Microeconomic questions

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Signature Date At a price of $ per CD, a firm sells CDs. If the slope of the demand curve is $ ,marginal revenue for the st CD is$ .(Enter your response rounded to the nearest penny.) The firm should cut the price to sell one more CD if the marginal cost is less than $ .(Enter your response rounded to the nearest penny.) 20 60 − 0.15 61 (1) raise lower (2) increase decrease At a price of $ per CD, the marginal revenue of a CD seller is $ .If the marginal cost of CDs is $ ,the firm should (1) its price to (2) the quantity sold. 22 16 9 Restaurant Pricing. Consider a restaurant that charges for all you can eat and has customers at this price. The slope of the demand curve is $ per meal, and the marginal cost of providing a meal is $ . $20 25 − 0.20 4 Hint: The y-intercept equals the charge plus the (absolute value of the slope the number of customers), and the x-intercept equals the y-intercept divided by the slope. 1.) Use the line drawing tool to draw and label the demand line.

2.) Use the line drawing tool to draw and label the marginal revenue line.

3.) Use the line drawing tool to draw the marginal cost line. Carefully follow the instructions above, and only draw the required objects. The profit-maximizing quantity is meals. (Enter your response rounded to the nearest unit.) The profit-maximizing price is $ .(Enter your response rounded to the nearest dollar.) Student: __________________________________________ I.D :_____________________ CRN :_____________________ Course: MICROECONOMICS Assignment 4 ----------- / 40 4.

5. (1) Yes No (2) increase decrease (3) increase decrease Airline Pricing. Consider an airline that initially has a single price of $ for all consumers. At this price, it has business travelers and tourists. The airline's marginal cost is $ .The slope of the business demand curve is $ per traveler, and the slope of the tourist demand curve is $ per traveler. 400 100 80 250 − 2 − 1 Does the single-price policy maximize the airline's profit? (1) The airline should (2) the price it charges business travelers and it should (3) the price it charges tourists.

(1) marginal revenue price marginal cost Equilibrium? In your city, there are currently three firms providing oil changes. For each firm, there is a fixed cost of $ per day and a marginal cost of $ per oil change. Each firm currently maximizes its profit by providing oil changes per day.

90 14 15 a. For each firm, marginal revenue equals $ .(Enter your response rounded to the nearest dollar.) b. This is a long-run, monopolistically competitive equilibrium if (1) equals $ .(Enter your response rounded to the nearest penny.) 6. 1: Application Related to Application: Opening a Dunkin' Donuts Shop 1 Willingness to Pay for a Dunkin' Donuts Franchise. You operate a Dunkin' Donuts shop under a franchise agreement. You pay a royalty of percent of your sales revenue to the parent company. Your profit-maximizing quantity is donuts per year, and at this quantity, your price is $ and your average cost per donut (including all the opportunity cost of production but not the % royalty) is $ . 5 15,000 1.50 5 0.55 a.

1.) Use the line drawing tool to draw and label the marginal revenue lines that show your profit-maximizing choice. 2.) Use the line drawing tool to draw and label the marginal cost lines that show your profit-maximizing choice. 3.) Use the line drawing too to draw and label the demand lines that show your prfit-maximizing choice. 4.) Use the point drawing tool to show the equilibrium price and quantity combination.

Carefully follow the instructions above, and only draw the required objects. b. To the nearest dollar, what is the maximum amount you are willing to pay per year for the franchise? $ OPENING A DUNKIN' DONUTS SHOP APPLYING THE CONCEPTS: What does it take to enter a market with a franchise? One way to get into a monopolistically competitive market is to get a franchise for a nationally advertised product. If you want to get into the donut market, you could pay a franchise fee of $40,000 to Allied Domecq, the parent company of Dunkin' Donuts. That gives you the right to sell donuts under the Dunkin' Donuts brand. You'll also get a few weeks of training at the corporate headquarters in Massachusetts and some help in organizing a grand opening. Once you start making money, you'll pay a royalty to the parent company equal to 5.9 percent of your sales. How much money are you likely to make in your donut shop? You will compete for donut consumers with other donut shops, bakeries, grocery stores, and coffee shops. Given the small barriers to entering the donut business, you should expect keen competition for consumers. Although your brand-name donuts will give you an edge over your competitors, remember you must pay the franchise fee and royalties. In the monopolistically competitive donut market, you should expect to make zero economic profit, with total revenue equal to total cost. Your total cost includes the franchise fee and royalties, as well as the opportunity cost of your time and the opportunity cost of any funds you invest in the business. The table below shows the franchise fees and royalty rates for several franchising opportunities. The fees indicate how much entrepreneurs are willing to pay for the right to sell a brand-name product. 7.

9. FRANCHISING FEES AND ROYALTIES Brand and Product Franchising Fee Royalty Rate Dunkin' Donuts: Coffee and donuts $40,000 5.9% Great Clips: Haircuts 20,000 6 Glass Doctor: Mobile windshield repair 24,000 4-7 Flowerama: Flowers, plants, gifts 35,000 5 SOURCE: Based on data from www.entrepreneur.com (accessed October 8, 2010). Pete wants to open a restaurant and has chosen to open a McDonald's. McDonald's requires an upfront investment of plus % on all sales. $120,000 5.7 If his restaurant does million in sales, Pete will owe McDonald's $ for the franchise. (Enter your response rounded to the nearest dollar.) $2.4 Pizza Hut wants to hire Baltimore Ravens quarterback Joe Flacco to do an advertisement for their new pizza called Flacco's Favorite. The ad will cost $ ,000 plus the $ ,000 to be paid to Flacco. 128 38 If Pizza Hut earns $ in profit per customer, they would need new customers to make this ad worthwhile. (Enter your response rounded to the nearest whole number.) 5 In the figure depicted to the right, suppose Jack promises Jill that if she picks the high price, he will too. Is this promise credible? A. No, because this would require Jill and Jack to form a cartel. B. No, because by picking the high price, Jill and Jack will be engaging in illegal price-fixing. C. Yes, because this will jointly maximize both Jack and Jill's profits. D. No, because by instead picking the low price, Jack's profit will increase. 10. (1) high low (2) high low Buzz and Moe are duopolists in the lawn-care market. The game tree to the right shows the possible pricing outcomes and their payoffs. The outcome of the pricing game is that Buzz will pick the (1) price and Moe will pick the (2) price. 11. (1) Yes No Vitamin Market Areas. Beta and Gamma produce vitamin A at a constant average cost of $5 per unit. Assume that low-price guarantees are illegal. Here are the possible outcomes: (Enter your responses as integers.) Price-fixing (cartel). Each firm sells units at a price of $ per unit. Corresponding profit for each firm will be $ . 30 20 Duopoly (no price-fixing). Each firm sells units at a price of $ per unit. Corresponding profit for each firm will be $ . 42 12 Underpricing (one firm charges $ and the other charges $ ).The low-price firm sells units and the high-price firm sells units. Corresponding profit for the low-price firm will be $ , and profit for the high-price firm will be $ . 20 12 72 3 a. Suppose Beta chooses a price first, followed by Gamma. A game tree for the price-fixing game with corresponding profits is depicted to the right.

What will be the outcome? A. Beta will choose a price of $ and Gamma will choose a price of $ . 20 12 B. Beta will choose a price of $ and Gamma will choose a price of $ . 12 20 C. Beta and Gamma will both choose a price of $ . 12 D. Beta and Gamma will both choose a price of $ . 20 b. Suppose the firms agree to pick the high price. Once Beta picks the high price, how much more could Gamma earn if it cheated on the price-fixing agreement? $ c. Suppose the firms divide the market into two areas of equal size and assign each firm one of the areas. Will this arrangement generate a successful cartel? (1)