KEY Practice Final Spring 2015:

1. A
2. C
3. D
4. C
5. B or D
6. D
7. E
8. E
9. B
10. D
11. A
12. A
13. C
14. E
15. B
16. C
17. D
18. D
19. A
20. B
21. E
22. C
23. A
24. C
25. A
26. B
27. B
28. A
29. C
30. B
31. D
32. A
33. D
34. A
35. D

1.The following table contains information for a price-taking competitive firm. Complete the table
and determine the profit maximizing output when price (=MR) is $10.
Output
0
1
2
3
4
5
6

Total Cost
10
15
20
50
68
100
150

Marginal Cost
5
5
30
18
32
50

Fixed Cost
10
10
10
10
10
10
10

Average Cost
15
10
16.66
17
20
25

2. You own a hot dog stand at a university where there are few other food options for
students. You notice that when you charge $2.00 you sell 100 hotdogs. When you raise the
price to $3.00 you only sell 80 hotdogs. 2 questions:
a. What type of demand elasticity conditions are present? (Hint: you do not have to compute
the precise own price elasticity of demand.)
Notice that as the price rises, quantity demanded falls (expected); however, the total revenue rises.
Thus you are operating in range of INELASTIC demand.
b. Should you raise or lower your hotdog price to achieve your highest total revenue?
When inelastic demand conditions are present, the firm should raise prices to raise total revenue.
Extra here: taking the two points you could determine the line equation to be
P=7-0.05Qd or Qd = 140-20P
From this you could find a total revenue and marginal revenue function. Maximizing the total
revenue function (i.e. setting marginal revenue=0) implies Q = 70, or the price is $3.5
3. a.P=502Q
b.MR(Q)=504Q;MR(4)=504(4)=$34
c.SettingMR=MCyields504Q=2,orQ=12.P=502(12)=$26
d.Profitsare($26)(12)74=$238GRAPHlikeFig.814Baye
4. With the original pricing scheme, the number of visits per customer is qd=48.75. Hence profits
from each customer is [$20 + ($5-$3)*48.75]=$117.50. This gives you a bonus of 10%, or $11.75
per customer. However, you consider a two-part pricing scheme. You may charge a price of $3
(equal to marginal cost) as the visit fee and the consumer surplus as the fixed fee. Note that at the
marginal cost of $3, the number of visits per customer is equal to Qd = 49.25. For this Qd=49.25,
the consumer surplus is [0.5($200-$3)*49.25] = $4851.13. Hence the membership fee can be as
high as $4851.13 per customer. Yur compensation with be 0.1*($4851.13) = $485.11 per customer!