Questions and Answers of Managerial Economics And Strategy

3.6 Water taken from the public water supply and put in bottles would seem to be a homogeneous good.Yet Coke and Pepsi have spent large amounts on advertising to convince consumers that their bottled
3.5 Solve for the Nash-Bertrand equilibrium for the firms described in Question 3.4 if Firm 1’s marginal cost is $30 per unit and Firm 2’s marginal cost is $10 per unit. C
*3.4 Suppose that identical duopoly firms have constant marginal costs of $10 per unit. Firm 1 faces a demand function of q1 = 100 - 2p1 + p2, where q1 is Firm 1’s output, p1 is Firm 1’s price,
3.3 In an initial Nash-Bertrand equilibrium, two firms with differentiated products charge the same equilibrium prices. A consumer-testing agency praises the product of one firm, causing its demand
*3.2 Will price be lower if duopoly firms set price or if they set quantity? Under what conditions can you give a definitive answer to this question?
3.1 If firms produce identical products and have the same constant marginal cost explain why the Nash-Bertrand equilibrium price and market quantity are the same regardless of the number of firms.
2.15 In 2013, the U.S. Federal Trade Commission (FTC)allowed the number two and number three office supply companies, OfficeMax and Office Depot, to merge. Office Depot’s market value was $1.3
2.14 All the firms in a competitive industry have the same constant marginal cost. All the firms merge into a single firm.a. If the merged firm’s marginal cost does not change, what happens to
*2.13 To examine the trade-off between efficiency and market power from a merger, consider a market with two firms that sell identical products. Firm 1 has a constant marginal cost of 2, and Firm 2
2.12 In 2008, cruise ship lines announced they were increasing prices from $7 to $9 per person per day because of increased fuel costs. According to one analyst, fuel costs for Carnival
2.11 Firms 1 and 2 produce differentiated goods. Firm 1’s inverse demand function is p1 = 120 - 2q1 - q2, while Firm 2’s inverse demand function is p2 = 120 - 2q2 - q1. Firm 1 has a constant
*2.10 Why does differentiating its product allow an oligopoly firm to charge a higher price?
2.9 A homogeneous-good duopoly faces an inverse market demand function of p = 38 - Q. Firm 1 has a constant marginal cost of MC1 = 4. Firm 2’s constant marginal cost is MC2 = 6. Calculate the
2.8 How does the Nash-Cournot equilibrium change in the airline example if Ryanair’s marginal cost is $129 and easyJet’s is $189? (Hint: See Q&A 11.1.)
2.7 In a homogeneous-good Cournot duopoly where both firms have a constant marginal cost m and the inverse market demand function is p = a - bQ, show that the Nash-Cournot equilibrium output of a
2.6 Ryanair and easyJet are the two largest low-cost airlines in Europe. In 2015, the cost per available seat kilometer (CASK) was 3.60¢ (cents) for Ryanair and 6.44¢ for easyJet. Assuming that
2.5 The state of Connecticut sets a maximum fee that bail-bond businesses can charge for posting a givensize bond (Ayres and Waldfogel, 1994). The bailbond fee is set at virtually the maximum amount
*2.4 Your college is considering renting space in the student union to one or two commercial textbook stores. The rent the college can charge per square foot of space depends on the firms’ profit
2.3 Duopoly quantity-setting firms face the inverse market demand function p = 80 - 0.5 (q1 + q2). Each firm has a marginal cost of $20 per unit. What is the Nash-Cournot equilibrium?
*2.2 What is the homogeneous-good duopoly’s Nash-Cournot equilibrium if the market demand function is Q = 200 - p and each firm’s marginal cost is $5 per unit? (Hint: Start by determining the
2.1 According to Robert Guy Matthews, “Fixed Costs Chafe at Steel Mills,” Wall Street Journal, June 10, 2009, stainless steel manufacturers increased prices even though the market demand curve
11.1 explain why some maple syrup producers cheat on the cartel despite efforts to prevent such actions.
1.6 Based on the Mini-Case, “Cheating on the Maple Syrup Cartel,” what methods does the cartel use to discourage cheating? Using a graph similar to Figure
1.5 In 2013 and 2014, a federal judge ruled that Apple colluded with five major U.S. publishers to drive up the prices of e-books (which could be read on Apple’s iPad). Apple collects a 30%
*1.4 A market has an inverse demand function p = 120 - Q and four firms, each of which has a constant marginal cost of MC = 40. If the firms form a profit-maximizing cartel and agree to operate
1.3 What are the main factors that increase the likelihood of a cartel being successful?
1.2 Many retail stores offer to match or beat the price offered by a rival store. Explain why firms that belong to a cartel might make this offer.
1.1 In most “normal” years (years in which the market has not been disrupted by Middle East wars), at each Organization of Petroleum Exporting Countries(OPEC) meeting, Saudi Arabia, the largest
4. Explain how two conditions determine the monopolistic competition equilibrium.
3. Show how firms independently choose their prices to determine the Nash-Bertrand equilibrium.
2. Illustrate how firms independently choose their output levels to determine the Nash-Cournot equilibrium.
1. Explain how firms in a cartel raise their profits by coordinating their actions.
9.3 A restaurant faces very high demand for its signature mousse desserts in the evening but is less busy during the day. Its manager estimates that inverse demand functions are pe = 20 - Qe in the
9.2 Anil is planning a birthday party at an amusement park for his young daughter and her friends. The manager of the park is considering whether to use uniform pricing or two-part-pricing. Anil’s
9.1 The Jam Factory makes boutique jams that it sells in specialty stores in two different cities.In City 1, the daily inverse demand function is p1 = 12 - 0.5Q1 and the marginal revenue function is
8.1 Each week, a department store places a different item of clothing on sale. Give an explanation based on price discrimination for why the store conducts such regular sales.
7.3 Based on the information in Question 7.2, determine the profit-maximizing uniform price. Does Sea Breeze Boat Company earn a higher profit under peak-load pricing or uniform pricing? Compare
*7.2 Sea Breeze Boat Company has a monopoly in renting sailboats at a lake. During fall, its hourly inverse demand function is p = 90 - 2q. During summer, the inverse demand function is p = 90 - q.
7.1 The inverse demand function for a resort hotel in Jamaica is p = 240 - Q during the high season and p = 120 - Q during the low season. The resort’s marginal cost is $20 per night in cleaning
6.3 Why do Honda service departments emphasize to customers the importance of using “genuine Honda parts” when servicing and tuning Honda cars and motorcycles? Is Honda likely to be as successful
*6.2 A computer hardware firm sells both laptop computers and printers. It has a large inventory of laptops and printers that it wants to sell, so it has no variable production cost. Through the
6.1 A monopoly sells two products, of which any given consumer wants to buy only one (and places no value on the other good). If the monopoly can prevent resale, can it increase its profit by
5.5 As described in the Mini-Case “Music for a Song,”Shiller and Waldfogel (2011) estimated that if iTunes used two-part pricing charging an annual access fee and a low price per song, it would
5.4 Ricardo from Question 5.3 marries Dianelys, who also wants to join StayFit Gym. The manager believes that Dianelys’s inverse demand function is p = 26 - 0.04q. The manager has a policy of
*5.3 Ricardo has moved to a small town with only one gymnasium, the StayFit Gym. His inverse demand function is p = 28 - 0.04q, where q is the number of times Ricardo visits the gym per year. The
5.2 A water park in Melbourne, Australia, charges a uniform ticket price, A, for all visitors and a separate price, p, per trip down the water slide. Every day, 800 teenagers visit the park. Each of
5.1 Using math, show why, under two-part pricing, customers who purchase fewer units pay more on average per unit than do customers who buy more units.
4.5 Grocery store chains often set consumer-specific prices by issuing frequent-buyer cards to willing customers and collecting information about their purchases. Grocery chains can use that data to
4.4 In the nonlinear price discrimination analysis in panel a of Figure 10.4, suppose that the monopoly can make consumers a take-it-or-leave-it offer.a. Suppose the monopoly sets a price, p*, and a
4.3 Assume that the quantity-discriminating monopoly as in panel a of Figure 10.4 can set three prices, depending on the quantity a consumer purchases.The firm’s profit is = p1Q1 + p2(Q2 - Q1) +
4.2 In panel b of Figure 10.4, the single-price monopoly faces a demand curve of p = 90 - Q and a constant marginal (and average) cost of m = 30. Find the profit-maximizing quantity (or price) using
*4.1 Are all the (identical) customers of the nonlinear price-discriminating monopoly in panel a of Figure 10.4 worse off than they would be if the firm set a single (uniform) price (panel b)? What
3.12 According to a report from the Foundation for Taxpayer and Consumer Rights, gasoline costs twice as much in Europe as in the United States because taxes are higher in Europe. However, the amount
*3.11 Spenser’s Superior Stoves advertises a one-day sale on electric stoves. The ad specifies that no phone orders are accepted and that the purchaser must transport the stove. Why does the firm
3.10 Provide at least three examples illustrating how firms can use discounts while avoiding giving rebates to consumers with a high willingness to pay.(Hint: See the Managerial Implication,
3.9 A monopoly has a marginal cost of zero and faces two groups of consumers. At first, the monopoly could not prevent resale, so it maximized its profit by charging everyone the same price, p = $10.
3.8 Does a monopoly’s ability to price discriminate between two groups of consumers depend on its marginal cost curve? Why or why not? [Consider two cases: (a) the marginal cost is so high that the
3.7 How would the analysis in Q&A 10.2 change if MC = 7?
3.6 In Q&A 10.2, calculate the firm’s profit with and without a ban against shipments between the two countries.
3.5 Why are electronic textbooks likely to facilitate price discrimination?
3.4 A monopoly sells its good in the United States, where the elasticity of demand is -1.5, and in Germany, where the elasticity of demand is -2.5. Its marginal cost is $20. At what price does the
*3.3 A patent gave Sony a legal monopoly to produce a robot dog called Aibo (“eye-BO”). The Chihuahuasize pooch robot can sit, beg, chase balls, dance, and play an electronic tune. When Sony
*3.2 A monopoly sells its goods in the German and U.S.markets. The German inverse demand function is pG = 900 - QG, and the U.S. inverse demand function is pA = 1,000 - 2QA, where both prices, pG and
3.1 A firm charges different prices to two groups. Would the firm ever operate where it was suffering a loss from its sales to the low-price group? Explain.
2.6 A firm is a natural monopoly (Chapter 9). Its marginal cost curve is flat, and its average cost curve is downward sloping (because it has a fixed cost). The firm can perfectly price
2.5 To promote her platinum-selling CD Feels Like Home in 2005, singer Norah Jones toured the country for live performances. However, she sold an average of only two-thirds of the tickets available
2.4 As described in the Mini-Case, “Google Uses Bidding for Ads to Price Discriminate,” Google uses auctions to charge advertisers according to how much they are willing to pay to reach a target
2.3 How would the answers to Q&A 10.1 and Table 10.1 change if seniors’ reservation price was $5?
*2.2 If a monopoly faces an inverse demand function of p = 150 - 2Q, has a constant marginal and average cost of 50, and can perfectly price discriminate, what is its profit? What are the consumer
2.1 Using the information in the Mini-Case, “Botox Revisited,” determine how much Allergan loses by being a single-price monopoly rather than a perfectly price-discriminating monopoly. Explain
1.8 In 2015, the European Commission charged six U.S.studios and a U.K. pay television company, Sky UK, with unfairly blocking access to films and other content.The charges challenge the studios’
1.7 On February 2017, Budget Car rental charged C$60(Canadian dollars) to rent a Chevrolet Impala for one day in Toronto, Canada, but only C$50 a day in Montreal, Canada. Is this price
1.6 A jean manufacturer would find it profitable to charge higher prices in Europe than in the United States if it could prevent resale between the two countries. What techniques can it use to
*1.5 Disneyland price discriminates by charging lower entry fees for children than adults and for local residents than for other visitors. Why does it not have a resale problem? (Hint: See the
*1.4 Many colleges provide students from low-income families with scholarships, subsidized loans, and other programs so that they pay lower tuitions than students from high-income families. Explain
1.3 A monopoly currently sells its product at a single price. What conditions must be met so that it can profitably price discriminate?
1.2 Prescription drugs, even those manufactured by U.S.companies, cost much less in Canada than in the United States. Why? Explain if this is due to price discrimination?
1.1 In the examples in Table 10.1, if the movie theater does not price discriminate, it charges either the highest price the college students are willing to pay or the one that the senior citizens
7. Explain why firms charge higher prices in periods of peak demand.
6. Describe the advantages of selling related products in a bundle.
5. Show how charging an access fee and a per-unit price raises profit.
4. Demonstrate how a firm can increase its profit by charging prices based on the quantities consumers buy.
3. Describe how a firm sets different prices for various consumer groups to raise its profit.
2. Show how a monopoly may use perfect price discrimination to extract all surplus from consumers.
1. Identify the conditions necessary to price discriminate.
8.3 A firm’s demand function is Q = 110 - p + 2A0.5, where A is the amount of advertising undertaken by the firm and the price of advertising is one. The firm’s cost of production is C = 50 + 10Q
8.2 A monopoly faces the demand function Q = 30 - p.Its inverse demand function is therefore p = 30 - Q, so its marginal revenue function is MR = 30 - 2Q.The firm’s cost function is C = 6Q + Q2, so
8.1 A monopoly faces the inverse demand function:p = 100 - 2Q, with the corresponding marginal revenue function, MR = 100 - 4Q. The firm’s total cost of production is C = 50 + 10Q + 3Q2, with a
7.3 Some people propose reducing the number of years that a drug patent lasts, but their critics argue that such a change would result in even higher prices during the patent period as companies
7.2 Does the Managerial Solution change if the entry of the generic causes a parallel shift to the left of the patent monopoly’s linear demand curve?
7.1 Under what circumstances will a drug company charge more for its drug after its patent expires?
6.3 What are the main factors that have created positive network externalities for eBay? (Hint: See the Mini-Case, “Critical Mass and eBay.”)
*6.2 A monopoly produces a good with a network externality at a constant marginal and average cost of 10.In the first period, its inverse demand function is p = 50 - 2Q. In the second period, its
6.1 A monopoly chocolate manufacturer faces two types of consumers. The larger group, the hoi polloi, loves desserts and has a relatively flat, linear demand curve for chocolate. The smaller group,
5.6 Use a diagram similar to Figure 9.7 to illustrate the effect of social media on the demand for Super Bowl commercials. (Hint: See the Mini-Case “Super Bowl Commercials.”)
5.5 Canada subsidizes Canadian magazines to offset the invasion of foreign (primarily U.S.) magazines, which take 90% of the country’s sales. The Canada Magazine Fund provides a lump-sum subsidy to
5.4 Why are newsstand prices higher than subscription prices for an issue of a magazine?
5.3 A monopoly’s demand function is Q = 1280p-2A0.5, where Q is its quantity, p is its price, and A is the level of advertising. Its constant marginal and average cost of production is 8, and its
*5.2 A monopoly’s inverse demand function is p = 240 - 4Q + (102A - 0.5A2)/2Q, where Q is its quantity, p is its price, and A is the level of advertising.Its marginal cost of production is constant
5.1 Using a graph, explain why a firm might not want to spend money on advertising, even if such an expenditure would shift the firm’s demand curve to the right.

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