Chapter 7

10. 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) third-degree price discrimination B) second-degree price discrimination C) first-degree price discrimination D) intertemporal price discrimination E) peak-load pricing

A

12. 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

4. Most phone companies charge lower (or zero) prices for long distance calls in the evening and weekends than during normal business hours. This practice is an example of: A) peak-load pricing. B) intertemporal price discrimination. C) two-part tariff. D) Second degree price discrimination. E) Third degree price discrimination.

A

13. 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

14. Double Espresso is a coffee shop. They give you a free membership card, which you can show to the cashier every time you buy a coffee drink. Once you buy 10 drinks, Double Espresso will give you one free coffee drink. This practice is an example of: A) First-degree price discrimination B) Second-degree price discrimination C) Third-degree price discrimination D) Intertemporal price discrimination E) Two-part tariff

B

16. 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

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

B

21. Firm Epsilon is a monopolist with cost function C = 10Q The demand for Epsilon's output is QD = 260 - 2P Suppose Epsilon can first-degree price discriminate. Then Epsilon will have a profit A) 14,000 B) 14,400 C) 14,600 D) 14,200 E) None of the above

B

6. Offering temporary price cuts on bathroom tissue. This practice is an example of A) peak-load pricing. B) intertemporal price discrimination. C) two-part tariff. D) Second degree price discrimination. E) Third degree price discrimination.

B

9. Visitors can buy a one-day ticket to Disneyland for $80, or buy an "Annual Passport" for $499. With the Annual Passport, the visitor has unlimited access to the park for one entire year. This is an example of A) third-degree price discrimination B) second-degree price discrimination C) first-degree price discrimination D) intertemporal price discrimination E) peak-load pricing

B

11. 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

17. 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

3. 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

8. Pricing of Gilette safety razors is an example of A) peak-load pricing. B) intertemporal price discrimination. C) two-part tariff. D) Second degree price discrimination. E) Third degree price discrimination.

C

1. 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. E) engages in third-degree price discrimination.

D

22. Firm Beta is a monopolist with cost function C = 10Q Beta has a single consumer, who has a demand function QD = 260 - 2P Suppose Beta can price discriminate by using a two-part tariff. Then under the optimal twopart tariff, Beta will sell Q= units of output A) 10 B) 120 C) 60 D) 240 E) None of the above

D

15. McDonald's 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 hamburger. This practice is an example of: A) peak-load pricing. B) intertemporal price discrimination. C) two-part tariff. D) Second degree price discrimination. E) Third degree price discrimination.

E

5. Selling food processors along with coupons that can be sent to the manufacturer for a $10 rebate. This practice is an example of A) peak-load pricing. B) intertemporal price discrimination. C) two-part tariff. D) Second degree price discrimination. E) Third degree price discrimination.

E

7. Low airfares requires airline travelers to spend at least one Saturday night away from home. This practice is an example of A) peak-load pricing. B) intertemporal price discrimination. C) two-part tariff. D) Second degree price discrimination. E) Third degree price discrimination.

E

19. The local zoo has hired you to assist them in setting admission prices. The zoo's managers recognize that there are two distinct demand curves for zoo admission. One demand curve applies to those ages 12 to 64, while the other is for children and senior citizens. The two demand curves are: Pa = 9.6 − 0.08Qa Pcs = 4 − 0.05Qcs where Pa = adult price, Pcs = children's/senior citizen's price, QA = daily quantity of adults, and QCS = daily quantity of children and senior citizens. Crowding is not a problem at the zoo, so that the managers consider marginal cost to be zero. If the zoo decides to price discriminate, what are the profit maximizing price and quantity in each market?

Market A: REVA = PA(QA)QA = (9.6 − 0.08QA)QA = 9.6QA − 0.08QA 2 . MRA = 9.6 − 0.16QA. Profit maximization MRA = MC , that is, 9.6 − 0.16QA = 0 and QA = 60. Consequently PA = 9.6 − 0.08 ∗ 60 = 4.8 Market CS: REVCS = PCS (QCS )QCS = (4 − 0.05QCS )QCS = 4QCS − 0.05QCS2 . MRCS = 4 − 0.1QCS . Profit maximization MRCS = MC , that is, 4 − 0.1QCS = 0 and QCS = 40. Consequently PCS = 4 − 0.05 ∗ 40 = 2

18. American Tire and Rubber Company sells identical radial tires under the firm's own brand name and private label tires to discount stores. The radial tires sold in both sub-markets are identical, and the marginal cost is constant at $10 per tire for both types. The firm has estimated the following demand curves for each of the markets. PB = 70 − 0.0005QB (brand name) PP = 20 − 0.0002QP (private label). Quantities are measured in thousands per month and price refers to the wholesale price. American currently sells brand name tires at a wholesale price of $28.50 and private label tires for a price of $17. Are these prices optimal for the firm?

No. Optimal prices should be PB = $40; PP =$15