Suppose there are three types of customers who frequent Louisiana Fried Chicken(LFC), a fast food chain that sells chicken and biscuits. (For simplicity, assume anequal number of each type of customer) These customers have the followingvaluations (“reservation prices”) for chicken and biscuits:Consumer Chicken Biscuits1 $12 $12 $10 $33 $9 $4Suppose the fully allocated cost of making an order of chicken is $6 and the fullyallocated cost of making an order of biscuits is $2.50.If LFC does not know the identities of the customers (i.e. is unable to pricediscriminate) and sets one price for chicken (regardless of who buys) and oneprice for biscuits (regardless of who buys), what would those prices be? a. Price of Chicken = $9 and the Price of Biscuits = $1 b. Price of Chicken = $12 and the Price of Biscuits = $4 c. Price of Chicken = $10 and the Price of Biscuits = $3 d. Price of Chicken = $9 and the Price of Biscuits = $4 You are considering buying a new machine for your factory. You estimate that your profits will increase by $25,000 over its first year in operation (for simplicity assume profits are received at the end of each year), $20,000 over its second year, $10,000 over its third year, at which time you will be able to sell it for $5,000. If interest rates are 10%, what is the maximum amount you should pay for this machine? a. $50,525.92 b. $46,769.35 c. $60,000.00 d. $51,769.35 Two firms produce high quality aloha shirts: Hawaiian Wear (HW) and Island Wear (IW). Each firm has the same cost function given by TC = 20Q + Q^2. The market demand for aloha shirts is P = 200 – 2QT where QT is the total output of the two firms. Suppose the managers of the two firms decide to collude. If they formed a cartel, what would be the profit maximizing level of output? a. 45 b. 22.5 c. 30 d. 36 A particular monopolist has a demand curve and cost function for its product estimated to be P = 250 – .15Q and TC = $25,000 + $10Q. Calculate the deadweight loss caused by the monopolist. a. $48,000 b. 800 units c. $104,000 d. $52,000 CamCo makes inexpensive 35mm cameras. Its subsidiary, InFocus, Inc., makes the lenses for the cameras. The market for such lenses is highly competitive, and they can be either bought or sold at the equilibrium market price of $2. CamCo estimates the demand for its cameras to be Qc = 12,000 – 400Pc. This implies that Pc = 30 – .0025Qc and MR = 30 – .005Qc.The marginal cost of manufacturing the cameras, not including the cost of the lenses, is constant and equal to $5. The marginal cost of the InFocus division for making the lenses is given by the equation MCl = 0.30 + 0.0004Ql. Each camera requires one lens. How many cameras will Camco produce and what price will be charged for each? a. 5000 and $17.50 b. 5600 and $16 c. 4574 and $18.56 d. 4600 and $18.50 You have devised a plan to provide cleaning services for local theaters. You plan to charge $20 to clean each facility. The method you plan to use requires leasing equipment costing $200 per month, but would require a labor cost of $10.00 per theater. If you want to earn a profit of at least $500 per month, what are the minimum numbers of theaters you must clean? a. 50 b. 20 c. 35 d. 70 The Bruises and Bumps Company makes and sells skateboards at an average price of $70 each. Over the past year they sold 4,000 skateboards. Its closest competitor, Broken Bones Inc., sells its skateboards at an average price of $65. If the point price elasticity of demand for the skateboards produced by Bruises and Bumps is –2.5, and Bruises and Bumps were to lower their price by 5%, how many skateboards should they expect to sell this year? a. 3500 b. 6000 c. 4250 d. 4500 The Hawaiian Sea Salt Company sells salt to retail grocery chains in Hawaii and on the mainland. The demand function in each of these markets is: Hawaii grocery chains: P1 = 180 – 8Q1 Mainland grocery chains: P2 = 100 – 4Q2 Where P1 and P2 are the prices charged and Q1 and Q2 are the quantities sold in the respective markets. Hawaiian Sea Salt Company’s total cost function for salt is: TC = 50 + 20 (Q1 + Q2) Assuming that the Hawaiian Sea Salt Company is able to charge different prices in the two markets, what are the profit maximizing prices and output levels for sea salt in the two markets? a. Q1 = 20 & P1 = $100 and Q2 = 20 & P2 = $60 b. Q1 = 20 & P1 = $20 and Q2 = 20 & P2 = $20 c. Q1 = 8.75 & P1 = $110 and Q2 = 7.5 & P2 = $70 d. Q1 = 10 & P1 = $100 and Q2 = 10 & P2 = $60 The Bruises and Bumps Company makes and sells skateboards at an average price of $70 each. Over the past year they sold 4,000 skateboards. Its closest competitor, Broken Bones Inc., sells its skateboards at an average price of $65. If the point cross-price elasticity of demand between the two companies is 0.5, how many skate- boards will Bruises and Bumps sell if Broken Bones lowers their price 5%? a. 4100 b. 3900 c. 3750 d. 4250 A particular monopolist has a demand curve and cost function for its product estimated to be P = 250 – 0.15Q and TC = $25,000 + $10Q. Calculate the profit-maximizing price and output level for this monopolist. a. Q = 1600 and P = $10 b. Q = 833 and P = $130 c. Q = 800 and P = $130 d. Q = 2500 and P = $10 Suppose there are three types of customers who frequent Louisiana Fried Chicken(LFC), a fast food chain that sells chicken and biscuits. (For simplicity, assume anequal number of each type of customer) These customers have the followingvaluations (“reservation prices”) for chicken and biscuits:Consumer Chicken Biscuits1 $12 $12 $10 $33 $9 $4Suppose the fully allocated cost of making an order of chicken is $6 and the fullyallocated cost of making an order of biscuits is $2.50.If LFC sells chicken and biscuits as a meal deal, what price would be set for themeal deal which includes both an order of chicken and an order of biscuits? a. $13 b. $14 c. $15 d. $16 Two firms produce high quality aloha shirts: Hawaiian Wear (HW) and Island Wear (IW). Each firm has the same cost function given by TC = 20Q + Q2. The market demand for aloha shirts is P = 200 – 2QT where QT is the total output of the two firms. If each firm acts to maximize its profits, taking its rival’s output as given (i.e., the firms behave as Cournot oligopolists), what will the equilibrium level of output be for each firm? a. QHW = 18 and QIW = 18 b. QHW = 22.5 and QIW = 22.5 c. QHW = 45 and QIW = 45 d. QHW = 30 and QIW = 30 Suppose output is produced using only labor according to the production function Q = 5L –L^2. If the price of output is $10 and the cost of labor is $10, what is the profit maximizing amount of labor that should be employed? a. 2.5 units b. 0 units c. 2 units d. 10 units The Hawaiian Sea Salt Company sells salt to retail grocery chains in Hawaii and on the mainland. The demand function in each of these markets is: Hawaii grocery chains: P1 = 180 – 8Q1 Mainland grocery chains: P2 = 100 – 4Q2 Where P1 and P2 are the prices charged and Q1 and Q2 are the quantities sold in the respective markets. Hawaiian Sea Salt Company’s total cost function for salt is: TC = 50 + 20 (Q1 + Q2) If all transportation and other transaction costs between Hawaii and the Mainland were zero, could Hawaiian Sea Salt Company practice price discrimination? a. Yes, because the salt can only be produced in Hawaii. b. No, because on the mainland there are more substitutes available. c. No, because consumers would only buy it from the cheaper location. d. Yes, because demands still differ. You have devised a plan to provide cleaning services for local theaters. You plan to charge $20 to clean each facility. The method you plan to use requires leasing equipment costing $200 per month, but would require a labor cost of $10.00 per theater. How many theaters per month must you clean to break even? a. 25 b. 20 c. 50 d. 10