Question 1

Additional products should be introduced by a single-plant firm in order of decreasing profitability up to the point where the marginal revenue of the least profitable product is equal to its marginal cost.

True

Accepted Answer

This strategy ensures that the firm maximizes its profit by introducing additional products as long as the revenue from selling one more unit (marginal revenue) of the product exceeds the cost of producing that unit (marginal cost). When the marginal revenue of the least profitable product equals its marginal cost, producing more would not increase profit, hence it's the optimal point to stop adding new products.

Question 2

A single-plant, multi-product, imperfectly competitive firm with excess plant capacity should continue to introduce new products until the price of the last product introduced is equal to its marginal cost or until all capacity is employed.

True

Accepted Answer

In an imperfectly competitive market, a firm with excess capacity should continue to introduce new products as long as the marginal revenue (which equals price in this context due to imperfect competition) of the last product introduced is greater than or equal to its marginal cost, or until all capacity is utilized. This strategy maximizes profit by ensuring that the firm is producing at a level where the cost of producing one more unit (marginal cost) is covered by the revenue generated from selling that unit (price), and it fully utilizes available capacity to avoid inefficiencies.

Question 3

If the optimal level of output where products are jointly produced in fixed proportions occurs where the marginal revenue for one product is negative, then the firm will maximize profit by disposing of some or all of the output of that product rather than by selling it.

True

Accepted Answer

When the marginal revenue for one product is negative, it means that the firm is losing money by producing that product. Therefore, the firm will maximize profit by disposing of some or all of the output of that product rather than by selling it.

Question 4

A firm that sells on two markets and engages in third-degree price discrimination will increase the quantity sold on each market until marginal revenue is the same on both markets and is equal to marginal cost.

Accepted Answer

In third-degree price discrimination, a firm charges different prices in different markets based on differences in elasticity of demand. The firm will continue to sell in each market until the marginal revenue (MR) from each market is equalized and matches the marginal cost (MC) of production, maximizing profit.

Question 5

A firm that sells on two markets and engages in third-degree price discrimination will adjust the quantity sold on each market until the same price holds on both markets.

Accepted Answer

In third-degree price discrimination, a firm adjusts quantities and prices such that the marginal revenue (MR) is equalized across the two markets, not necessarily the price. This often results in different prices for different markets based on their respective price elasticities of demand.

Question 6

Dumping occurs when a firm charges a higher price for a product on foreign markets than on domestic markets.

Accepted Answer

Dumping occurs when a firm charges a lower price for a product in foreign markets than in its domestic market.

Question 7

The harassment thesis holds that the threat of filing a dumping complaint against a foreign producer discourages the producer from aggressively competing in the domestic market.

Accepted Answer

The harassment thesis suggests that the mere threat of a dumping complaint can act as a deterrent against foreign producers, discouraging them from competing too aggressively in the domestic market for fear of legal and financial repercussions.

Question 8

Transfer pricing refers to the determination of prices of intermediate products sold by one semiautonomous division of a firm and purchased by another semiautonomous division of the same firm.

Accepted Answer

Transfer pricing is the process used to determine the price for goods or services exchanged between divisions within the same company, exactly as described.

Question 9

Tax laws require that transfer prices be established, but they have little effect on the operation of a firm.

Accepted Answer

Transfer prices significantly affect a firm's operation by influencing decisions on resource allocation, performance evaluation, and tax liability across different jurisdictions, thereby impacting overall profitability and efficiency.

Question 10

Incremental analysis states that a firm should take an action if the resulting change in revenue exceeds the corresponding change in cost.

Accepted Answer

Incremental analysis is a decision-making tool used in business to compare the additional or incremental benefits of an action to the incremental costs associated with taking that action. If the incremental revenue exceeds the incremental costs, the action is considered financially beneficial and should be taken.

Question 11

Skimming refers to the practice of introducing several variations on a basic product and charging different prices for each.

Accepted Answer

The answer of Skimming refers to the practice of introducing...

Question 12

A firm has two semi-autonomous divisions: production and marketing. The production division manufactures a product that is purchased and then resold by the marketing division. The marginal cost functions for the production division and for the value added by the marketing division are defined below.
MC_P = 100 + 6Q MC_M = 4Q
The demand function for the product is:
QD = 120 - 0.20P
(i) Assume that there is no external market for the output of the production division. How many units should be produced and what transfer price should be paid to the production division by the marketing division?
(ii) Assume that the external market for the output of the production division is perfectly competitive and that the market price is $292. How many units should be produced by the production division, how many should be purchased by the marketing division, what transfer price should be paid to the production division by the marketing division, and what price should be charged for the product by the marketing division?

Accepted Answer

The answer of A firm has two semi-autonomous divisions: production...

Question 13

A firm has two semi-autonomous divisions: production and marketing. The production division manufactures a product that is purchased and then resold by the marketing division. The marginal cost functions for the production division and for the value added by the marketing division are defined below.
MC_P = 2Q MC_M = Q
The demand function for the product is:
QD = 100 - P
(i) Assume that there is no external market for the output of the production division. How many units should be produced and what transfer price should be paid to the production division by the marketing division?
(ii) Assume that the external market for the output of the production division is perfectly competitive and that the market price is $52. How many units should be produced by the production division, how many should be purchased by the marketing division, what transfer price should be paid to the production division by the marketing division, and what price should be charged for the product by the marketing division?

Accepted Answer

The answer of A firm has two semi-autonomous divisions: production...

Deck 10: Pricing Practices