Question One (worth six points)

Kemp (which sells dairy products) and the Minnesota Wild both have market power.But the Minnesota Wild has greater market power than Kemp. The reason:there are more substitutes for the products Kemp sells than the Wild sell.

Pick two firms that you buy stuff from on a regular basis.

1. Why do both firms have market power? Explain.

1. Which company has greater market power? Explain.

1. Consider the two firms. Assume both firms increase prices by 10%. For which of the two firms would that amount you bought go down the most (measured in percent terms)? Explain your reasoning.

Question Two (worth six points)

Profits equal Total Revenue minus Total Costs

1. Define marginal revenue (MR).
2. Define marginal cost- (MC).
3. Using numbers, explain why it makes sense that a firm should increase output if MR is greater than MC and should decrease output if MR is less than MC.

Question Three (worth four points)

Assume that Alexis is the manager of a resort and every week she must decide on the weekly rent for cottages at the resort. (Assume all cottages are of the same quality.)

Assume that last week Alexis charged a rent of $900 a week per cottage and rented 50 cottages.This week Alexis will charge a rent of $890 a week per cottage and will rent 51 cottages. If she does so her marginal revenue will be equal to $390.

1. Explain why her marginal revenue only goes up by $390 when she is renting one more cottage and receiving $890 more from renting that cottage.

1. The marginal revenue from renting the 51^st cottage would be equal to $890 if what was true? Explain your reasoning.