Quiz 8 - Intermediate ECON
Your local grocery store offers a coupon that reduces the price of milk during the coming week. The regular retail price of milk in the store is $3.00 per gallon, and the coupon price is $2.00 per gallon for the next week. If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users, what is the price elasticity of demand for non-users?
-1.5
Johnny's Shop-and-Pay is a regional grocery chain, and their marketing manager is trying to determine the profit-maximizing coupon program for the store's laundry detergent brand. Coupon users at the store have an elasticity of demand for this product that equals -3, and the elasticity of demand for non-users of the coupon for the store brand equals -1.5. If the full retail (undiscounted) price of the detergent is $10 per box, what is the optimal discount to provide for coupon users?
50% off
The pricing technique known as tying:
All of these
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:
All of these
Club Med, which operates a number of vacation resorts, offers vacation packages at a lower price in the winter (i.e., the "off season") than in the summer. This practice is an example of:
Both peak-load pricing and intertemporal price discrimination are correct.
Mixed bundling is more profitable than pure bundling when:
Both the marginal cost of each good being sold is positive and the consumers' reservation values of each good being sold are not perfectly negatively correlated with one or another are correct.
Albatross Software has two main products: WindSong is a program that can be used to edit audio files and SunBurst is a program that can be used to edit digital photos. The two major types of customers are small businesses and home users. The small business customers have a reservation price of $300 for WindSong and $450 for SunBurst. The home users have a reservation price of $100 for WindSong and $125 for SunBurst. Which of the following statements is true?
Bundling the two software products is not likely to be profitable because the demands are positively correlated.
Louey's Greasy Spoon restaurant charges $15 for each dinner entree and $5 for each dessert selection, and they offer a dinner special that provide an entree and dessert for $18. If a diner at Louey's assigns zero value to dessert and $19 to an entree, what is their optimal decision?
Buy only the entree
Refer to Figure 11.2.1 above. When the firm charges the reservation price to each consumer, the additional profit equals area:
C + D
Automobile manufacturers commonly sell new car models at the full suggested retail price during the first few years the car is on the market, and they do not offer rebates or discounts. After the initial sales period, the manufacturers typically offer rebates or discounts on these models. The marginal cost of manufacturing the cars is constant across time. Which of the following statements is true?
Early buyers have higher reservation prices for the new models, and the manufacturers maximize profits by charging these buyers a higher price.
Which of the following is NOT a condition for third degree price discrimination?
Economies of scale
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?
MRA = MRB = MC.
What is the key characteristic of profit maximizing price discrimination that distinguishes intertemporal price discrimination from peak-load pricing?
Marginal costs are independent across time periods under peak-load pricing.
A local restaurant offers an "all-you-can-eat" salad bar for $3.49. However, with any sandwich, a customer can add the "all-you-can-eat" salad bar for $1.49. This is an example of:
None of these
Bindy, an 18-year-old high school graduate, and Luciana, a 40-year-old college graduate, just purchased identical hot new sports cars. Acme Insurance charges a higher rate to insure Bindy than Luciana. This practice is an example of:
None of these
The price of on-campus parking from 8:00 AM to 5:00 PM, Monday through Friday, is $3.00. From 5:00 PM to 10:00 PM, Monday through Friday, the price is $1.00. At all other times parking is free. This is an example of:
None of these
When the movie Jurassic Park debuted in Westwood, California, the price of tickets was $7.50. After several months the ticket price had fallen to $4.00. This is an example of:
None of these
Under perfect price discrimination, marginal profit at each level of output equal:
P - MC.
Which of the following product pairs would NOT be good candidates for price discrimination through tying?
Pencils and paper
MNO Limited publishes a magazine targeted at urban professionals who live on the east and west coasts of the U.S., and all of the magazines are printed at a marginal cost of $0.50 per copy at a publishing plant in Kansas. If the East Coast elasticity of demand for the magazine is -1.25 and the West Coast elasticity of demand is -1.50, what prices should MNO Limited charge for the magazines in these two markets in order to maximize profits?
Price should be $1.50 on the West Coast and $2.50 on the East Coast.
Which of the following is NOT a potential objective of tying strategies used by firms?
Reduce production costs and avoid problems associated with diseconomies of scale.
Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct?
The Japanese firm will sell steel at a lower price abroad than they will charge domestic users.
A firm has two customers with non-identical demands and a constant marginal cost of production. At any positive price, the consumer surplus values for the two customers are related as CS2 ≥ CS1 . What can we say about the optimal two-part tariff for the firm?
The optimal price is greater than MC and the optimal tariff is equal to CS1.
Which of the following statements about setting optimal two-part tariffs for many consumers is NOT true?
The profit from the entrance fee (tariff) is a convex function of the tariff because if first declines and then increases as the tariff increases.
Refer to Figure 11.2.3 above. In this case, the firm charges two different prices. This pricing scheme corresponds to:
Third degree price discrimination.
An amusement park charges an entrance fee of $75 per person plus $2.50 per ride. This is an example of:
a two-part tariff.
For most residential telephone service, people pay a monthly fee to have a hookup to the telephone company's line plus a fee for each call actually made. Under this pricing scheme, the telephone company is using:
a two-part tariff.
The local cable TV company charges a "hook-up" fee of $30 per month. Customers can then watch programs on a "pay-per-view" basis (a fee is charged for every program watched). This is an example of:
a two-part tariff.
A local restaurant sells strawberry pie for $3.00 per slice. However, if you order the prime rib dinner, you can get a slice of pie for only a dollar. This is an example of:
bundling.
Season ticket holders for the St. Louis Rams received a surprise when they read the applications forms to renew their season tickets. In order to get their season ticket to the Rams' home games, they also had to buy tickets to the preseason games. Many season ticket holders grumbled about this practice as an underhanded way for the St. Louis Rams to get more money from its season ticket holders. This practice is an example of:
bundling.
Refer to Figure 11.3.1 above. The price-discriminating firm earns a higher profit by:
charging a lower price as time goes by.
For a two-part tariff imposed on two consumers, the entry fee is based on the:
consumer surplus of the customer with lower willingness-to-pay.
Refer to Figure 11.5.1 above. The points on the figure represent the reservation prices of four different consumers. With mixed bundling:
consumers A and D pay $90 for a single good, and consumers B and C pay $120 for a bundle.
Bundling raises higher revenues than selling the goods separately when:
demands for two products are negatively correlated.
Second-degree price discrimination is the practice of charging:
different prices for different quantity blocks of the same good or service.
Bundling is effective when the demands for the bundled products are ________ and ________ correlated.
different; negatively
When a firm charges each customer the maximum price that the customer is willing to pay, the firm:
engages in first-degree price discrimination.
For a perfect first-degree price discriminator, incremental revenue is:
equal to the price paid for each unit of output.
Under perfect price discrimination, consumer surplus:
equals zero.
A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). After selling all of its output, the firm discovers that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30. To maximize profits the firm should:
have sold less output in the local market and more on the internet auction site.
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.
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.
You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. You will charge the higher price in the market with the:
lower own price elasticity of demand (more inelastic demand).
In peak-load pricing,
marginal revenue in the peak period is greater than in the off-peak period.
Suppose a firm produces identical goods for two separate markets and practices third-degree price discrimination. In the first market the firm charges $30 per unit, and it charges $22 per unit in the second market. Which of the following represents the ratio of price elasticities of demand in the two markets?
none of these
A firm has two customers and creates a two-part tariff with a usage fee (P) that exceeds the marginal cost of production and leaves each customer with positive consumer surplus such that CS2 > CS1 > 0. If the firm sets the entry fee equal to CS2, then the number of customers that actually buy the product is equal to:
one
Refer to Figure 11.3.2 above. This figure is a representation of:
peak-load pricing, which is different from third-degree price discrimination.
A local restaurant offers "early bird" price discounts for dinners ordered from 4:30 to 6:30 PM. This is an example of:
peak-load pricing.
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:
peak-load pricing.
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:
price discrimination.
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 medium combination meal. This practice is an example of:
price discrimination.
The maximum price that a consumer is willing to pay for each unit bought is the ________ price.
reservation
Many cellular phone rate plans are structured as a combination of ________ price discrimination.
second-degree and third-degree
An electric power company uses block pricing for electricity sales. Block pricing is an example of:
second-degree price discrimination.
When a monopolist engages in perfect price discrimination,
the demand curve and the marginal revenue curve are identical.
The maximum price that a consumer is willing to pay for a good is called:
the reservation price.
A doctor charges two different prices for medical services, and the price level depends on the patients' income such that wealthy patients are charged more than poorer ones. This pricing scheme represents a form of:
third-degree price discrimination.
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:
third-degree price discrimination.
A pricing strategy that requires consumers pay an up-front fee plus an additional fee for each unit of product purchased is a:
two-part tariff.
