Question

1) Suppose that a firm is producing with positive profits in the short run but in the long run has zero profits. What type(s) of firms could this be?

a) Monopoly

b) Competitive

c) Monopolistic Competitive

2) Suppose that Kent State Rocks! is a firm with market power (meaning that they can choose the price) of their output: Kent State Rocks! paraphernalia. Suppose that there are two types of people: Kent State students who have to have the newest Kent State gear (their demand is relatively inelastic) and Akron students who are not really interested in Kent State gear other than to vandalize it (relatively elastic demand). If the marginal costs of supplying to each type of student is the same, _________________ students will be charged a higher price. This is an example of ________________ .

a) First degree price discrimination

b) Third degree price discrimination

Answer 1

1.

B.

C.

Perfectly competitive as well as monopolistic firms both, can earn positive economic profit in the short run, but in the long run they will earn zero economic profit.

2.

Kent State students

Third degree price discrimination

Third degree price discrimination takes place when one product is sold at different prices to different group of customers on the basis of willingness to pay, ability and sensitiveness towards the price. Here, Kent state students are less responsive to price. So, their demand is relatively inelastic in nature. Due to this reason, there will be charged higher prices for the products and services.