An Informative Microeconomics Quiz!

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An Informative Microeconomics Quiz! - Quiz

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Questions and Answers
  • 1. 

    The maximum price that a consumer is willing to pay for each unit bought is the ________ price. 

    • A.

      Reservation

    • B.

      Consumer surplus

    • C.

      Auction

    • D.

      Choke

    • E.

      Market

    Correct Answer
    A. Reservation
    Explanation
    The maximum price that a consumer is willing to pay for each unit bought is referred to as the reservation price. This is the highest price that a consumer is willing to pay in order to obtain a product or service. It represents the consumer's perceived value or utility of the product, and any price above this level would result in the consumer not making a purchase.

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  • 2. 

    Third-degree price discrimination involves....

    • A.

      Charging each consumer the same two part tariff.

    • B.

      The use of increasing block rate pricing.

    • C.

      Charging lower prices the greater the quantity purchased.

    • D.

      Charging different prices to different groups based upon differences in elasticity of demand.

    Correct Answer
    D. Charging different prices to different groups based upon differences in elasticity of demand.
    Explanation
    Third-degree price discrimination involves charging different prices to different groups based upon differences in elasticity of demand. This means that the seller will charge higher prices to consumers with a more inelastic demand, who are less sensitive to price changes, and lower prices to consumers with a more elastic demand, who are more sensitive to price changes. By doing so, the seller can capture a larger portion of consumer surplus and increase their profits.

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  • 3. 

    Second-degree price discrimination is the practice of charging..

    • A.

      Each customer the maximum price that he or she is willing to pay

    • B.

      The reservation price to each customer

    • C.

      Different groups of customers different prices for the same products

    • D.

      Different prices for different blocks of the same good or service.

    Correct Answer
    D. Different prices for different blocks of the same good or service.
    Explanation
    Second-degree price discrimination is the practice of charging different prices for different blocks of the same good or service. This means that the seller divides the market into distinct groups based on certain characteristics or purchasing behaviors, and then sets different prices for each group. By doing so, the seller can capture more consumer surplus and maximize profits. This strategy is often used when it is difficult to identify individual customers' reservation prices or when the seller wants to incentivize certain purchasing behaviors.

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  • 4. 

    McDonald's restaurant located near the high school offered a Tuesday special for high school students.  If high school students showed their student ID cards, they would be given 50 cents off any special meal.  This practice is an example of: 

    • A.

      Price discrimination

    • B.

      Tying

    • C.

      Two-part tariff

    • D.

      Collusion

    • E.

      Bundling

    Correct Answer
    A. Price discrimination
    Explanation
    The practice described in the question, where McDonald's offers a special discount to high school students who show their student ID cards, is an example of price discrimination. Price discrimination refers to the practice of charging different prices to different customers for the same product or service based on their willingness to pay. In this case, McDonald's is offering a lower price to high school students as a way to attract their business and potentially increase their sales.

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  • 5. 

    Suppose that the marginal cost of an additional ton of steel produced by the Japanese is the same whether the steel is set aside for domestic use or exported abroad.  If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct? 

    • A.

      The Japanese will sell steel at a higher price abroad than they will charge domestic users.

    • B.

      The Japanese will sell more steel in Japan than they will sell abroad.

    • C.

      The Japanese will sell more steel abroad than they will sell in Japan.

    • D.

      The Japanese will sell steel at a lower price abroad than they will charge domestic users.

    • E.

      Insufficient information exists to determine whether the price or quantity will be higher or lower abroad.

    Correct Answer
    D. The Japanese will sell steel at a lower price abroad than they will charge domestic users.
    Explanation
    If the price elasticity of demand for steel is greater abroad than it is in Japan, it means that the demand for steel is more responsive to changes in price in the foreign market compared to the domestic market. This implies that if the Japanese want to sell more steel abroad, they will have to lower the price to attract more buyers. On the other hand, since the demand is less responsive to price changes in Japan, the Japanese can charge higher prices to domestic users. Therefore, the correct answer is that the Japanese will sell steel at a lower price abroad than they will charge domestic users.

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  • 6. 

    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.

      Sell less in both markets until marginal revenue is zero.

    • B.

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

    • C.

      Do nothing until it acquires more information on costs.

    • D.

      Have sold less output in the local market and more on the internet auction site

    • E.

      Sell more in both markets until marginal cost is zero.

    Correct Answer
    E. Sell more in both markets until marginal cost is zero.
    Explanation
    The correct answer is to sell more in both markets until marginal cost is zero. This is because a monopolist in third-degree price discrimination aims to maximize profits by equating marginal revenue with marginal cost in each market. Since the marginal revenue in the local market is $20 and the marginal revenue on the internet auction site is $30, the firm should continue to sell more in both markets until the marginal cost reaches zero. This will allow the firm to maximize its profits by producing and selling at the point where marginal cost equals marginal revenue in each market.

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  • 7. 

    For a perfect first-degree price discriminator, incremental revenue is..

    • A.

      Less than the marginal revenue for a non-discriminating monopolist.

    • B.

      Greater than price if the demand curve is downward sloping

    • C.

      Equal to the price paid for each unit of output.

    • D.

      The same as the marginal revenue curve if the firm is a non-discriminating monopolist.

    Correct Answer
    C. Equal to the price paid for each unit of output.
    Explanation
    For a perfect first-degree price discriminator, incremental revenue is equal to the price paid for each unit of output. This means that the additional revenue generated from selling one more unit of output is equal to the price charged for that unit. In other words, the price charged for each unit is based on the individual consumer's willingness to pay, maximizing the total revenue for the firm. This is different from a non-discriminating monopolist, where the incremental revenue is less than the marginal revenue, as the monopolist must lower the price to sell additional units.

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  • 8. 

    A firm sells an identical product to two groups of consumers, A and B.  The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits.  Which of the following best describes the price and output strategy that will maximize profits? 

    • A.

      MRA = MRB = MC.

    • B.

      MRA = MRB.

    • C.

      (MRA - MRB) = (1 - MC).

    • D.

      PA = PB = MC.

    Correct Answer
    A. MRA = MRB = MC.
    Explanation
    The correct answer is MRA = MRB = MC. This means that the marginal revenue for both groups of consumers is equal to the marginal cost. By setting prices in this way, the firm can maximize its profits because it is charging the highest price that each group of consumers is willing to pay, while also ensuring that the cost of producing each additional unit is covered. This strategy allows the firm to capture the maximum possible revenue from both groups of consumers without incurring any additional costs.

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  • 9. 

    Under perfect price discrimination, marginal profit at each level of output equal 

    • A.

      P - MC

    • B.

      P - AR

    • C.

      P - AC

    • D.

      0.

    Correct Answer
    A. P - MC
    Explanation
    Under perfect price discrimination, the marginal profit at each level of output is equal to the difference between the price (P) and the marginal cost (MC). This means that the firm is able to charge each customer the maximum price they are willing to pay, resulting in the highest possible profit. By setting the price equal to the marginal cost, the firm maximizes its profit by capturing the entire consumer surplus. This is because the firm is able to extract the full value that each customer places on the product, without any surplus being left to the consumer.

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  • 10. 

    Under perfect price discrimination, consumer surplus..

    • A.

      Equals zero

    • B.

      Is maximized

    • C.

      Is less than zero

    • D.

      Is greater than zero

    Correct Answer
    A. Equals zero
    Explanation
    Under perfect price discrimination, consumer surplus equals zero. This is because perfect price discrimination occurs when a seller is able to charge each customer the maximum price they are willing to pay for a product or service. In this scenario, the seller captures all of the consumer surplus, leaving none for the consumer. As a result, consumer surplus is reduced to zero.

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  • 11. 

    A single price monopoly that faces the demand curve P = 10 – Q  and  profit maximizes by reducing price from $6 to $5 must have a marginal cost of 

    • A.

      1

    • B.

      5

    • C.

      6

    • D.

      10

    • E.

      None of the above

    Correct Answer
    A. 1
    Explanation
    The correct answer is 1. In order to maximize profits, a monopoly will set its price where marginal cost equals marginal revenue. By reducing the price from $6 to $5, the monopoly is indicating that its marginal cost is less than $5. Since none of the other options are less than $5, the only possible answer is 1.

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  • 12. 

    If the monopolist facing the demand curve P = 10 - Q is a perfectly discriminating monopolist and marginal cost is constant at $4, how much will the firm sell if it profit maximizes?  

    • A.

      6

    • B.

      5

    • C.

      4

    • D.

      10

    • E.

      None of the above

    Correct Answer
    A. 6
    Explanation
    A perfectly discriminating monopolist can charge each consumer the maximum price they are willing to pay, resulting in a price equal to the consumer's willingness to pay. The monopolist will continue to sell units of the product until the marginal cost equals the consumer's willingness to pay. In this case, the marginal cost is $4 and the demand curve is P = 10 - Q. Setting the marginal cost equal to the willingness to pay, we have 4 = 10 - Q. Solving for Q, we find Q = 6. Therefore, the firm will sell 6 units if it profit maximizes.

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  • 13. 

    • A.

      10

    • B.

      12

    • C.

      13

    • D.

      38

    • E.

      None of the above

    Correct Answer
    C. 13
  • 14. 

    If the firm facing the demand curve P = 10 - Q still has zero marginal costs and is now a perfect price discriminator instead of a single price monopolist, what will profits be if fixed costs are 12?  

    • A.

      10

    • B.

      12

    • C.

      13

    • D.

      38

    • E.

      None of the above

    Correct Answer
    D. 38
    Explanation
    In perfect price discrimination, the firm is able to charge each customer the maximum price they are willing to pay. Since the firm has zero marginal costs, it can capture the entire consumer surplus. The demand curve P = 10 - Q represents the willingness to pay of each customer. By setting the price equal to the willingness to pay, the firm can maximize its profits. At a price of 10, the quantity demanded would be 0, resulting in zero profits. At a price of 12, the quantity demanded would be 10, resulting in profits of 12*(10-0) = 120. However, since fixed costs are given as 12, the profits would be 120 - 12 = 108. Therefore, the correct answer is 38.

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  • 15. 

    A firm with a demand curve P = 10 - Q is a perfect price discriminating monopolist with zero marginal costs and fixed costs of 12. Consider the following two statements comparing the price discriminating case with a single price monopolist:.                  1) In this case consumers are better off as a group because more of the product is produced.                   2) Producers are better off because they have higher profits.  

    • A.

      Both statements are true.

    • B.

      Only the first statement is true.

    • C.

      Only the second statement is true.

    • D.

      Both statements are false.

    Correct Answer
    C. Only the second statement is true.
    Explanation
    In the case of perfect price discrimination, the monopolist is able to charge each consumer their maximum willingness to pay, resulting in higher profits for the producer. This is because the producer can extract all consumer surplus and capture the entire market demand. However, it does not necessarily mean that consumers are better off as a group because more of the product is produced. The producer may choose to produce less in order to maintain higher prices and maximize profits. Therefore, only the second statement is true.

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