G202 EXAMINATION TEST 2026 COMPLETE
QUESTIONS AND SOLUTIONS
◉ Strategies to restrict competition. 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. 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. 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. Answer: - ALWAYS NEGATIVE
0 = more inelastic --------> infinity = more elastic
ELASTICITY DETERMINES PRICE
◉ Market Power Pricing. 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. 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
- no social inefficiency occurs because all market surplus goes to the
producer (CS = 0)
- profits are increased this way vs. using a single price
◉ Imperfect Price Discrimination. Answer: groups of consumers are
charged different prices
- consumer surplus is decreased, but not equal to zero
- profits are increased relative to using a single price, but not as high as
perfect price discrimination
ex. Victoria's Secret used different prices based on demographics
-Male vs. Female prices
-Social class prices (cheaper for poor, more expensive for rich)
QUESTIONS AND SOLUTIONS
◉ Strategies to restrict competition. 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. 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. 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. Answer: - ALWAYS NEGATIVE
0 = more inelastic --------> infinity = more elastic
ELASTICITY DETERMINES PRICE
◉ Market Power Pricing. 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. 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
- no social inefficiency occurs because all market surplus goes to the
producer (CS = 0)
- profits are increased this way vs. using a single price
◉ Imperfect Price Discrimination. Answer: groups of consumers are
charged different prices
- consumer surplus is decreased, but not equal to zero
- profits are increased relative to using a single price, but not as high as
perfect price discrimination
ex. Victoria's Secret used different prices based on demographics
-Male vs. Female prices
-Social class prices (cheaper for poor, more expensive for rich)
