How could a manager use the information contained in this regression equation? What will be an ideal response? ANSWER Many answers are possible. A manager might note that demand is elastic, and thus that sales might respond to a price decrease. Likewise, sales should respond to increases in advertising. Sales are less likely to […]
Why do cartels tend to break up? What will be an ideal response? ANSWER There are many reasons, but one of the best is that there is an incentive to cheat. While the cartel maximizes joint profits, individual profit could be increased if the firm could sell more at the cartel price. If everyone […]
The firm is considering changing its price to $900. Predict the quantity demanded at that price, all other things equal and provide a 95% confidence interval on your estimate. (In doing this, explain the value of t-critical you will use in developing your 95% confidence interval.) ANSWER At a price of $900, the point […]
What is multicollinearity? In general, how would you know if you had a problem with multicollinearity, and how could you correct it? What will be an ideal response? ANSWER Multicollinearity occurs when the independent variables are correlated. One indication of multicollinearity is that the equation will pass the F-test, but individual variables will not […]
Because firms selling a homogeneous product set price in response to the (perceived) pricing decision of other firms in the Bertrand Model of oligopoly in equilibrium price exceeds marginal cost. Indicate whether the statement is true or false ANSWER False. Because firms set price and sell a homogeneous product other firms will always set […]
A monopolist sells to two consumer groups, students and non-students. Demand for students: Q = 500 – 1/2P Demand for non-students: Q = 750 – 2P MC = 20 Find the profit-maximizing price/quantity combination in each market if the groups can be separated. ANSWER Students: P = 1000 – 2Q MR = 1000 – […]
Suppose the demand for Pepsi is qp = 54 – 2pp + 1p. The demand for Coke is qc = 54 – 2pc + 1pp. Each firm faces a constant marginal cost of zero. Determine the Bertrand equilibrium prices. What happens to the Bertrand equilibrium prices and profits if increased differentiation causes the demand for […]
Which of the following is NOT a club good? A) cable television B) a rock concert C) a country club D) a baseball bat ANSWER D
McDonald’s charges a higher price for a Big Mac in New York City than it does in a small town in Iowa. Is this an example of third-degree price discrimination? Explain. What will be an ideal response? ANSWER No, or not necessarily. Costs differ between the two markets, because land is more expensive in […]
In the presence of a negative externality, a specific tax can achieve the social optimum because A) output is reduced to zero as a result. B) it internalizes the external cost. C) it directly charges the producer for polluting. D) the price of the good rises by the full amount of the tax. ANSWER […]
