Carter makes unique fancy boots. It sells its boots in London, where the yearly demand for the boots is described by the straight-line equation P=600-Q/4. It has a factory in London, with yearly production costs given by c(Q) = 50,000 + 100Q. Note that Q is given in terms of pairs of boots. Thus, producing 4 pairs of boots costs 50,400. There are no other costs.

Question 13

What is Carter's fixed cost?

Question 14

What is Carter's marginal cost?

Question 15

Carter exhibits

a. Economies of scale

b. Diseconomies of scale

c. Constant economies of scale

d. Economies of scale followed by diseconomies of scale

Question 16

What is Carter's profit-maximizing price?

Question 17

What is Carter's profit-maximizing (yearly) quantity?

Question 18

What are Carter's (yearly) profits?

Carter has just opened a branch in Manchester, where the (yearly) demand curve is given by P=400-Q/5. Carter produces boots that it sells in Manchester in its London factory, shipping them to Manchester at a cost of 2 per pair of boots. In addition, there are fixed costs of 10,000 associated with the Manchester branch. The Carter management knows about price discrimination and will charge different prices in London and Manchester.

Question 19

What price should Carter charge in London?

Question 20

What price should Carter charge in Manchester?

Question 21

What are Carter's total profits now?

Carter has hired a new manager, who has not taken any economics. The manager argues that it does not make sense for Carter to sell boots in Manchester for less money than it gets for the boots in London. Accordingly, Carter increases the Manchester price to the same level as the London price.

Question 22

What are Carter's (yearly) profits now?

PDQ has the beach-side concession for selling ice cream in Tyrico Bay, Trinidad. It can make two types of ice cream, which it labels Deluxe and Super Deluxe. It costs PDQ 2.00 to make a serving of Deluxe ice cream and 2.50 to make a serving of Super Deluxe.

Each day, PDQ has n potential customers, where n is a number that varies randomly from day to day, depending mainly on the weather. PDQ has determined that there are two types of customers, ice cream fanatics and regular customers. Although the number of customers varies, on any given day 50% of them are fanatics and 50% are regular. The customers have the following valuations, or willingness to pay, for the two types of ice cream:

Deluxe Super Deluxe

Fanatics 5.50. 8.00

Regular 4.00. 4.50

Note that Fanatics are willing to pay 8.00-5.50=2.50 to upgrade from Deluxe to Super Deluxe, while Regulars are willing to pay 4.50-4.00=0.50 to upgrade from Deluxe to Super Deluxe.

(Assume that if customers are indifferent between buying and not buying, they buy; if they are indifferent between buying a Deluxe and a Super Deluxe, they buy the Super Deluxe.)

Question 23

Suppose PDQ sells only Deluxe ice cream. How much should it charge?

Question 24

Suppose PDQ sells only Super Deluxe ice cream. How much should it charge?

Question 25

If PDQ sells both Deluxe ice cream and Super Deluxe ice cream, how much should it charge for Deluxe ice cream?

Question 26

If PDQ sells both Deluxe ice cream and Super Deluxe ice cream, how much should it charge for Super Deluxe ice cream?

Question 27

What should PDQ do?

a. Sell only Deluxe ice cream

b. Sell only Super Deluxe ice cream

c. Sell both Deluxe and Super Deluxe ice cream

Question 28

When Michelin lowers the price of its premium tire by 1%, demand rises by 3%. This means that Michelin's elasticity of demand is _ _ _ _ and the demand for Michelin's tires is _ _ _ _ _:

a. (1/3), elastic.

b. (1/3), inelastic.

c. 3, elastic.

d. 3, inelastic.

Question 29

A monopolist is charging a price of 50 for its product, and selling 10,000 units. We can conclude that

a. The firm's marginal cost is 50.

b. The firm's marginal cost is greater than 50.

c. The firm's marginal cost is less than 50.

d. All of the above are possible.

(Make the standard assumption that production is infinitely divisible and there are no capacity constraints.)

Question 30

Chiropractors and physical therapists can both treat back injuries, but only physical therapists can treat ankle injuries. Suppose that the hourly rate for chiropractic treatment isP_C, regardless of the specific treatment, and the hourly rate for physical therapy isP_T, regardless of the specific treatment. Suppose ankle injuries become more common. At the same time, the per treatment cost of delivering chiropractic services falls (per hour room rates, insurance, etc...). What is the effect on the market for chiropractic treatment?

a. The price and quantity both increase.

b. The price and quantity both decrease.

c. The price increases, the effect on quantity is ambiguous.

d. The quantity increases, the effect on price is ambiguous.