Microeconomics Ch.11

Peak Load Pricing

Charging higher prices during peak periods when capacity constraints cause marginal costs to be high.

A firm setting a two-part tariff with only one customer should set the entry fee equal to...

Consumer Surplus

Intertemporal Price Discrimination

Separating consumers with different demand functions into different groups by charging different prices at different points in time.

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...

in the foreign market will equal the marginal cost; in the domestic market will equal the marginal cost; in the domestic market will equal the marginal revenue in the domestic market.

Advertising Rule of thumb:

A/PQ= -(E_A/ E_P)

Mixed Bundling

Customer can buy the goods individually or as a package.

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

Intertemporal Price Discrimination

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?

MR must be the same for both full-fare and upgrade customers.

What is the key characteristic of profit maximizing price discrimination that distinguishes intertemporal price discrimination from peak-load pricing?

Marginal costs for the firm are different across time periods under peak-load pricing.

A local restaurant offers ʺearly birdʺ price discounts for dinners ordered from 4:30 to 6:30 PM. This is an example of

Peak Price Loading

Third degree price discrimination

The practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group

An amusement park charges an entrance fee of $75 per person plus $2.50 per ride. This is an example of

Two Party tariff

first-degree price discrimination

When a firm charges each customer the maximum price that the customer is willing to pay

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 is attempting to:

convert consumer surplus into producer surplus.

Second-degree price discrimination

the practice of charging different prices for different quantity blocks of the same good or service