Chapter 11
Alberto's software has two main products. Windsong is a program that can be used to edit audio files and sunburst is a program that can be used to edit digital photos. The two major types of customers are small businesses and home users. The small business customers have a reservation price of $300 for windsong and $450 for sunburst. The home users have a reservation price of $100 for windsong and $125 for sunburst. Which of the following statements is true
Bundling the two software products is not likely to be profitable because the demands are positively correlated
Discrimination based upon the quantity consumed is referred to as blank price discrimination
Second -degree
Many cellular phone rate plans are structured as a combination of blank price discrimination
Second degree and third degree
Suppose that the marginal cost of an additional ton of steel prosecuted by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following would be correct
The Japanese firm will sell steel at a lower price abroad than they will charge domestic users
Grocery store chains advertise more than convenience stores because
The advertising elasticity of demand for convenience stores is near zero and is much smaller than for grocery store chains
When a monopolist engages in perfect price discrimination
The demand curve and the marginal revenue curve are identical
The maximum price that a consumer is willing to pay for a good is called
The reservation price
A national chain of bookstores has initiated a frequent buyer program. If you buy a frequent buyer card for $10 you are entitled to a 10 percent discount on all purchases for 1 year. This practice is an example of
Two part tariff
A pricing strategy that requires consumers pay an up front fee plus an additional fee for each unit of product purchased is a
Two part tariff
The local cable tv company charges a hookup fee for $30 per month. Customers can then watch programs on pay per view basis this is an example of
Two part tariff
An amusement park charges an entrance fee of $75 per person plus $2.5 per ride. This is an example of
Two part tarriff
When a company introduces new audio products, it often initially sets the price high and losers the price about a year later. This is an example of
Intertemporal price discrimination
Rather than charging a single price to all customers a firm charges a higher price to ment and a lower price to women. By engaging in this practice, the firm
Is attempting to convert consumer surplus into producer surplus
You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. You will charge the higher price in the market with the
Lower own price elasticity of demand (more inelastic demand)
If there are open first class seats available on as particular flight, some airlines allow customers with coach tickets to upgrade to first class tickets during the electronic check in process. Suppose the regular price of a first class ticket is $800 the total price of the upgrade ticket is $400 the marginal cost of serving both types of customers is $100 and the airline maximizes profits. Which of the following statements is true
MR must be the same for both full-far and upgrade customers
We may be tempted to determine the optimal level of advertising expenditures at the point where the last dollar spent on advertising generates an additional dollar of sales revenue. In general this rule will not allow the firm to maximize profits because it ignores the
Marginal cost of additional sales generated by the advertising
Mixed bundling is more profitable than pure bundling when
Marginal cost of each good being sold is positive, the consumers reservation values of each good being sold are not perfectly negatively correlated with one or another
What is the key characteristic of profit maximizing price discrimination that distinguishes intertemporal price discrimination peak load pricing
Marginal costs are interdependent across time period under peak load pricing
In peak load pricing
Marginal revenue in the peak period is greater than in the off peak period
Suppose we advertise up to the point where the last dollar spent on advertising generates an additional dollar of sales revenue. If the full marginal cost of advertising is greater than one, then we will generate
More output than the profit maximizing level
What is the profit maximizing condition for a vertically integrated firm
Net marginal revenue equals the marginal cost of each intermediate good
A local restaurant offers an all you can eat salad bar for 3.49 however with any sand which a customer can add the all you can eat salad bar for 1.49 this is an example of
None of the above
The price of on campus parking from 8 to 5 Monday through Friday is $3 from 5 to 10 Monday through Friday the price is $1. At all other times parking is free. This is an example of
None of the above
When the movie Jurassic park debuted in Westwood California the price of tickets was $7.50 after several months the ticket price had fallen to $4 this is an example of
None of the above
Bindy an 18 year old high school graduate and licaina a 40 year old college graduate just purchased identical hot new sports cars. acme insurance charges a higher rate to insure Bindy and Luciana. This practice is an example of
None of the above; collusion, price discrimination, two part tariff, bundling
A firm hAS two customers and creates a two part tariff with a usage fee (p) that exceeds the marginal cost of production and leaves each customer with positive consumer surplus such that CS2>CS1>0. If the firm sets the entry fee equal to CS2 then the number of customers that actually buy the product is equal to
One
Under perfect price discrimination marginal profit at each level of output equal
P-MC
A local theater charges $5 for every matinee ticket but the ticket prices are much higher during the evening. This is an example of
Peak load pricing
Club med, which operates a number of vacation resorts, offers vacation packages at a loser price in the winter than in the summer. This practice is an example of
Peak load pricing and intertemporal price discrimination
Which of the following product paints would not be good candidates for price discrimination through tying
Pencils and paper
The pricing technique known as tying
Permits a firm to meter demand, permits a firm to practice price discrimination, enables as firm to extend its monopoly power to new markets
In 1994 Walt Disney corporation ran a special promotion on tickets to Disney land. Residents of Southern California who lived near the amusement park were offered admission at the special price of $22. Other visitors to Disney were charged $30. This is an example of
Price discrimination
McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their ID cards they would be given 50 cents off any medium combination meal. This practice is an example of
Price discrimination
The manager of a firm is attempting to practice third degree price discrimination. She has equated the marginal revenue in each of her markets. By doing this her
Revenues are maximized given her level of output
The manager of a firm is attempting to practice third degree price discrimination. She heads equated the marginal revenue in each of her markets, by doing this her
Revenues are maximized given her level of output
Your local grocery store offers a coupon that reduces the price of milk during the coming week. The regular retail price of milk in the store is $3.00 per gallon, and the coupon price is $2.00 per gallon for the next week. If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users, what is the price elasticity of demand for non-users
-1.5
One guys pizza advertising expenditures are $1200 and sales $30000 when the advertising expenditure increases to $1400 pizza sales increase to $32000 the arc advertising elasticity of demand is approximately
.4
A 10 percent decreases in advertising results in a 5 percent sales decrease. The advertising elasticity of demand is
.5
The price elasticity of demand for nursery products is -10 the advertising elasticity of demand is .4. Using the rule of thumb for advertising the profit maximizing level of advertising will be set at blank of sales
4 percent
For most residential telephone service, people pay a monthly fee to have a hookup to the telephone company's line plus a fee for each call actually made. Under this pricing scheme the telephone company is using
A two part tariff
You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. If your firm practices third degree price discrimination to maximize profits the marginal revenue
All of the aobve; in the foreign market will equal marginal cost, in the domestic market will equal marginal cost, in the domestic market will equal the marginal revenue
A local restaurant sells strawberry pie for $3 per slice. However if you order the prime rib dinner you can get a slice of pi for only a dollar. This is an example of
Bundling
Season ticket holders for the st Lou's rams received a surprise when they read the applications forms to renew their season tickets. In order to get their season tickets they also had to buy tickets to the preseason games. Many season ticket holders grumbled about this practice as an underhanded way for the rams to get more money from its season ticket holders. This practice is an example of
Bundling
A firm setting a two part tariff with only one customer should set the entry fee equal to
Consumer surplus
For a two part tariff imposed on two consumers the entry fee is based on the
Consumer surplus of the customer with lower willingness to pay
Bundling raises higher revenues than selling the goofed separately when
Demands for the two products are negatively correlated
Bundling is effective when the demands for the bundled products are blank and blank correlated
Different and negatively
second degree price discrimination is the practice of charging
Different prices for different quantity blocks of the same good or service
Automobile manufacturers commonly sell new car models at the full suggested retail price during the first few years the car is on the market and they do not offer rebates or discounts. After the initial sales period the manufacturers typically offer rebates or discounts on these models. The marginal cost of manufacturing the cars is constant across time. Which of the following statements is true?
Early buyers have higher reservation prices for the new models and the manufacturers maximize profits by charging these buyers a higher price
Which of the following is not a condition for third degree price discrimination
Economies of scale
Under perfect price discrimination consumer surplus
Equals 0
The acme oil company is a vertically integrated firm. It explores for and extracts crude oil. It Also refines the crude oil into gasoline and other products, and sells these products to consumers. There are many other firms that extract and sell crude oil so that the market for crude oil is regarded by acme oil as competitive. The internal [price that acme oil uses when the crude oil that it extracts is sold to one of its refineries
Equals the market price for crude oil
A firm is charging a different price for each unit purchased by a consumer. This is called
First degree price discrimination
A third degree price discriminating monopolist can sell its output either in the local market or in an internet auction site. After selling all of its output the firm discovered that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30. To maximize profits the firm should
Have sold less output in the local market and more on the internet auction site
A local restarting offers "early bird" price discounts for dinners ordered from 4:30 to 6:30pm. This is an example of
Peak load pricing
Which of the following strategies are used by business firms to capture consumer surpluss
Price discriminations
The maximum price that a consumer is willing to pay for each unit bought is the blank price
Reservation
An electric power company uses block pricing for electricity sales. Block pricing is an example of
Second degree price discrimination
What is net marginal revenue
The additional revenue the firm earns from an extra unit of an internally produced intermediate input
The acme oil company is a vertically integrated form. It explores for and extracts crude oil. It also refines the crude oil into gasoline and other products. And sells these products to consumers . The internal price that acme oil uses when the crude oil that it extracts is sold to one of its refineries is called
The transfer price
A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for adults. This tennis pro is practicing
Third degree price discrimination
Some grocery stores are now offering customers coupons which entitle them to a discount on certain items on their next visit when they go through the check out line. This practice is an example of
Third degree price discrimination
Third degree price discrimination involves
changing different prices to different groups based upon differences in elasticity of demand.
Bundling products makes sense for the seller when
consumers have heterogeneous demands & firms cannot price discriminate.
You interview with an athletic footwear manufacturer that has annual advertising expenditures of $32 million and total sales revenue of $100 million, and the firm selects the profit maximizing level of advertising expenditures. If the advertising elasticity of demand is .4 then you know that the rule of thumb for advertising implies that demand for the firms products is
Elastic
When a firm charges each customer the maximum price that the customer is willing to pay, the firm
Engages in first degree price discrimination
For a perfect first degree price discriminator incremental revenue is
Equal to the price paid for each unit of output