ECON 151 Assignment #9

Name one barrier to entry a new firm would face in competing​ with: i. Google in online advertising ii. Apple in smartphones iii. Facebook in social media apps iv. Amazon in online retailing

- The knowledge to provide services with the latest technologies. - The usefulness of the product increases with the number of consumers who use it. - The ability to produce on a large scale at a low average cost.

An example of yield management is

- a college adjusting the cost of tuition with financial aid according to whether the student came for an on−campus visit. - an airline adjusting plane ticket prices each day according to day of the week. - a ship adjusting cruise prices according to the number of days remaining before departure. - a book company adjusting the price of a novel according to time since introduction.

Price discrimination is when

- firms charge a higher price for a product when it is first introduced and a lower price later. - firms charge a higher price to customers who are less sensitive to price and a lower price to consumers who are more sensitive to price. - firms charge each consumer a different price equal to that​ consumer's willingness to pay.

What does the columnist mean by​ "barriers to​ entry"?

Anything that keeps new firms from entering an industry in which firms are earning economic profits.

What is perfect price​ discrimination?

Charging every consumer a different price equal to their willingness to pay

What is the law of one​ price?

Identical products should sell for the same price​ everywhere, assuming no transactions costs.

How might​ "fast-changing technology" reduce the importance of the barriers to entry you identified​ above?

It may create opportunities for new firms to offer goods and services that better serve their​ customers' wants.

What quantity on the graph represents​ long-run equilibrium if the firm were perfectly​ competitive?

MC = ATC = D

What is yield​ management? Give an example of a firm using yield management to increase profits. Yield management is the practice of

continually adjusting prices to take into account fluctuations in demand.

Efficiency is maximized when

demand equals marginal cost.

Perfect price discrimination is

efficient because it converts into producer surplus what had been consumer surplus and deadweight loss.

Do airlines practice price discrimination?

YES, by charging business travelers and leisure travelers different prices. Price discrimination The practice of charging different prices to different customers for the same product when the price differences are not due to differences in cost. Airlines practice price discrimination​ because: 1. Airlines seats are a perishable product. 2. The marginal cost of flying one additional passenger is low. For​ example, airlines: 1. Charge business travelers and leisure travelers different prices. 2. Charge lower prices for tickets purchased well in advance of the flight. 3. Reduce the price on seats that they expect will not be sold. 4. Charge lower prices to passengers who will stay at their destination over a Saturday night.

The government regulated price where efficiency is maximized is where

average total cost equals demand.

Arbitrage is

buying a product in one market at a low price and reselling it in another market at a higher price.

​Cost-plus pricing is

charging consumers a price by adding a percentage markup to average cost.

For​ example, business travelers have a more ___ demand than leisure​ travelers, so airlines charge business travelers a ___ price.

inelastic; higher Business​ travelers: ≻Often have inflexible schedules. ≻​Can't commit until the last minute to traveling on a particular day ≻Are not very sensitive to changes in price. Leisure​ travelers: ≻Are flexible about when they travel ≻Are willing to buy their tickets well in advance ≻Are sensitive to changes in price ​Therefore, demand for business travelers is more​ inelastic, and airlines consequently charge them higher prices.

The percentage markup

is higher on products that have inelastic demand and is lower on products that have elastic demand.

This is a monopolistically competitive firm because

its demand curve is downward sloping.

The efficient price and quantity IN A NATURAL MONOPOLY is where

marginal cost equals demand.

A monopoly maximizes profit by producing a quantity where

marginal cost equals marginal revenue and charging the corresponding price for that quantity indicated by the demand curve. Profit equals price minus the average cost of production for units produced.

​Cost-plus pricing is

not consistent with a firm maximizing profits because it ignores demand.

​Cost-plus pricing is

not necessarily consistent with a firm maximizing profits because it ignores demand and focuses on average cost rather than marginal cost. If marginal cost is significantly different than average cost at the current level of​ production, then it is unlikely that price is set such that the quantity sold is where marginal cost equals marginal revenue.

What is​ cost-plus pricing? An example of​ cost-plus pricing is charging a price

percent higher than average cost.

Firms might charge different prices for the same product even when transactions costs are zero and the product can be resold if the

reputations of the firms are different.

The graph shows a ____ equilibrium because the firm is making _____ economic profits.

short-run; positive

Under what circumstances can a firm successfully practice price​ discrimination? To successfully practice price​ discrimination,

some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.

A natural monopoly is a situation in which economies of scale are so large that one firm can

supply the entire market at a lower average total cost than can two or more firms.

Arbitrage would be prevented from ensuring that identical products sell for the same price everywhere if

transaction costs are high.

Perfect price discrimination is

unlikely to occur because firms typically do not know how much each consumer is willing to pay.

Odd pricing is

when prices end in ​"9​."

Is the reseller exploiting the people who buy these goods from him on​ Amazon? Briefly explain.

​No, because the people who bought these goods must have been made better off by purchasing these goods.

In​ 2016, Walmart closed 150 stores in the United States and deeply discounted the merchandise in them. Some people bought the merchandise at these low prices and resold it on​ Amazon, eBay, and other sites. An article in the Wall Street Journal described one reseller​ who: "sent three employees in a​ 26-foot truck to the nearest closing​ Walmart, about 160 miles south.... They hauled off​ $35,000 in​ merchandise, like Legos and Star Wars​ pajamas, which he said he expects to sell for as much as​ $100,000 on​ Amazon." Is the reseller making a​ $65,000 profit on these​ goods? Briefly explain.

​No, the seller is making less than​ $65,000 because he incurs transactions costs.