ a. every firm has a small and perceivable market power.

b. there are a large number of firms.

c. firms are price takers.

d. firms produce homogeneous goods.

25. The products in a monopolistically competitive industry are

a. homogeneous.

^ b. heterogenous.

c. competitive.

d. uncompetitive.

26. Which of the following is true under monopoly

a. profits are always positive.

^ b. P > MC.

c. P = MR.

d. all of the above.

27. Which firm would you expect to make the lowest profits, other things equal:

^ a. Bertrand oligopolist.

b. Cournot oligopolist.

c. Sweezy oligopolist.

d. Stackelberg oligopolist.

28. Which feature is common to both perfectly and monopolistically competitive markets

a. firms produce homogeneous goods.

b. there is free entry.

c. long run profits are zero.

^ d. both b and c.

29. The source(s) of monopoly power for a monopoly may be

a. economies of scale.

b. economies of scope.

c. patents.

^ d. all of the above.

30. In the long run monopolistically competitive firms produce output such that

a. P > MC.

b. P = ATC.

c. ATC > minimum average cost.

^ d. all of the above.

31. Which of the following is true:

a. in Bertrand oligopoly each firm believes that their rivals will hold their output constant if it changes its output.

b. in Cournot oligopoly firms produce an identical product at a constant marginal cost and engage in price competition.

c. in oligopoly a change in marginal cost never has an effect on output or price.

^ d. none of the above are true.

32. Firms behave the same no matter what type of oligopoly it is. This statement is

a. true.

^ b. false.

c. true of homogeneous product industries.

d. none of the above.

33. The spirit of equating marginal cost with marginal revenue is not held by

a. perfectly competitive firms.

b. oligopolistic firms.

c. both a and b.

^ d. none of the above.

34. An oligopolist has a marginal revenue curve that jumps down at 500 units of output. What kind of oligopoly does the firm most likely belong to?

^ a. Sweezy.

b. Cournot.

c. Stackelberg.

d. Bertrand.

35. The dominated strategy of Player 2 in following payoff matrix is:

Player 2

T1 T2 T3

Player 1 S1 10, 0 5, 1 4, -200

S2 10, 100 5, 0 0, -100

a. T1.

b. T2.

^ c. T3.

d. a dominated strategy does not exist.

II. (10 points) The following demand curve has been estimated for a monopoly firm: Q = 250 - 0.4P, where Q is the quantity sold per month and P is the price charged by the firm. The firm's total cost function is:

TC = 1,000 + 7.5Q2 + (1/15)Q3.

a. At what output and price will firm maximize total revenue?

Inverse demand: P = 625 - 2.5Q

To maximize TR find FONC: [pic] => Q = 125

P|Q=125 = 625 - 2.5(125) = 312.5

b. At what output and price will firm maximize total profit?

To maximize T( find FONC: [pic]

[pic]

M( = 625 - 20Q - 0.2Q2 = 0

[pic], since Q= -125 makes no sense.

P|Q=25 = 625 - 2.5(25) = 562.5

c. Compare the maximum profit obtainable with the profit that the firm would have if it chose a revenue-maximizing strategy.

T(|Q=125 = 312.5(125) - [1,000 + 7.5(125)2 + (1/15)1253] = -209,333.333

T(|Q=25 = 562.5(25) - [1,000 + 7.5(25)2 + (1/15)253] = 7,333.33

III. (10 points) Determine whether the following perfectly competitive firm should produce output in the short run or temporarily shut down, given:

P = $250 and TC = 5,250 +100Q + 2.5Q2.

If the firm does not operate, it loses TFC = 5,250.

If it maximizes profit and produces where

MR = P = 250 = 100 + 5Q = MC => Q = 30.

AVC = (100Q + 2.5Q2) / Q = 100 + 2.5Q = 100 + 2.5(30) = 175 < 250 = P.

Therefore, firm should produce.

b. What profit or loss will the firm have if it operates where MR = MC? Does this profit or loss check with your decision on whether to produce or temporary shut down?

T( = TR - TC = 250(30) - 5,250 -100(30) - 2.5(30)2 = - 3,000 > -5,200 = TFC.

Yes, because the loss is less than the fixed cost, and therefore the firm will lose more money if it shut down and paid just its fixed cost.

IV. (10 points) The demand for spring water is given by P = 1000 - QT, where QT is the total amount of product sold. The marginal cost is zero.

a. If there are two firms in the market and they behave like Cournot oligopolists, determine their reaction functions.

P = 1000 - (Qi + Qj) => MRi = 1000 - 2Qi - Qj

For reaction function

Mri = 1000 - 2Qi - Qj = 0 = MCi => [pic]

b. What will be the equilibrium price and equilibrium output (for each firm and total) in Cournot duopoly?

Substitute Qj into Qi to collapse two equations with two unknowns into one equation with one unknown and solve:

[pic] QT = 666.67

Substitute into inverse demand function P = 1000 - 666.67 = 333.33

c. What would be the price and output for a monopolist?

P = 1000 - Q MR = 1000 - 2Q

To maximize monopoly profit MR = 1000 - 2Q = 0 = MC => Q = 500

Substitute into inverse demand function P = 1000 - 500 = 500

V. (10 points) The ATS Railroad runs a freight train daily between Chicago and St Louis. Two major customers use this service: Chicago Beef Distributors and Canadian Gypsum Company. The demand for freight cars is given by the following equations:

Qb = 50 - 0.125Pb for Chicago Beef Distributors, and

Qg = 60 - 0.2Pg for Canadian Gypsum Company.

ATS Railroad's cost function is given as: TC = 5,000 + 80Q.

a. With price discrimination what will be the quantity demanded by each customer?

Max ( where MC = MRb = MRg.

Inverse demand: Pb = 400 - 8Qb

Marginal revenue: MRb = 400 - 16Qb = 80 = MC => Qb = 20.

Inverse demand: Pg = 300 - 5Qg

Marginal revenue: MRg = 300 - 10Qb = 80 = MC => Qg = 22.

b. What prices will be charged each customer?

Pb = 400 - 8Qb = 400 - 8(20) = 240.

Pg = 300 - 5Qg = 300 - 5(22) = 190.

c. What will be ATS Railroad's total profit?

T( = TR - TC = Pb Qb + Pg Qg - 5,000 - 80(Qb + Qg)

= 240(20) + 190(22) - 5,000 - 80(20 + 22) = 620.

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