Use the law of diminishing marginal utility to explain why Domino’s and Pizza Hut allow the purchase of a second pizza for only $4 when one pays full price (around $10) for the first pizza. Why not simply charge $7 a pizza instead?
What will be an ideal response?
The second pizza gives less marginal utility than the first. The companies are trying to charge a high price for the first pizza, which gives high marginal utility, and get customers to buy that second pizza, with relatively low marginal utility, by charging a price that reflects the lower MU. At $7 apiece, the companies might lose selling the second pizza and be worse off than selling two pizzas at an average price of $7.
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The price of pizza falls by 25 percent. If the elasticity of demand for pizza is equal to –1.5, what will happen to the quantity of pizza demanded?
What will be an ideal response?
The major economic effect of Medicare subsidies is
A) that the number of physicians has decreased since compensation is low. B) to increase the price of medical services and reduce the quantity demanded. C) to increase the price of medical services and increase the quantity demanded. D) to lower the price of medical services and reduce the quantity demanded.
In the long run, the price charged by the monopolistically competitive firm attempting to maximize profits:
A. must be less than ATC. B. must be more than ATC. C. may be either equal to ATC, less than ATC, or more than ATC. D. will be equal to ATC.
Firms gain control over price in monopolistic competition by
A. blocking entry of other firms into the industry. B. colluding with other firms to set prices. C. producing a product for which there are no close substitutes. D. differentiating their products.