Chapter 11 - Pricing with Market Power

A firm is charging a different price for each unit purchased by a consumer. This is called A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) fourth-degree price discrimination. E) fifth-degree price discrimination.

A

A local restaurant offers ʺearly birdʺ price discounts for dinners ordered from 4:30 to 6:30 PM. This is an example of A) peak-load pricing. B) second-degree price discrimination. C) a two-part tariff. D) tying. E) none of the above

A

A local restaurant sells strawberry pie for $3.00 per slice. However, if you order the prime rib dinner, you can get a slice of pie for only a dollar. This is an example of A) bundling. B) second-degree price discrimination. C) a two-part tariff. D) tying. E) none of the above

A

Bundling is effective when the demands for the bundled products are __________ and __________ correlated. A) different; negatively B) different; positively C) similar; negatively D) similar; positively E) identical; perfectly

A

For a two-part tariff imposed on two consumers, the entry fee is based on the: A) consumer surplus of the customer with lower willingness-to-pay. B) consumer surplus of the customer with higher willingness-to-pay. C) simple average of the consumer surplus for the two buyers. D) none of the above

A

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 ʺsoldʺ to one of its refineries: A) equals the market price for crude oil. B) equals the market price for crude oil less a discount because Acme Oil does not to profit from itself. C) is unrelated to the market price of crude oil. D) is greater than the marginal cost of extracting crude oil.

A

The maximum price that a consumer is willing to pay for a good is called: A) the reservation price. B) the market price. C) the first-degree price. D) the block price. E) the choke price.

A

Use the following statements to answer this question. I. To maximize profit, a firm will advertise more when the advertising elasticity is larger. II. To maximize profit, a firm will advertise more when the price elasticity of demand is smaller. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

A

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 A) lower own price elasticity of demand (more inelastic demand). B) higher own price elasticity of demand (more elastic demand). C) larger teenage population. D) greater consumer incomes.

A

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: A) zero. B) one. C) two. D) We donʹt have enough information to answer this question.

B

A firm setting a two-part tariff with only one customer should set the entry fee equal to A) marginal cost. B) consumer surplus. C) marginal revenue. D) price.

B

A pricing strategy that requires consumers pay an up-front fee plus an additional fee for each unit of product purchased is a A) tying contract. B) two-part tariff. C) form of perfect price discrimination. D) none of these.

B

An amusement park charges an entrance fee of $75 per person plus $2.50 per ride. This is an example of A) first-degree price discrimination. B) a two-part tariff. C) second-degree price discrimination. D) bundling. E) tying.

B

An electric power company uses block pricing for electricity sales. Block pricing is an example of A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) Block pricing is not a type of price discrimination.

B

Discrimination based upon the quantity consumed is referred to as __________ price discrimination. A) first-degree B) second-degree C) third-degree D) group

B

For most residential telephone service, people pay a monthly fee to have a hookup to the telephone companyʹs line plus a fee for each call actually made. Under this pricing scheme, the telephone company is using A) limit pricing. B) a two-part tariff. C) second-degree price discrimination. D) two stage price discrimination.

B

In 1994, the Walt Disney Corporation ran a special promotion on tickets to Disneyland. Residents of southern California who lived near the amusement park were offered admission at the special price of $22. Other visitors to Disneyland were charged about $30. This practice is an example of: A) collusion. B) price discrimination. C) two-part tariff. D) bundling. E) tying.

B

In peak-load pricing, A) marginal revenue is equal in both periods. B) marginal revenue in the peak period is greater than in the off-peak period. C) marginal revenue in the peak period is less than in the off-peak period. D) the sum of the marginal revenues is greater than the sum of the marginal costs.

B

McDonaldʹs restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of: A) collusion. B) price discrimination. C) two-part tariff. D) bundling. E) tying.

B

Second-degree price discrimination is the practice of charging A) the reservation price to each customer. B) different prices for different quantity blocks of the same good or service. C) different groups of customers different prices for the same products. D) each customer the maximum price that he or she is willing to pay.

B

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: A) intertemporal price discrimination. B) third-degree price discrimination. C) a two-part tariff. D) bundling. E) none of the above

B

Suppose we advertise up to the point where the last dollar spent on advertising generates an additional dollar of sales revenue (i.e, the marginal revenue of advertising equals one). If the full marginal cost of advertising is greater than one, then we will generate: A) less output than the profit maximizing level. B) more output than the profit maximizing level. C) the profit maximizing level of output. D) We donʹt have enough information to answer this question.

B

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. The internal price that Acme Oil uses when the crude oil that it extracts is ʺsoldʺ to one of its refineries is called: A) the shadow price. B) the transfer price. C) the market price. D) the non-market price. E) none of the above

B

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 (i.e, the marginal revenue of advertising equals one). In general, this rule will not allow the firm to maximize profits because it ignores the: A) price elasticity of demand. B) marginal cost of additional sales generated by the advertising. C) advertising-to-sales ratio. D) fixed costs of advertising.

B

What is net marginal revenue? A) The same as marginal profit. B) The additional revenue the firm earns from an extra unit of an internally produced intermediate input. C) The additional revenue the firm earns from producing one more unit of output. D) The additional revenue the firm earns from selling one more unit of output.

B

When a monopolist engages in perfect price discrimination, A) the marginal revenue curve lies below the demand curve. B) the demand curve and the marginal revenue curve are identical. C) marginal cost becomes zero. D) the marginal revenue curve becomes horizontal.

B

A 10 percent decrease in advertising results in a 5 percent sales decrease. The advertising elasticity of demand is __________. A) -2.0 B) -0.5 C) 0.5 D) 2 E) none of the above

C

A doctor charges two different prices for medical services, and the price level depends on the patientsʹ income such that wealthy patients are charged more than poorer ones. This pricing scheme represents a form of A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) pricing at each consumerʹs reservation price.

C

A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits? A) PA = PB = MC. B) MRA = MRB. C) MRA=MRB=MC. D)(MRA-MRB)=(1-MC).

C

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: A) peak-load pricing. B) intertemporal price discrimination. C) two-part tariff. D) bundling. E) Both A and B are correct.

C

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) fourth-degree price discrimination. E) fifth-degree price discrimination.

C

A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). After selling all of its output, the firm discovers 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 A) have sold more output in the local market and less at the internet auction site. B) do nothing until it acquires more information on costs. C) have sold less output in the local market and more on the internet auction site. D) sell less in both markets until marginal revenue is zero. E) sell more in both markets until marginal cost is zero.

C

Many cellular phone rate plans are structured as a combination of __________ price discrimination. A) first-degree and second-degree B) first-degree and third-degree C) second-degree and third-degree D) peak-load pricing and third-degree

C

Mixed bundling is more profitable than pure bundling when A) the marginal cost of each good being sold is positive. B) the consumersʹ reservation values of each good being sold are not perfectly negatively correlated with one or another. C) Both A and B are correct. D) the marginal cost of one good is zero.

C

One Guyʹs Pizza advertising expenditures are $1,200 and sales are $30,000. When the advertising expenditure increases to $1,400, pizza sales increase to $32,000. The arc advertising elasticity of demand is approximately __________. A) 0 B) 0.1 C) 0.4 D) 2.5 E) 12.5

C

Suppose that the marginal cost of an additional ton of steel produced 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 will be correct? A) The Japanese firm will sell more steel abroad than they will sell in Japan. B) The Japanese firm will sell more steel in Japan than they will sell abroad. C) The Japanese firm will sell steel at a lower price abroad than they will charge domestic users. D) The Japanese firm will sell steel at a higher price abroad than they will charge domestic users. E) Insufficient information exists to determine whether the price or quantity will be higher or lower abroad.

C

The local cable TV company charges a ʺhook-upʺ fee of $30 per month. Customers can then watch programs on a ʺpay-per-viewʺ basis (a fee is charged for every program watched). This is an example of A) peak-load pricing. B) second-degree price discrimination. C) a two-part tariff. D) intertemporal price discrimination. E) none of the above

C

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 A) profits are maximized. B) costs are minimized given her level of output. C) revenues are maximized given her level of output. D) all of the above

C

The price elasticity of demand for nursery products is -10. The advertising elasticity of demand is 0.4. Using the ʺRule of Thumb for Advertising,ʺ the profit maximizing level of advertising will be set at __________ of sales. A) 0.25 percent B) 0.4 percent C) 4 percent D) 40 percent

C

Under perfect price discrimination, consumer surplus A) is less than zero. B) is greater than zero. C) equals zero. D) is maximized.

C

Under perfect price discrimination, marginal profit at each level of output equal A) 0. B) P - AC. C) P - MC. D) P - AR.

C

Use the following statements to answer this question. I. To maximize profit, a firm will increase its advertising expenditures until the last dollar of advertising generates an additional dollar of revenue. II. The full marginal cost of advertising is the sum of the dollar spent directly on advertising and the marginal production cost that results form the increased sales that advertising brings about. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

C

What is the key characteristic of profit maximizing price discrimination that distinguishes intertemporal price discrimination from peak-load pricing? A) Peak-load pricing does not require MC = MR. B) Marginal revenue may be different across different groups of buyers under intertemporal price discrimination. C) Marginal costs are independent across time periods under peak-load pricing. D) Marginal revenue must be constant under both pricing schemes.

C

What is the profit maximizing condition for a vertically integrated firm? A) Net marginal revenue equals the sum of the marginal costs of the intermediate inputs. B) Marginal revenue equals the marginal cost of the final output. C) Net marginal revenue equals the marginal cost of each intermediate good. D) The sum of net marginal revenues equals the marginal cost of the final output.

C

When a company introduces new audio products, it often initially sets the price high and lowers the price about a year later. This is an example of A) a two-part tariff. B) second-degree price discrimination. C) intertemporal price discrimination. D) first-degree price discrimination.

C

Which of the following is NOT a condition for third-degree price discrimination? A) Monopoly power B) Different own price elasticities of demand C) Economies of scale D) Separate markets

C

Which of the following product pairs would NOT be good candidates for price discrimination through tying? A) Razors and razor blades B) Ink-jet printers and ink cartridges C) Pencils and paper D) Cellular telephones and cell phone service

C

Bundling products makes sense for the seller when A) consumers have heterogeneous demands. B) the products are complementary in nature. C) firms cannot price discriminate. D) both A and C.

D

Halifax & Smyth (H&S) is a clothier that specializes in expensive men's suits, and the firm makes the suits from wool fabrics that are woven by one of the firm's divisions. This division is not the only source for this material, and H&S could buy or sell wool fabric in the outside competitive market. H&S will buy some of the wool fabric that it needs for suits from the outside market if the: A) market price is less than the optimal transfer price if the outside market did not exist. B) market price is less than the point where the net marginal revenue of weaving wool fabric intersects the marginal cost of wool fabric. C) market price is less than the point where the net marginal revenue of assembling menʹs suits intersects the marginal cost of assembly. D) Both A and B are correct.

D

If there are open first-class seats available on a particular flight, some airlines allow customers with coach (discount) 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 (original price plus the upgrade) is $400, the marginal cost of serving both types of customers (full-fare and upgrade first-class flyers) is $100, and the airline maximizes profits. Which of the following statements is true? A) MR for the full-fare customers must be higher than the MR from upgrade customers. B) MR for the full-fare customers may be higher or lower than the MR from upgrades. C) MR = MC for the full-fare customers, but the airline is willing to collect any positive amount from the upgrade customers. D) MR must be the same for both full-fare and upgrade customers.

D

Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. By engaging in this practice, the firm: A) is trying to reduce its costs and therefore increase its profit. B) is engaging in an illegal activity that is prohibited by the Sherman Antitrust Act. C) is attempting to convert producer surplus into consumer surplus. D) is attempting to convert consumer surplus into producer surplus. E) Both A and C are correct.

D

Season ticket holders for the St. Louis Rams received a surprise when they read the applications forms to renew their season tickets. In order to get their season ticket to the Ramsʹ home games, they also had to buy tickets to the preseason games. Many season ticket holders grumbled about this practice as an underhanded way for the St. Louis Rams to get more money from its season ticket holders. This practice is an example of: A) peak-load pricing. B) intertemporal price discrimination. C) two-part tariff. D) bundling. E) Both A and B are correct.

D

The pricing technique known as tying A) permits a firm to meter demand. B) permits a firm to practice price discrimination. C) enables a firm to extend its monopoly power to new markets. D) all of the above

D

Third-degree price discrimination involves A) charging each consumer the same two-part tariff. B) charging lower prices the greater the quantity purchased. C) the use of increasing block rate pricing. D) charging different prices to different groups based upon differences in elasticity of demand.

D

When a firm charges each customer the maximum price that the customer is willing to pay, the firm A) engages in a discrete pricing strategy. B) charges the average reservation price. C) engages in second-degree price discrimination. D) engages in first-degree price discrimination.

D

Which of the following strategies are used by business firms to capture consumer surplus? A) Price discrimination B) Bundling C) Two-part tariffs D) all of the above

D

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 A) in the foreign market will equal the marginal cost. B) in the domestic market will equal the marginal cost. C) in the domestic market will equal the marginal revenue in the domestic market. D) all of the above E) none of the above

D

A local restaurant offers an ʺall-you-can-eatʺ salad bar for $3.49. However, with any sandwich, a customer can add the ʺall-you-can-eatʺ salad bar for $1.49. This is an example of A) peak-load pricing. B) second-degree price discrimination. C) a two-part tariff. D) tying. E) none of the above

E

Bindy, an 18-year-old high school graduate, and Luciana, a 40-year-old college graduate, just purchased identical hot new sports cars. Acme Insurance charges a higher rate to insure Bindy than Luciana. This practice is an example of: A) collusion. B) price discrimination. C) two-part tariff. D) bundling. E) none of the above

E

Suppose a firm produces identical goods for two separate markets and practices third-degree price discrimination. In the first market the firm charges $30 per unit, and it charges $22 per unit in the second market. Which of the following represents the ratio of price elasticities of demand in the two markets? A) E2 = (21/29)E1 B) E2 = (29/21)E1 C) E2=E1 D) E2 = (22/30)E1 E) none of these

E

The price of on-campus parking from 8:00 AM to 5:00 PM, Monday through Friday, is $3.00. From 5:00 PM to 10:00 PM, Monday through Friday, the price is $1.00. At all other times parking is free. This is an example of A) bundling. B) second-degree price discrimination. C) a two-part tariff. D) tying. E) none of the above

E

A local theater charges $5.00 for every matinee (daytime) ticket, but the ticket prices are much higher during the evening. This is an example of A) peak-load pricing. B) second-degree price discrimination. C) a two-part tariff. D) bundling. E) none of the above

A

Halifax & Smyth (H&S) is a clothier that specializes in expensive men's suits, and the firm makes the suits from wool fabrics that are woven by one of the firm's divisions. This division is the only source for this material, and H&S uses the optimal transfer price to determine the value of the wool fabric. What happens if the marginal cost of assembling the men's suits increases? A) The net marginal revenue (NMR) curve for wool fabric shifts upward, and wool (suit) production increases. B) The net marginal revenue (NMR) curve for wool fabric shifts upward, and wool (suit) production decreases. C) The net marginal revenue (NMR) curve for wool fabric shifts downward, and wool (suit) production increases. D) The net marginal revenue (NMR) curve for wool fabric shifts downward, and wool (suit) production decreases.

A

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? A) The firms practice peak-load pricing by charging a higher price in the initial sales period. B) Early buyers have higher reservation prices for the new models, and the manufacturers maximize profits by charging these buyers a higher price. C) The marginal revenue from buyers who purchase these cars after the initial sales period must be lower that the marginal revenue from early buyers. D) To maximize profits, the firms equate the buyersʹ reservation prices across time.

B

The maximum price that a consumer is willing to pay for each unit bought is the __________ price. A) market B) reservation C) consumer surplus D) auction E) choke

B

Bundling raises higher revenues than selling the goods separately when A) demands for two goods are highly positively correlated. B) demands for two products are mildly positively correlated. C) demands for two products are negatively correlated. D) there is a perfect positive correlation between the demands for two goods. E) the goods are complementary in nature.

C

For a perfect first-degree price discriminator, incremental revenue is A) greater than price if the demand curve is downward sloping. B) the same as the marginal revenue curve if the firm is a non-discriminating monopolist. C) equal to the price paid for each unit of output. D) less than the marginal revenue for a non-discriminating monopolist.

C

Grocery store chains advertise more than convenience stores because: A) the advertising elasticity of demand is smaller for grocery store chains than for convenience stores. B) convenience stores have more elastic demand for their products than grocery store chains. C) the advertising elasticity of demand for convenience stores is near zero and is much smaller than for grocery store chains. D) all of the above E) none of the above

C

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 0.4, then you know that "Rule of Thumb for Advertising" implies that the demand for the firm 's products is: A) inelastic. B) unit elastic. C) elastic. D) zero.

C

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? A) -0.67 B) -1.0 C) -1.5 D) We do not have enough information to answer the question.

C

Albatross 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? A) Bundling the two software products is not likely to be profitable because the marginal cost of producing software is positive by very small. B) Bundling the two software products is not likely to be profitable because the consumer demands are homogeneous. C) Bundling the two software products is likely to be profitable because the demands are negatively correlated. D) Bundling the two software products is not likely to be profitable because the demands are positively correlated.

D

Club Med, which operates a number of vacation resorts, offers vacation packages at a lower price in the winter (i.e., the ʺoff seasonʺ) than in the summer. This practice is an example of: A) peak-load pricing. B) intertemporal price discrimination. C) two-part tariff. D) bundling. E) Both A and B are correct.

E

When the movie ʺJurassic Parkʺ debuted in Westwood, California, the price of tickets was $7.50. After several months the ticket price had fallen to $4.00. This is an example of A) peak-load pricing. B) second-degree price discrimination. C) a two-part tariff. D) tying. E) none of the above

E