BE300 SAMPLE EXAM QUESTION ANSWER KEY: MODULE 1
1. Dusquesne Light Company (DLC), which serves Pittsburgh, PA, lists the rates for residential electricity
as follows:
First 17 KWH per day @ 8.286 cents each
Add’l KWH per day @ 9.696 cents each
Minimum charge: 2 KWH per day @ 8.286 each
DLC (like DTE and most utilities) bills on the basis of total monthly electricity use (not daily use) and
specifies rates per day only because months have different numbers of days. In a month with 30 days, what
would be the cost to a Pittsburgh resident of consuming the 60th KWH of electricity?
a) $4.97 min charge: 2*8.286*30
b) 9.696 cents
c) 8.286 cents
d) Zero
e) Cannot determine without knowing the demand curve for electricity
2. High-speed internet service providers, like Xfinity, have typically charged a flat monthly fee for unlimited
internet use. Very high volume use by a relatively small number of users has begun to slow down internet
response times for other users, however. To address this problem, internet service providers have begun to
adopt alternative pricing arrangements. One such arrangement would charge a monthly fee of $40 (down
from the current monthly fee of $60) for up to 1 terabyte (1000 gigabytes) of use per month with a charge
$0.20 for each additional gigabyte (GB) above 1TB. Consider a customer with the following monthly
demand for internet service:
QGB = 1200 – 1250P,
where QGB is the number of gigabytes used per month, and P is price per gigabyte (in dollars). Compared
to the previous flat monthly fee of $60 (with unlimited usage), a customer with this demand curve will
a) reduce use from 1200 GBs to 1000 GBs per month and be worse off under this pricing
arrangement.
b) reduce use from 1200 GBs to 1000 GBs per month and be better off under this pricing
arrangement.
c) reduce use from 1200 GBs to 950 GBs per month and be worse off under this pricing
arrangement.
d) reduce use from 1200 GBs to 950 GBs per month and be better off under this pricing
arrangement.
e) use the same number of GBs per month but be better off.
3. Post-merger T-Mobile/Sprint is developing new data plans targeted to certain regions of the country. Using
billing records for customers in the west coast (CA-OR-WA) region, the pricing team has determined that
typical data usage can be estimated with the following demand:
Q = 1600 – 100P (where P is in cents per MB; and Q is in MB)
And the pricing team has proposed the following charges:
First 400 MB @ 5¢
Next 200 MB @ 3¢
Remaining MB @ 1¢
What will be the consumer surplus generated by the typical west coast customer, given this pricing schedule,
if the customer uses marginal decision-making? If west coast consumers choose quantity based on the
average price per MB, will quantity increase or decrease relative to marginal decision making?
a) CS with marginal decision making: $92.50; using average price leads to consuming less than the
optimal amount.
b) CS with marginal decision making: $92.50; using average price leads to consuming more than the
optimal amount
c) CS with marginal decision making: $112.50; using average price leads to consuming less than the
optimal amount
d) CS with marginal decision making: $112.50; using average price leads to consuming more than the
optimal amount
e) CS with marginal decision making: $127.50; using average price leads to consuming less than the
optimal amount
f) CS with marginal decision making: $127.50; using average price leads to consuming more than the
optimal amount
Use the following setup for both questions #4 and #5
Big Blue Gym is a new fitness center that has recently opened offering various hour-long fitness classes (cardio
training, yoga, strength training, spinning, etc.).
They have three options for payment:
(1) You can pay $20 for each individual class you attend.
(2) You can buy "punch cards" for $160. Each punch card allows you to attend 10 classes in that (and only
that) month for no additional fee. (And you could buy more than one punch card if you wanted.)
(3) they offer a "gym unlimited" membership. With this membership you pay $300 a month and then can attend
however many classes you like that month.
Suppose that my monthly demand for fitness classes can be expressed by the equation:
Q = 24 – 0.75P
where Q is the number of classes I attend and P is the price I'd be willing to pay per class.
4. (Fill in each blank with a number only. No symbols, no commas, no words, no decimals. If any answer you get
is not an integer, please round it to the nearest integer.)
a. If I decided to go with option (1), and just pay for each class individually, how many classes would I attend?
What would my total monthly bill be? How much consumer surplus would I get?
• Classes Attended (#):
• Total Monthly Bill ($):
• Consumer Surplus ($):
b. Suppose that I decide to go with option (2), buying punch card(s). Suppose I buy 1 punch card. How many
classes would I attend? What would my total monthly bill be? How much consumer surplus would I get?
• Classes Attended (#):
• Total Monthly Bill ($):
• Consumer Surplus ($):
c. Suppose that I decide to go with option (3), the unlimited membership. How many classes would I attend?
What would my total monthly bill be? How much consumer surplus would I get?
• Classes Attended (#):
• Total Monthly Bill ($):
• Consumer Surplus ($):
5. Which of the three membership/payment options should I choose?
a) Pay by the class
b) Buy a punch card
c) Unlimited gym access
d) I’m indifferent between options (a) and (b)
e) I’m indifferent between options (a) and (c)
f) I’m indifferent between options (b) and (c)
g) I’m indifferent between all three options
h) None. At the prices being charged, I wouldn’t go to any classes
6. Suppose a chemical firm is producing 100 units of output with MC = $8, AVC = $7, and ATC = $9. The
prevailing price of the product in the market is $8.50. There are many substitutes for this firm's product,
so that this firm's sales would fall dramatically if it tried to raise the price. In order to maximize short-run
profits (or minimize short-run losses if that is the best the firm can do) the firm should:
a. increase the selling price to some point above $9.
b. increase output until MC equals $8.50.
c. increase output until MC = min ATC.
d. shut down production in the short-run since it is losing money.
e. reduce its output so as to lower MC, AVC, and ATC and earn an economic profit.
7. In 1796, Gottfried Christoph Hartel, a German music publisher, calculated the cost of printing music using
an engraved plate technology and used these estimated cost functions to make production decisions. Hartel
figured that the fixed cost of printing a single musical page — the cost of engraving the plates — was 900
pfennigs. The marginal cost of each copy is 5 pfennigs per page.
Suppose Hartel expects to sell exactly 300 copies of a composition at 15 pfennigs per page of the
composition. He has to pay the composer a fee for each page of original musical composition that he will
copy (i.e., a one-time per-page fee, not per sale). What is the greatest amount the publisher is willing to pay
the composer per page for the publishing rights?
a. 3000 pfennings
b. 2100 pfennings
c. 700 pfennings
d. 420 pfennings
e. 0 pfennings because costs > revenues
8. The market for surface paint (non-leaded) for homes is competitive. But painting is a messy business.
Benjamin Moore, one of many popular paint companies, is interested in developing a new formula for
interior painting that will reduce the mess and differentiate Benjamin Moore’s product enough that the firm
will gain market power. Only Benjamin Moore will have this unique formula.
Benjamin Moore’s economic consultants estimate that the monthly demand for this new paint product will
be Q = 10 – .1P, where Q is gallons of paint demanded, and P is the price per gallon. The marginal cost is
estimated to be constant at $20 per gallon. In this market, two-part pricing, or a fixed fee strategy, is not
applicable.
Which of the following statements are true?
a. Total revenue is maximized at a price of $50 per gallon.
b. Operating profits are maximized at a price of $20 per gallon.
c. Operating profits are maximized at a price of $60 per gallon.
d. Both (a) and (b) are true.
e. Both (a) and (c) are true.
9. Bright Idea is an LED light bulb company that faces substantial competition selling lightbulbs for household
use. There are many other foreign and domestic light bulb producers selling nearly identical products and
Bright Idea is concerned new entrants might hurt its profits in the future. Bright Idea can only succeed by
fine-tuning its operations. You are hired as a consultant to suggest ways to increase profits for their 800
lumen light bulb division. Bright Idea is able to sell their bulbs for P = $6 in this market. You obtain the
following data from the company. At the current quantity of light bulb production, the marginal cost of
production is $7.40 per unit and the average total cost is $5.45 per unit. To maximize profits, what should
you recommend?
a. Shutdown production in the short-run
b. Increase the price to $7.40
c. Increase output to lower average total costs
d. Reduce output
e. None of the above
10. Ghose and Han (2014) found that the price elasticity of demand for Google Play apps is –3.7. Google is
considering raising the prices of apps by 5% — would this make sense if they are trying to maximize
revenue?
(a) Yes, although Q demanded would fall, Total Revenue would rise
(b) No, both Q demanded and Total Revenue would fall
(c) No, although Q demanded would rise, Total Revenue would fall
(d) Yes, both Q demanded and Total Revenue would rise
11. The market for electronics product A is perfectly competitive with a constant marginal cost of 80 and a
market demand of P = 120 – Q. One firm is considering developing a new technology to reduce the MC to
50. Suppose the firm will be able to patent this innovation successfully, what is the highest amount of
research and development cost the firm will be willing to pay to develop this technology?
a) 1300
b) 1100
c) 1000
d) 1200
e) 900
12. The market for bagels in Ann Arbor is perfectly competitive and currently in equilibrium. Each bagel store
pays a labor cost of $2 per bagel and spends $1.5 on the raw materials for each bagel produced. The inverse
annual market demand for bagels is P = 20−0.5Q, where P is in dollars, and Q is in thousands of bagels.
Rose Bagel is considering entering an exclusive contract with a supplier where, for an annual subscription
fee, the supplier will provide the bagel store with a fully automated bagel machine that would eliminate the
need for labor, and the supplier will provide any needed raw materials free of additional charge. An
exclusive contract means no other bagel stores in the market area could enter a similar contract with
suppliers. What is the maximum annual subscription fee that Rose Bagel would be willing to pay for this
exclusive contract?
(a) $55,500
(b) $72,000
(c) $115,500
(d) $135,000
(e) $196,000
13. Suppose a chemical firm produces 100 units of output with MC = $7.5, AVC = $7, and ATC = $9. The
prevailing price of the product in the market is $8. The chemical firm is in a perfectly competitive market,
and there are many substitutes for its product, so its sales would fall dramatically if it tried to raise the price.
To maximize short-run profits (or minimize short-run losses if that is the best the firm can do), the firm
should:
(a) increase the selling price to some point above $9.
(b) increase output until MC equals $8.
(c) increase output until MC = min ATC.
(d) shut down production in the short run since it is losing money.
(e) reduce its output to lower MC, AVC, and ATC and earn an economic profit.
14. You just invented a cheap, ultra-fast mobile Internet service, where the consumption of it is measured in
gigabytes (GB). Your marginal cost of providing service is constant for any GB of provision, and the
marginal cost is $0.5/GB. Your fixed cost of providing service is $0. You anticipate you will have a lot of
market power, and you can definitely prevent resale of your service. You are deciding what prices to offer
so you can maximize your profits.
You were told that the demand for your service is identical, and you were provided the individual demand
curve of each potential user (i.e. so you know the type of your customers), which is given by
Q = 60 – 10P ,
where P is the price per GB (in $), and Q is the number of GB of mobile data consumed.
You are contemplating five options you learned from BE 300:
Option 1: offer the following block price schedule
0-10GB $4/GB
10-20GB $2/GB
20+GB $1.5/GB
Option 2: offer the following block price schedule
0-15GB $5/GB
15-30GB $3/GB
30+GB $1/GB
Option 3: engage in offering a two-part tariff.
Option 4: engage in offering a flat fee of $105, which comes with the first 10GB of consumption (i.e. first
10GB is free of any charge), but any consumption thereafter comes at the price of $2.5/GB.
Option 5: engage in offering a flat fee of $120, which comes with the first 15GB of consumption (i.e. first
15GB is free of any charge), but any consumption thereafter comes at the price of $1.5/GB.
Your goal is to maximize your profits for when you launch the service (which you are so proud about). You
do not care about the surplus of your potential consumers. Which option maximizes your profits? (Recall
that profits are given as total revenue minus total costs)
(a) Option 1
(b) Option 2
(c) Option 3
(d) Option 4
(e) Option 5
15. In the summer, when many students are away from campus, the inverse demand for Uber rides from the
airport to Ann Arbor is the same as the inverse demand from the airport to Ypsilanti and is given by the
equation
𝑃𝑃 = 100 − 0.1𝑄𝑄.
At the beginning of the semester, suppose the inverse demand for rides to Ypsilanti from the airport is
unchanged, but the inverse demand for rides to Ann Arbor is now given by the equation
𝑃𝑃 = 200 − 0.05𝑄𝑄.
If the marginal cost of a ride for Uber is $10 and Uber can use 3rd-degree price discrimination, which of the
following statements are true?
i) Uber charges $55 for rides to Ann Arbor and Ypsilanti in the summer.
ii) At the beginning of the semester, Uber will set prices so that rides to Ann Arbor are twice as
much as rides to Ypsilanti.
(a) Only i).
(b) Only ii).
(c) Both i) and ii).
(d) Neither i) nor ii).
16. A monopolist has marginal revenue function MR(Q) = 10 – 4Q. Assume demand is downward-sloping and
linear. At a price of P = 4, calculate the own-price elasticity of demand, and then determine what should
the monopolist do to increase it profits. Should it raise, lower, or keep the price of P = 4?
17. Tabea recently bought a new Verizon data plan. Tabea’s demand for data is given by the equation
𝑄𝑄 = 2000 − 100𝑃𝑃 (P is in cents, and Q is in MB)
The data plan uses the following pricing:
• First 500 MB at 1 cent per MB
• Second 500 MB at 5 cents per MB
• Remaining MBs at 10 cents per MB
Tabea’s consumer surplus is ________ if she uses marginal decision-making. If Tabea mistakenly thinks
the true price per MB is the average price on her bill, she will consume _________ than the optimal amount.
(a) $120; less.
(b) $120; more.
(c) $150; less.
(d) $150; more.
(e) $100; less.
(f) $100; more.
18. Suppose that DTE’s pricing team hires you to price their electricity services. Demand for a typical DTE
customer is given by the equation
𝑄𝑄 = 3000 − 200𝑃𝑃. (P is in cents, and Q is in KWH)
Your supervisor instructs you to set one high price per KWH on the 1st 500 KWH only. The remaining
KWHs must be free. How high can you set the price per KWH on the first 500 KWH while having the
typical customer still use electricity?
(a) $30.00
(b) $22.50
(c) $0.45
(d) $0.15
(e) $0.02
19. Achim is a student in Philadelphia who will be moving to start a new job soon. His demand for electricity
is given by the equation
𝑄𝑄 = 1500 − 100𝑃𝑃. (P is in cents, and Q is in KWH)
PECO is Achim’s electricity provider. Suppose that PECO charges a flat 6 cents per KHW.
a. How many KWH does Achim consume? What is Achim’s total expenditure? What is his consumer
surplus?
Achim moves to northern Virginia to start his new job and has the same demand for electricity. The utility
provider there is NOVEC. Suppose that NOVEC has the following price schedule:
• First 400 KWHs at 12 cents per KWH
• Next 200 KWHs at 7 cents per KWH
• Remaining KWHs at 5 cents per KWH
b. How many KWHs does Achim consume in northern Virginia? What is Achim’s total expenditure in
northern Virginia? What is Achim's consumer surplus?
NOVEC informs Achim that his next month’s bill will have a $10 credit, which will be deducted from his
final bill.
c. How much will Achim consume next month in northern Virginia? What is Achim’s total expenditure next
month? What is Achim’s consumer surplus?
d. How high of a credit can NOVEC give Achim without losing revenue on electricity? Why? Assume that
his demand is unchanged, and the pricing schedule is the same as (B).
20. You’re currently living in your cousin’s home in Dana Point, CA, and pay for the utilities on her beach
house while she is deployed overseas. One of the utilities is electricity, provided by San Diego Gas &
Electric, and the price structure is as follows:
Tier 1 (first 100 kWh) $1.00/kWh
Tier 2 (next 100 kWh) $0.70/kWh
Tier 3 (remaining kWh) $0.50/kWh
Monthly fixed fee $ 20
Your monthly demand is:
kWh = 1000 – 1000P, where P is in $ dollars (i.e. not in ₵, cents).
(a) What do you estimate will be your monthly consumption of kWh, assuming you follow marginal
decision making? Draw a graph illustrating your analysis and show your work detailing your
calculations.
(b) What is your total willingness to pay (WTP), total expenditure (TE), and consumer surplus (CS),
based on the given information and marginal decision making? Show your work.
(c) What do you estimate will be your monthly consumption of kWh, assuming you use average price to
determine the quantity of kWh you consume? Show your work.
(d) Which of the following statements best describes your assessment of the outcomes of the different
decision making in part (a) versus (c)? Circle the best answer.
A. You prefer the outcome from using average price because the total expense is lower.
B. You prefer the outcome from using marginal price because the total expense is lower.
C. You prefer the outcome from using average price because the quantity consumed is higher.
D. You prefer the outcome from using marginal price because the quantity consumed is higher.
E. You prefer the outcome from using average price because the consumer surplus is higher.
F. You prefer the outcome from using marginal price because the consumer surplus is higher.