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Economics for Management Studies

UNIVERSITY OF TORONTO SCARBOROUGH DEPARTMENT OF MANAGEMENT MGEC02 Topics in Price TheoryInstructor A Mazaheri Sample Test1 Solutions Instructions This is a closed book testYou have 2 Hours Good LuckLast Name First NameID FOR MARKERS ONLYQ1 Q2 Q3 Q4 Q5 TotalMarksEarnedMaximum 25 20 15 15 15 90 Marks Possible Page 1 of 11 Answer all following 5 questionsQuestion1 25 Points Answer the following Short Questionsa 5 Points Bookstores often offer annual memberships that allow customers to purchase books at a 10 discount Explain why this may increase profits of the bookstore AnswerThis book club membership program is an example of a twopart tariff If the consumer purchases a membership they are able to purchase subsequent books at a discount to the price charged to nonmembers This membership is in the best interest of the stores profits if the consumers increase purchases at the store That is the loss in profit margin due to the discount is offset by the membership fee and the increased number of book purchases If the consumer will not purchases any more books than without the membership and saves money by joining the club then bookstore profits are reduced The bookstore must believe that joining the book club will induce the consumer to purchase books more frequently at the bookstore or the membership fee will exceed the customers savingsb 5 Points The outcome of Bertrand duopoly is efficient True False Uncertain Explain Answer Uncertain The outcome of the Bertrand duopoly is efficient only if both players have similar marginal cost and if the good is not differentiated Page 2 of 11
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