Economics MCQ - Economics Section 1

36 The market price of a dominant firm in an oligopolistic market is most likely based on the:

The dominant company determines its profit maximizing quantity by equating its marginal revenue and marginal cost. The price is then set based on the dominant company’s demand curve.

37 An airline segments customers into business travelers and leisure travelers. It then charges a higher price for the business segment. This is most likely an example of:

In first-degree price discrimination, a company is able to charge each customer the highest price the customer is willing to pay. In seconddegree price discrimination, a company offers a menu of quantity-based pricing options designed to induce customers to self-select based on how highly they value the product. The scenario given in the question is an example of third- degree price discrimination where customers are segregated by demographic or other traits.

38 National Refinery of Pakistan is a monopoly enjoying very high barriers to entry. Its marginal cost is PKR 5,000 and its average cost is PKR 8,000. A recent market study has determined the price elasticity of demand to be 1.25. The company will most likely set its price at:

Profits are maximized when MR = MC. For a monopoly:
MR = P [1 − (1 / Price Elasticity)]
5000 = P [1 − (1 / 1.25)]
P = 25000.

39 A market has 5 suppliers, each of them with 20 percent of the market. What are the concentration ratio and the HHI of the top three firms?

The concentration ratio for the top three firms is 20 + 20 + 20 = 60 percent. The HHI is 0.20² * 3 = 0.12.

40 One of the disadvantages of the Herfindahl-Hirschmann index is that the index:

The HHI does not reflect low barriers to entry that may restrict the market power of companies currently in the market