Econ 11.1-11.5

Firms with market power employ various pricing strategies designed to immediately capture consumer surplus and convert it into additional profits. Which of the following is not one of those pricing​ strategies? A. Predatory pricing. B. ​Two-part tariffs. C. Bundling. D. Price discrimination.

A. Predatory pricing.

How can a firm determine an optimal​ two-part tariff if it has two customers with different demand​ curves? ​ (Assume that it knows the demand​ curves.) The firm should set A. a usage fee​ (P*) greater than marginal cost and an entry fee​ (T*) equal to the remaining surplus of the consumer with the smaller demand such that profit is maximized with respect to P and T. B. a usage fee​ (P*) greater than marginal cost and an entry fee​ (T*) equal to the remaining surplus of the consumer with the larger demand such that profit is maximized with respect to P and T. C. a usage fee​ (P*) equal to zero and an entry fee​ (T*) equal to the remaining surplus of the consumer with the smaller demand such that profit is maximized with respect to P and T. D. a usage fee​ (P*) equal to marginal cost and an entry fee​ (T*) equal to the surplus of the consumer with the smaller demand. E. a usage fee​ (P*) equal to marginal cost and an entry fee​ (T*) equal to the surplus of the consumer with the larger demand.

A. a usage fee​ (P*) greater than marginal cost and an entry fee​ (T*) equal to the remaining surplus of the consumer with the smaller demand such that profit is maximized with respect to P and T.

Electric utilities often practice​ second-degree price discrimination. Why might this improve consumer​ welfare? ​Second-degree price discrimination might improve consumer welfare​ because, compared with​ single-monopoly pricing, A. output is higher. B. profit is higher. C. prices are lower. D. variety is greater. E. producer surplus is lower.

A. output is higher.

Suppose a firm can practice​ perfect, first-degree price discrimination. What is the lowest price it will​ charge, and what will its total output​ be? The lowest price and total output will occur at the point where A. the marginal cost curve intersects the demand curve. B. the marginal cost curve intersects the marginal expenditure curve. C. the average cost curve intersects the demand curve. D. the marginal revenue curve intersects the marginal cost curve. E. the demand curve intersects the supply curve.

A. the marginal cost curve intersects the demand curve.

How does a car salesperson practice price​ discrimination? The salesperson practices A. ​first-degree price discrimination by trying to charge an entry fee and a per unit price. B. imperfect price discrimination by trying to determine each​ customer's reservation price. C. ​second-degree price discrimination by trying to determine each​ customer's marginal value. D. predatory price discrimination by trying to charge different prices to different groups of consumers. E. ​third-degree price discrimination by trying to determine each​ customer's demand. How does the ability to discriminate correctly affect his or her​ earnings? A. If the negotiated price is higher than the reservation​ price, a sale is​ lost, and if the negotiated price is lower than the reservation​ price, some profit is lost. B. If the reservation price is higher or lower than the reservation​ price, revenue is gained. C. If the negotiated price equals the reservation​ price, profit equals zero. D. If the negotiated price is higher than the reservation​ price, some profit is​ lost, and if the negotiated price is lower than the reservation​ price, a sale is lost. E. If the reservation price is higher or lower than the reservation​ price, a sale is lost.

B. imperfect price discrimination by trying to determine each​ customer's reservation price. A. If the negotiated price is higher than the reservation​ price, a sale is​ lost, and if the negotiated price is lower than the reservation​ price, some profit is lost.

Which of the following is an example of intertemporal price​ discrimination? A. Charging a high price for a​ round-trip flight without a Saturday night stay and a lower price for the same flight that includes a Saturday night stay. B. Charging a high price for one light bulb and a lower price per bulb for a package of four light bulbs. C. Charging a high price for a hardback edition book and a lower price for the paperback version released a year later. D. All of the above.

C. Charging a high price for a hardback edition book and a lower price for the paperback version released a year later.

Why is the pricing of a Gillette safety razor a form of​ two-part tariff? A. The razor and blades can be purchased as a package or separately. B. The razor and blades are packaged together. C. The razor is the entry fee and the blades are the usage fee. D. The razor and the blades have different prices. E. The razor and the blades are not both demanded by all consumers. Must Gillette be a monopoly producer of its blades as well as its​ razors? A. It has to be a monopoly producer of blades if arbitrage is possible. B. It​ doesn't have to be a monopoly producer of blades if all customers have identical demand curves. Your answer is correct. C. It​ doesn't have to be a monopoly producer of blades if it can distinguish consumer types. D. It​ doesn't have to be a monopoly producer of blades if the marginal cost of production is constant. E. It has to be a monopoly producer of blades if all customers have identical demand curves. Suppose you were advising Gillette on how to determine the two parts of the tariff. What advice could you​ offer? A. When consumers have different demand​ curves, the blade price should equal zero and the razor price should equal the largest consumer surplus. B. When consumers have identical demand​ curves, the blade price should equal marginal cost and the razor price should equal consumer surplus for each consumer. C. When consumers have identical demand​ curves, the blade price should equal zero and the razor price should equal consumer surplus for each consumer. D. When consumers have different demand​ curves, the blade price should equal marginal revenue and the razor price should equal the smallest consumer surplus. E. When consumers have different demand​ curves, the blade price should equal marginal cost and the razor price should equal the smallest consumer surplus.

C. The razor is the entry fee and the blades are the usage fee. B. It​ doesn't have to be a monopoly producer of blades if all customers have identical demand curves. B. When consumers have identical demand​ curves, the blade price should equal marginal cost and the razor price should equal consumer surplus for each consumer.

A​ price-discriminating monopolist will charge a higher price to consumers whose demand is A. horizontal. B. linear. C. less elastic. D. more elastic.

C. less elastic.

Suppose a long bridge into a major U.S. city charges a higher toll​ (price) during rush hours on weekdays than at other times of the day. This is an example of A. ​second-degree price discrimination. B. intertemporal price discrimination. C. ​peak-load pricing. D. ​third-degree price discrimination.

C. ​peak-load pricing.

A monopolist that practices perfect price discrimination A. charges each consumer the maximum price the consumer is willing to pay. B. drives consumer surplus to zero. C. produces the perfectly competitive level of output. D. All of the above are correct. E. Only A and B are correct.

D. All of the above are correct.

When pricing​ automobiles, American car companies typically charge a much higher percentage markup over cost for​ "luxury option" items​ (such as leather​ trim, etc.) than for the car itself or for more​ "basic" options such as power steering and automatic transmission. Explain why. A. Luxury options have a higher price elasticity of demand than basic options. B. Basic options are in greater supply than the luxury options. C. Basic options are standard and therefore customers are unwilling to pay a premium for them. D. Luxury options have a lower price elasticity of demand than basic options. E. Basic options cost automobile companies substantially less than luxury options.

D. Luxury options have a lower price elasticity of demand than basic options.

If the demand for​ drive-in movies is more elastic for couples than for single​ individuals, it will be optimal for theaters to charge one admission fee for the driver of the car and an extra fee for passengers. True or​ false? Explain. A. False. The firm should intead set one price for a single person and another price for couples. B. True. This is a form of​ second-degree price​ discrimination, where customers are sorted by their demand for movies into different markets. C. False. The firm should instead set a high price for a car with only one passenger and a low price for a car with two or more passengers. D. True. This is a form of​ two-part tariff with an entry fee equal to the consumer surplus of the driver and a price for each passenger. E. False. The firm should instead set the same price for each car based on the marginal cost of production.

D. True. This is a form of​ two-part tariff with an entry fee equal to the consumer surplus of the driver and a price for each passenger.

In the town of​ Woodland, California, there are many dentistslong dashthe market is competitivelong dashbut only one eye doctor. Are senior citizens more likely to be offered discount prices for dental exams or for eye​ exams? Why? Seniors are more likely to get a discount for A. a dental exam because as a monopolist the eye doctor​ doesn't have to discount the price to get business. B. a dental exam because firms in a competitive market must fiercely compete for every customer. C. an eye exam because a monopoly will offer discounts to promote goodwill to avoid government regulation. D. an eye exam because a firm must have market power to price discriminate. E. an eye exam because a firm must know reservation prices to price discriminate.

D. an eye exam because a firm must have market power to price discriminate.

A firm sells a product and the refills that must be used to operate the product​ (like printers and ink​ cartridges). The firm wants to design a​ two-part tariff for pricing the product​ (the entry fee​) and its refills​ (the usage fee​). If all its customers have the same demand​ curve, the firm should set A. the price of the product at the monopoly level and give away the refills. B. the price of the refills at the monopoly level and give away the product. C. the price of the product equal to marginal cost and the price of the refills equal to each​ customer's consumer surplus. D. the price of the refills equal to marginal cost and the price of the product equal to each​ customer's consumer surplus.

D. the price of the refills equal to marginal cost and the price of the product equal to each​ customer's consumer surplus.

How is​ peak-load pricing a form of price​ discrimination? It is a form of price discrimination because A. demand can vary with the time of​ day; thus, the firm can charge a lower price when demand is higher and marginal cost is lower. B. demand can vary with customer​ age; thus, the firm can charge a lower price to customers whose demand is higher. C. demand can vary with customer​ age; thus, the firm can charge a lower price to customers whose demand is more elastic. D. demand can vary with the time of​ day; thus, the firm can charge a higher price when demand is more elastic and marginal cost is higher. E. demand can vary with the time of​ day; thus, the firm can charge a lower price when demand is more elastic and marginal cost is lower. Can it make consumers better​ off? With​ peak-load pricing, consumers are A. better off because of increased efficiency. B. better off because prices are further from marginal cost. C. worse off because firms charge higher prices. D. better off because marginal costs are minimized. E. worse off because firms capture consumer surplus.

E. demand can vary with the time of​ day; thus, the firm can charge a lower price when demand is more elastic and marginal cost is lower. A. better off because of increased efficiency.

Why does optimal​ third-degree price discrimination require that marginal revenue for each group of consumers equals marginal​ cost? Assume that marginal cost increases with output and that there are only two groups of consumers. If marginal revenue for one group was greater than marginal​ cost, A. the firm could increase profit by lowering the price and increasing output for that​ group, and then increasing output and raising the price for the other goup. B. the firm could increase profit by raising the price and increasing output for that​ group, and then decreasing output and lowering the price for the other goup. C. the firm could increase profit by setting the same price for both groups. D. the firm could increase profit by lowering the price and increasing output for that​ group, and then increasing output and lowering the price for the other goup. E. the firm could increase profit by lowering the price and increasing output for that​ group, and then decreasing output and raising the price for the other goup. Use this condition to explain how a firm should change its prices and total output if the demand curve for one group of consumers shifts​ outward, causing marginal revenue for that group to increase. Assume that marginal cost increases with output and that there are only two groups of consumers. If demand increases for one​ group, the firm should 1. the output for that​ group, while 2. the output and 3. the price for the other group. In the group with the increased​ demand, the price may or may not increase depending on how the curve shifts.

E. the firm could increase profit by lowering the price and increasing output for that​ group, and then decreasing output and raising the price for the other goup. 1. increase 2.decreasing 3. increasing