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BSc II-Sec B
Microeconomics Spring 2010
Quiz 2A
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.
b.
c.
d.
first-degree price discrimination.
second-degree price discrimination.
third-degree price discrimination.
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.
b.
c.
d.
e.
first-degree price discrimination.
second-degree price discrimination.
third-degree price discrimination.
fourth-degree price discrimination.
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.
b.
c.
d.
e.
have sold more output in the local market and less at the internet auction site.
do nothing until it acquires more information on costs.
have sold less output in the local market and more on the internet auction site.
sell less in both markets until marginal revenue is zero.
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 thirddegree price discrimination, when you have maximized profits, the marginal revenue
a.
b.
c.
d.
e.
in the foreign market will equal the marginal cost.
in the domestic market will equal the marginal cost.
in the domestic market will equal the marginal revenue in the domestic market.
all of the above.
none of the above
-1-
BSc II-Sec B
Microeconomics Spring 2010
Quiz 2A
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.
b.
c.
d.
e.
E2 = (21/29)E1.
E2 = (29/21)E1
E2 = E1.
E2 = (22/30)E1.
none of these.
When a monopolist engages in perfect price discrimination,
a.
b.
c.
d.
the marginal revenue curve lies below the demand curve.
the demand curve and the marginal revenue curve are identical.
marginal cost becomes zero.
the marginal revenue curve becomes horizontal.
In peak load pricing,
a.
b.
c.
d.
marginal revenue is equal in both periods.
marginal revenue in the peak period is greater than in the off-peak period.
marginal revenue in the peak period is less than in the off-peak period.
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.
b.
c.
d.
e.
bundling.
second-degree price discrimination.
a two-part tariff.
tying.
none of the above.
A firm setting a two-part tariff with only one customer should set the entry fee equal to
a.
b.
c.
d.
marginal cost.
consumer surplus.
marginal revenue.
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.
b.
c.
d.
e.
bundling.
second-degree price discrimination.
a two-part tariff.
tying.
none of the above.
-2-
BSc II-Sec B
Microeconomics Spring 2010
Quiz 2A
Bundling raises higher revenues than selling the goods separately when
a.
b.
c.
d.
e.
demands for two goods are highly positively correlated.
demands for two products are mildly positively correlated.
demands for two products are negatively correlated.
there is a perfect positive correlation between the demands for two goods.
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.
b.
c.
d.
e.
0
0.1
0.4
2.5
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.
b.
c.
d.
Both I and II are true.
I is true, and II is false.
I is false, and II is true.
Both I and II are false.
Which of the following is NOT regarded as a source of inefficiency in monopolistic
competition?
a.
b.
c.
d.
e.
the fact that price exceeds marginal cost.
excess capacity.
product diversity.
the fact that long-run average cost is not minimized.
all of the above.
What happens to an incumbent firm's demand curve in monopolistic competition as new
firms enter?
a.
b.
c.
d.
It shifts right.
It shifts left.
It becomes horizontal.
New entrants will not affect an incumbent firm's demand curve.
-3-
BSc II-Sec B
Microeconomics Spring 2010
Quiz 2A
Which of the following is true of the output level produced by a firm in long run equilibrium
in a monopolistically competitive industry?
a.
b.
c.
d.
It produces at minimum average cost.
It does not produce at minimum average cost, and average cost is increasing.
It does not produce at minimum average cost, and average cost is decreasing.
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
-4-
BSc II-Sec B
Microeconomics Spring 2010
Quiz 2A
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:
P
25
10
•
24,000
-5-
M
D
C
40,000 Q
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.