ECON Chapter 10 Advance pricing decisions
You are thinking of building a restaurant on Cape Cod. The marginal cost of building the restaurant is equal to $15 per diner, and the marginal cost of an additional meal is $20 per diner. In the peak vacation period, the weekly demand function is: QPEAK=$4,200−40PPEAK. In the off-peak period, the weekly demand function is: QOFF−PEAK=$1,800−20POFF−PEAK. P is the price of a meal. The profit-maximizing quantity of meals during the peak vacation period is 1,400. The profit-maximizing price of a meal during the peak vacation period is $70.00. The profit-maximizing quantity of meals during the off-peak vacation period is 700. The profit-maximizing price of a meal during the off-peak vacation period is $55.
1400 70.00 700 55
Say that you are a manager for Bloomin' Brands, the restaurant company that owns Outback Steakhouse. Your research department has determined that the demand from adults is different than the demand from seniors and has estimated the demand curves shown in Figure A and Figure B. Your estimate of the marginal cost curve appears in Figure C. To maximize your profit, you should sell 5000 dinners in a month. The number of dinners you will sell to adults in a month is 4000. The price you will charge for each adult dinner is $28. The number of dinners you will sell to seniors in a month is 1000. The price you will charge for each senior dinner is $24.
5,000 dinners 4000 dinners sold $28 seniors 1,000 dinners sold $24
You are a manager at Regal Cinema. You determine that at the Regal College in Appleton, the demand for students and adults have the marginal revenues in the adjacent table. The marginal cost for different quantities of movie goers is also in the table. What is the profit-maximizing number of tickets to sell? A. 20 B. 40 C. 60 D. None of the above answers are correct.
60
You are a manager at Regal Cinema. You determine that at the Regal College in Appleton, the demand for students and adults have the marginal revenues in the adjacent table. What is the total quantity that has a marginal revenue of $10? A. 60 B. 20 C. 40 D. None of the above answers are correct.
60
Compared to a single-price monopoly, a firm using first-degree price discrimination ____ consumer surplus and ____ the firm's economic profit. A. decreases; decreases B. decreases; increases C. increases; decreases D. increases; increases
B. decreases; increases
Sled dogs in Alaska must be fed year-round. They are generally fed USDA-inspected ground beef, identical to that sold for human consumption. Meat producers often add activated charcoal to the ground beef destined for dogs. The activated charcoal is harmless but makes the meat significantly less appealing for humans. Activated charcoal is not free, but the price of meat for dogs is less than the price of meat for humans. Why do meat producers add charcoal to meat intended for dog food and then sell it at a lower price? A. The meat producers are using first-degree price discrimination, and they add charcoal so that they can maintain their market power by offering a differentiated product. B. The meat producers are using second-degree price discrimination, and they add charcoal so the customers pay more for the first unit of meat intended for them and less for subsequent units intended for dogs. C. The meat producers are using third-degree price discrimination by selling at different prices to two groups of consumers, and they add charcoal to prevent arbitrage. D. The meat producers are using first-degree price discrimination, and they add charcoal so the customers pay the maximum amount they are willing to pay for each kind of meat.
C. The meat producers are using third-degree price discrimination by selling at different prices to two groups of consumers, and they add charcoal to prevent arbitrage.
If the demand and cost are the same, managers who use second-degree price discrimination make an economic profit that is ____ their economic profit if they charge every consumer the same price for every unit of the product they buy. A. not comparable to B. smaller than C. the same as D. larger than
D. larger than
Do you need market power to practice peak-load pricing? Why or why not? A. Market power is required to practice peak-load pricing as the firm would otherwise face a horizontal demand curve and would not be able to raise its price above its marginal cost. B. Market power is not required to practice peak-load pricing as the firm faces a horizontal demand curve in this case, but is still able to raise its price above its marginal cost. C. Market power is not required to practice peak-load pricing as the firm faces a horizontal supply curve in this case, but is still able to raise its price above its marginal cost. D. Market power is required to practice peak-load pricing as the firm would otherwise face a horizontal supply curve and would not be able to raise its price above its marginal cost.
Market power is required to practice peak-load pricing as the firm would otherwise face a horizontal demand curve and would not be able to raise its price above its marginal cost.
Why is the off-peak price unaffected by the marginal cost of expanding capacity? A. The peak demand determines capacity. During the off-peak period, the marginal cost of expanding capacity is irrelevant as it always exceeds the off-peak price. B. The off-peak demand determines capacity. During the off-peak period, the marginal cost of expanding capacity is irrelevant as the capacity is exactly equal to the demand. C. The off-peak demand determines capacity. During the off-peak period, the marginal cost of expanding capacity is irrelevant as the off-peak price is determined by the average total cost. D. The peak demand determines capacity. During the off-peak period, the marginal cost of expanding capacity is irrelevant as there is excess capacity.
The peak demand determines capacity. During the off-peak period, the marginal cost of expanding capacity is irrelevant as there is excess capacity.
The figure illustrates the demand at a pizza franchise. Suppose that there are 10,000 customers with identical demands. Each customer will visit the pizza shop once a year and buy either one, two, or three pizzas. Each customer is willing to pay some price between $14.00 and $13.00 for the first pizza (so some will pay $13.50, others will pay $13.25, and so on), between $13.00 and $12.00 for the second pizza, and between $12.00 and $11.00 for the third pizza. Suppose the managers do not price discriminate. The price they will charge is $11.00 per pizza, and the quantity of pizzas they will sell is 15,000. The consumer surplus will equal $22,500. Suppose the managers practice price discrimination by charging one price for a customer's first pizza, a second price for a customer's second pizza, and a third price for a customer's third pizza. Their profit-maximizing prices will be $13.00 for the first pizza, $12.00 for the second pizza, and $11.00 for the third pizza. The consumer surplus is $7,500. The amount by which the economic profit changes from the previous case is $15,000.
The profit-maximizing quantity is found at the intersection of the marginal revenue and marginal cost curves. From the figure, this quantity is 15,000 pizzas per year. The profit-maximizing price is the highest price that still enables the franchise to sell 15,000 pizzas, which the demand curve shows is $11.00. Consumer surplus (CS) is a triangle with the profit-maximizing quantity as its base and $14.00−$11.00 as its height. Using the formula for the area of a triangle, we have: CS=(1/2)×base×height. So, CS=(1/2)×15,000×($14.00−$11.00) ⇒ $22,500. The managers are engaging in second-degree price discrimination. The optimal prices are the prices customers are willing to pay for the 5,000th pizza, the 10,000th pizza, and the 15,000th pizza because these are the 1st, 2nd, and 3rd pizzas for the customer with the lowest willingness to pay. Consequently, the prices are $13.00 for the first pizza, $12.00 for the second pizza, and $11.00 for the third pizza. Consumer surplus (CS) is now three smaller triangles for the quantities between 0 to 5,000, 5,000 to 15,000, and 15,000 to 15,000: CS1=(1/2)×(5,000−0)×($14.00−$13.00)=$2,500. CS2=(1/2)×(10,000−5,000)×($13.00−$12.00)=$2,500. CS3=(1/2)×(15,000−10,000)×($12.00−$11.00)=$2,500. Total CS=CS1+CS2+CS3=$7,500. The firm's economic profit has increased by the same amount as that by which the consumer surplus has decreased from the single-price situation; i.e., $15,000.
Suppose American Airlines is practicing third-degree price discrimination by charging business travelers and pleasure travelers different prices for the same flight. Its managers discover that the marginal revenue from pleasure travelers is $250 and from business travelers is $200. So, American Airlines can increase its profit by selling one ▼ less business trip and one ▼ more pleasure trip.
less, more
If you can use third-degree price discrimination, you will set the highest markup in the market with the A. highest price elasticity of demand. B. highest marginal cost. C. lowest marginal cost. D. lowest price elasticity of demand.
lowest price elasticity of demand
To use first-degree price discrimination, the managers must charge each customer A. a price that equals the firm's marginal cost of each unit. B. a price that leaves the consumers with the maximum amount of consumer surplus. C. the exact same price. D. the highest price that customer is willing to pay for each unit the customer buys.
the highest price that customer is willing to pay for each unit the customer buys.
You are a manager at Regal Cinema. You determine that at the Regal College in Appleton, the demand for students and adults have the marginal revenues in the adjacent table. The marginal cost for different quantities of movie goers is also in the table. The profit-maximizing number of student tickets is ____ and the profit-maximizing number of adult tickets is ____. A. 40; 20 B. 40; 40 C. 60; 60 D. 20; 40
20; 40
The figure illustrates the demand at a pizza franchise. Suppose that there are 10,000 customers with identical demands. Each customer will visit the pizza shop once a year and buy either one, two, or three pizzas. Each customer is willing to pay some price between $14.00 and $12.00 for the first pizza (so some will pay $13.50, others will pay $12.25, and so on), between $12.00 and $10.00 for the second pizza, and between $10.00 and $8.00 for the third pizza. Suppose the managers do not price discriminate. The price they will charge is $10.00 per pizza, and the quantity of pizzas they will sell is 20,000. The consumer surplus will equal $40,000. Suppose the managers practice price discrimination by charging one price for a customer's first pizza, a second price for a customer's second pizza, and a third price for a customer's third pizza. Their profit-maximizing prices will be $12.00 for the first pizza, $10.00 for the second pizza, and $8.00 for the third pizza. The consumer surplus is $30,000. The amount by which the economic profit changes from the previous case is $10,000.
10.00 per pizza 20,000 pizzas per year CS=12×20,000×($14.00−$10.00) ⇒ $40,000. The managers are engaging in second-degree price discrimination. The optimal prices are the prices customers are willing to pay for the 10,000th pizza, the 20,000th pizza, and the 30,000th pizza because these are the 1st, 2nd, and 3rd pizzas for the customer with the lowest willingness to pay. Consequently, the prices are $12.00 for the first pizza, $10.00 for the second pizza, and $8.00 for the third pizza. Consumer surplus (CS) is now three smaller triangles for the quantities between 0 to 10,000, 10,000 to 20,000, and 20,000 to 30,000: CS1=(1/2)×(10,000−0)×($14.00−$12.00)=$10,000. CS2=(1/2)×(20,000−10,000)×($12.00−$10.00)=$10,000. CS3=(1/2)×(30,000−20,000)×($10.00−$8.00)=$10,000. Total CS=CS1+CS2+CS3=$30,000. The firm's economic profit has increased by the same amount as that by which the consumer surplus has decreased from the single-price situation; i.e., $10,000.
There are 200 golfers with identical monthly demands equal to: Q=16−0.2P, where P is the price per round (the greens fee) and Q is the number of rounds. The marginal revenue from this demand is: MR=80−10Q. The marginal cost of an additional round of golf is constant and is equal to $20. There is no fixed cost. The optimal quantity for a monopolist that charges a single price is 6 rounds of golf per month, and the optimal price is $50 per round. The total economic profit of the monopolist is $180. The adjacent figure (Figure A) shows the demand curve (D), the marginal revenue curve (MR), the marginal cost curve (MC), and the average total cost curve (ATC) of the firm. Using the rectangle-drawing tool, show the economic profit of the monopolist when it charges a single price. If half of the golfers are men and half are women, can the managers increase their economic profit by using third-degree price discrimination (assuming that price discrimination on the basis of gender is legal)? (Check all that apply.) A. The managers can improve their profit by engaging in price discrimination because both groups do not have the same willingness to pay. B. The managers can improve their profit by engaging in price discrimination because all the golfers do not have identical demands. C. The managers cannot improve their profit by engaging in price discrimination because both groups have the same willingness to pay. D. The managers cannot improve their profit by engaging in price discrimination because all the golfers have identical demands. If the managers use two-part pricing, the optimal membership charge would be $360 and the per-round fee would be $20. The total economic profit would be $72,000. The managers increase their economic profit with a separate membership charge (access fee) and a per-round fee (user fee). The adjacent figure (Figure B) shows the demand curve (D), the marginal revenue curve (MR), the marginal cost curve (MC), and the average total cost curve (ATC) of the firm. Using the triangle-drawing tool, show the consumer surplus for each golfer when the managers use two-part pricing. Carefully follow the instructions above and only draw the required objects.
6 50 180 C. The managers cannot improve their profit by engaging in price discrimination because both groups have the same willingness to pay. D. The managers cannot improve their profit by engaging in price discrimination because all the golfers have identical demands. 360 20 72000 increase
MasterCuts is a midlevel hair salon that has some market power. Suppose that the managers of MasterCuts have set prices for a basic haircut of $22 for an adult and $12 for a child. The marginal costs of both types of haircuts are equal. The managers discover that the marginal revenue from an adult haircut is $18 and the marginal revenue from a child haircut is $10. Should these managers change the prices of the adult and child haircuts to maximize their profit? Why or why not? (Check all that apply). A. MasterCuts should not change its prices because it is already selling the profit-maximizing number of haircuts where its marginal revenue is equal to marginal cost. B. MasterCuts should change its prices because it can increase its profits by selling more adult haircuts and fewer child haircuts until both marginal revenues are equal. C. MasterCuts should not change its prices because it already has significant market power. D. MasterCuts should change its prices because marginal revenue from an adult haircut is more than the marginal revenue from a child haircut. Which way should the price of adult haircuts move relative to the price of child haircuts? A. The price of adult haircuts would increase while the price of child haircuts would decrease. B. The price of adult haircuts would decrease while the price of child haircuts would remain unchanged. C. The price of adult haircuts would remain unchanged while the price of child haircuts would increase. D. The price of adult haircuts would decrease while the price of child haircuts would increase.
B. MasterCuts should change its prices because it can increase its profits by selling more adult haircuts and fewer child haircuts until both marginal revenues are equal. D. MasterCuts should change its prices because marginal revenue from an adult haircut is more than the marginal revenue from a child haircut. D. The price of adult haircuts would decrease while the price of child haircuts would increase.
If a firm faces a high-demand period (a peak-period) followed by a low-demand period (an off-peak period), the firm's capacity depends on A. the low-demand period and not the high-demand period. B. the difference between the high-demand and low-demand. C. the sum of the high-demand plus the low-demand. D. the high-demand period and not the low-demand period.
D. the high-demand period and not the low-demand period.
The managers of an upscale seafood restaurant have determined that adult and senior diners have different demands. The adult demand function for dinners is: Qd=200−P and the senior demand function for dinners is: Qd=180−2P. The marginal cost of a dinner is constant at $20. Suppose the managers do not price discriminate and there is no fixed cost. The price they will charge per dinner is $73.33. Suppose the managers do price discriminate. The price they will charge adults is $110 per dinner, and the price they will charge seniors is $55 per dinner. The quantity of dinners they will sell to adults is 90, and the quantity of dinners they will sell to seniors is 70. Suppose there is no fixed cost. The restaurant's economic profit if the managers charge one price is $8,532.80. The restaurant's economic profit if the managers engage in price discrimination is $10,550.00. Do the managers want to price discriminate? A. Yes, the managers want to price discriminate because they will be able to increase their economic profits. B. Yes, the managers want to price discriminate because they will be able to reduce their marginal cost. C. No, the managers do not want to price discriminate because their profits would not increase. D. No, the managers do not want to price discriminate because they would not be able to convert the consumer surplus into additional profits.
Q = 200 - P + 185 - 2P Q = 380 - 3P P = (380 - Q) / 3 Total revenue (TR) = P x Q = (380Q - Q^2) / 3 MR = dTR/dQ = (380 - 2Q) / 3 Equating MR and MC, (380 - 2Q) / 3 = 20 380 - 2Q = 60 2Q = 320 Q = 160 P = (380 - 160) / 3 = 220/3 = 73.33 B. For adult population: MC = $20 Q = 200-P or P = 200-Q MR = 200-2Q For profit maximization, MR = MC 20 = 200-2Q Q = 180/2 = 90 P = 200-90 = $110 For senior population: Q = 185-2P P = 185/2 - .5Q or P = 90 - .5Q 20 = 90-Q Q = 90-20 = 70 P = 90-(.5*70) = $55.00 Profit=($73.33−$20)×160=$8,532.80. Profit=($110−$20)×90+($55.00−$20)×70=$10,550.00. A. Yes, the managers want to price discriminate because they will be able to increase their economic profits.
Suppose that you are a manager for Adobe Systems, the creator of Photoshop and other software products. Adobe rents most of its products to its customers. Suppose that it has two classes of customers for its Photoshop program: students and businesspeople. Say that the demand function for students is: QS=400,000 programs−1,000P. And, the demand function for businesspeople is: QB=900,000 programs−1,000P. In both demand functions, P is the annual rental price of the program. Because Photoshop is delivered over the Internet, the marginal cost of another program is $0. Suppose that Adobe has fixed costs of $3,000,000. Suppose price discrimination is possible. The rental price that you would recommend Adobe to charge students would be $200, and the quantity of products that it should rent would be 200,000 programs. The rental price that you would recommend Adobe to charge businesspeople would be $450, and the quantity of products that it should rent would be 450,000 programs. Adobe's economic profit or economic loss would be $239,500,000 Suppose price discrimination is not possible. The rental price that you would recommend Adobe to charge would be $325, and the quantity of products that it should rent would be 650,000 products. Adobe's economic profit or loss would be $208,250,000. Is Adobe's economic profit larger when it price discriminates or when it sets a single rental price? A. Adobe's profit is larger when it price discriminates because Adobe is able to convert more consumer surplus into profit. B. Adobe's profit is larger when it sets a single price because it helps Adobe uniformly increase its revenues. C. Adobe's profit is larger when it sets a single price because Adobe is able to convert more consumer surplus into profit. D. Adobe's profit is larger when it price discriminates because it has increased Adobe's production efficiency. How might Adobe successfully engage in price discrimination? (Check all that apply.) A. Adobe can engage in price discrimination by maintaining its market power. Your answer is correct. B. Adobe can engage in price discrimination if it sets its price independent of the intersection of marginal cost and marginal revenue. C. Adobe can engage in price discrimination if it can prevent arbitrage. D. Adobe can engage in price discrimination if there are at least two different customer groups in the market and it can classify each customer into the appropriate group.
Qs=400,000-1000P => 400- (1/1000)Qs = 400- (1/500)Qs = 0 => 200,000 Ps =400- (200,000/1000)Qs Ps = 200 Qb=900,000-1000P => 900- (1/1000)Qb = 900- (1/500)Qb = 0 => 450,000 Pb =900- (450,000/1000)Qb Pb =450 economic profit=[($200×200,000)+($450×450,000)]−$3,000,000=$239,500,000. Q =(400,000−1,000P)+(900,000−1,000P) =1,300,000−2,000P, if P<$500. = 650,000 Q = 900,000−1,000P, if P≥$500. 650−(1/1,000)×Q = 0 ⇒ Q=650,000 products. P=650−(1/2,000)(650,000) ⇒ P=$325. (650,000*325)-3,000,000 = 208,250,000 A. Adobe's profit is larger when it price discriminates because Adobe is able to convert more consumer surplus into profit. Adobe can engage in price discrimination if there are at least two different customer groups in the market and it can classify each customer into the appropriate group. Adobe can engage in price discrimination if it can prevent arbitrage. Adobe can engage in price discrimination by maintaining its market power.
Suppose that you are a manager for Adobe Systems, the creator of Photoshop and other software products. Adobe rents most of its products to its customers. Suppose that it has two classes of customers for its Photoshop program: students and businesspeople. Say that the demand function for students is: QS=500,000 programs−1,000P. And, the demand function for businesspeople is: QB=900,000 programs−1,000P. In both demand functions, P is the annual rental price of the program. Because Photoshop is delivered over the Internet, the marginal cost of another program is $0. Suppose that Adobe has fixed costs of $3,000,000. Suppose price discrimination is possible. The rental price that you would recommend Adobe to charge students would be $250, and the quantity of products that it should rent would be 250,000 programs. The rental price that you would recommend Adobe to charge businesspeople would be $450, and the quantity of products that it should rent would be 450,000 programs. Adobe's economic profit or economic loss would be $262,000,000. Suppose price discrimination is not possible. The rental price that you would recommend Adobe to charge would be $350, and the quantity of products that it should rent would be 700,000 products. Adobe's economic profit or loss would be $242,000,000. Is Adobe's economic profit larger when it price discriminates or when it sets a single rental price? A. Adobe's profit is larger when it sets a single price because Adobe is able to convert more consumer surplus into profit. B. Adobe's profit is larger when it price discriminates because it has increased Adobe's production efficiency. C. Adobe's profit is larger when it price discriminates because Adobe is able to convert more consumer surplus into profit. D. Adobe's profit is larger when it sets a single price because it helps Adobe uniformly increase its revenues. How might Adobe successfully engage in price discrimination? A. Adobe can engage in price discrimination if there are at least two different customer groups in the market and it can classify each customer into the appropriate group. B. Adobe can engage in price discrimination if it sets its price independent of the intersection of marginal cost and marginal revenue. C. Adobe can engage in price discrimination if it can prevent arbitrage. D. Adobe can engage in price discrimination by maintaining its market power.
Qs=500,000-1000P => 500- (1/1000)Qs = 500- (1/500)Qs = 0 => 250,000 Ps =500- (250,000/1000)Qs Ps = 250 Qb=900,000-1000P => 900- (1/1000)Qb = 900- (1/500)Qb = 0 => 450,000 Pb =900- (450,000/1000)Qb Pb =450 economic profit=[($250×250,000)+($450×450,000)]−$3,000,000=$262,000,000. Q =(500,000−1,000P)+(900,000−1,000P) =1,400,000−2,000P, if P<$500. = 700,000 Q = 900,000−1,000P, if P≥$500. 700−(1/1,000)×Q = 0 ⇒ Q=700,000 products. P=700−(1/2,000)(700,000) ⇒ P=$350. (700,000*350)-3,000,000 = 242,000,000 C. Adobe's profit is larger when it price discriminates because Adobe is able to convert more consumer surplus into profit. A. Adobe can engage in price discrimination if there are at least two different customer groups in the market and it can classify each customer into the appropriate group. C. Adobe can engage in price discrimination if it can prevent arbitrage. D. Adobe can engage in price discrimination by maintaining its market power.
The managers of an upscale seafood restaurant have determined that adult and senior diners have different demands. The adult demand function for dinners is: Qd=200−P and the senior demand function for dinners is: Qd=180−2P. The marginal cost of a dinner is constant at $25. Suppose the managers do not price discriminate and there is no fixed cost. The price they will charge per dinner is $75.83 Suppose the managers do price discriminate. The price they will charge adults is $112.5 per dinner, and the price they will charge seniors is $57.5 per dinner. (Round your answer to two decimal places.) The quantity of dinners they will sell to adults is 87.5, and the quantity of dinners they will sell to seniors is 65. Suppose there is no fixed cost. The restaurant's economic profit if the managers charge one price is $7,656.25. The restaurant's economic profit if the managers engage in price discrimination is $7,751.58. Do the managers want to price discriminate? A. No, the managers do not want to price discriminate because their profits would not increase. B. No, the managers do not want to price discriminate because they would not be able to convert the consumer surplus into additional profits. C. Yes, the managers want to price discriminate because they will be able to increase their economic profits. D. Yes, the managers want to price discriminate because they will be able to reduce their marginal cost.
Qd=(200−P)+(180−2P)= 380−3P P=(380-Q)/3 (380−2Qd)/3=25 ⇒ 380-2Q=75 ⇒305/2= Qd = 152.5dinners P=(380-152.5)/3 = $75.83, Adults: MRA=200−2QA. 200−2QA=25 ⇒ QA=87.5 dinners. PA=200−87.5=$112.5 Seniors: Qs=180-2P-.5Q =180/2-.5Q 25=90-Q =65 dinners. Ps=90−1/2(65)=$57.50 ProfitADULTS=($112.5−$25)×87.5=$7,656.25. ProfitBOTH=($75.83−$25)×152.5=$7,751.58. C. Yes, the managers want to price discriminate because they will be able to increase their economic profits.