G202 Exam #2 questions with correct solutions
2026\2027 A+ Grade
Market Power
- correct answer - exists when firms are able to restrict competition to sustain prices above marginal
cost
- monopolies have 100% market power (don't really exist)
- can exist with multiple rival firms if products are different or markets are segmented (firms have loyal
customers i.e. coke v pepsi)
- to gain market power, managers attempt to sustain factors which limit competition
- zero profits never occur for either firm bc of loyal customers
Strategies to restrict competition
- correct answer Market Strategies:
- guarding trade secrets
- control over an essential resource (i.e. DeBeers diamond control)
- exclusive contacts and customer lock-in (i.e. Coke products on IU Campus)
Non-Market Strategies:
- parent or copyright protections
- trade regulations
- govt licensing
- govt or NGO certification
Optimal Sales Target
- correct answer the profit maximizing sale target occurs where marginal revenue = marginal cost (MR =
MC)
, If MR > MC then the firm can make a profit by selling one more unit
If MR < MC then the firm will lose money by selling one more unit
Optimal Price
- correct answer Given the optimal sales target, price is found as a markup over cost, where markup
depends on demand
- more inelastic demand results in a higher markup over costs
Elasticity
- correct answer - ALWAYS NEGATIVE
0 = more inelastic --------> infinity = more elastic
ELASTICITY DETERMINES PRICE
Market Power Pricing
- correct answer - marginal revenue falls twice as fast as demand curve
- a firm with market power sets price higher and output lower than efficient levels
- too few units are being produced and sold, giving up units with greater value than costs
- Qe = social efficiency quantity
- Qr = "sweet spot" or max quantity (MR=MC)
- Pr = max price
In class example: Abbot is afraid to sell drugs cheap to poor countries because the countries will just sell
the drugs back to the US for a huge profit
Perfect Price Discrimination
- correct answer each consumer is charged a price equal to her willingness to pay (doesn't really exist)
example: Dutch auction of tulip bulbs where people bid high then go lower and lower
2026\2027 A+ Grade
Market Power
- correct answer - exists when firms are able to restrict competition to sustain prices above marginal
cost
- monopolies have 100% market power (don't really exist)
- can exist with multiple rival firms if products are different or markets are segmented (firms have loyal
customers i.e. coke v pepsi)
- to gain market power, managers attempt to sustain factors which limit competition
- zero profits never occur for either firm bc of loyal customers
Strategies to restrict competition
- correct answer Market Strategies:
- guarding trade secrets
- control over an essential resource (i.e. DeBeers diamond control)
- exclusive contacts and customer lock-in (i.e. Coke products on IU Campus)
Non-Market Strategies:
- parent or copyright protections
- trade regulations
- govt licensing
- govt or NGO certification
Optimal Sales Target
- correct answer the profit maximizing sale target occurs where marginal revenue = marginal cost (MR =
MC)
, If MR > MC then the firm can make a profit by selling one more unit
If MR < MC then the firm will lose money by selling one more unit
Optimal Price
- correct answer Given the optimal sales target, price is found as a markup over cost, where markup
depends on demand
- more inelastic demand results in a higher markup over costs
Elasticity
- correct answer - ALWAYS NEGATIVE
0 = more inelastic --------> infinity = more elastic
ELASTICITY DETERMINES PRICE
Market Power Pricing
- correct answer - marginal revenue falls twice as fast as demand curve
- a firm with market power sets price higher and output lower than efficient levels
- too few units are being produced and sold, giving up units with greater value than costs
- Qe = social efficiency quantity
- Qr = "sweet spot" or max quantity (MR=MC)
- Pr = max price
In class example: Abbot is afraid to sell drugs cheap to poor countries because the countries will just sell
the drugs back to the US for a huge profit
Perfect Price Discrimination
- correct answer each consumer is charged a price equal to her willingness to pay (doesn't really exist)
example: Dutch auction of tulip bulbs where people bid high then go lower and lower
