Deck 7: Pricing With Market Power

Question 1

A firm with market power in pricing faces a:

A) flat demand curve.
B) vertical demand curve in all cases.
C) price inelastic demand curve.
D) downward sloping demand curve.

Answer 1

D

Question 2

For decision making for the firm with market power, fixed costs are:

A) a key element in the markup.
B) irrelevant.
C) the same as marginal costs.
D) opportunity costs of production.

Answer 2

B

Question 3

A typical university football program requires alumni to join one of several booster clubs (each club gets seats in different parts of the stadium) before the person can buy season tickets. What has this got to do with consumer surplus?

Answer 3

This pricing plan is a good example of two-part pricing. The football program can increase its profits by using the two-part tariff to convert some consumer surplus into profits or producer surplus. In addition to the per-unit price, the second price is the cost of joining one of the booster clubs.

Question 4

As a firm's market power in pricing decreases, the price elasticity of its demand:

A) stays the same.
B) decreases.
C) is equal to one.
D) increases.

Question 5

Using cost plus pricing, what is the price if ATC = $23.50 and the target rate of return is 17 percent?

A) $28.31
B) $138.24
C) $29.38
D) $46.74

Question 6

Using cost plus pricing, what is the price if ATC = $14.50 and the target rate of return is 4 percent?

A) $15.10
B) $49.34
C) $14.5
D) $22.10

Question 7

Great Nuggets finds that there is a clear gender difference in the demand for their chocolates. Men have very little price sensitivity and tend to buy whatever the sales clerk recommends. Women, on the other hand, tend to ask many questions about product quality and attempt to maximize the quantity available for the price. Great Nuggets would like to implement a two-tier pricing system based on gender. What (non-legal) problems would it encounter?

Question 8

Using the linear approximation system to estimate the profit maximizing price requires that the managers know the costs of production and:

A) the production function.
B) one price and quantity of demand.
C) two prices and quantities of demand.
D) decision-making process of the marketplace.

Question 9

If Tiger Toys faces a demand curve of P = 85 - .25Q and a MC = ATC = 20, then the market price would be:

A) $85.00
B) $52.50
C) $130.00
D) $32.50

Question 10

The simple case of pricing with market power assumes (a) all consumers are charged the same price, (b) the firm sells one product, and (c) demand exists in one time period. Discuss what happens as each assumption is relaxed.

Question 11

A small fitness center offering only personal training services has the following demand and cost parameters:
Demand: The fitness center has found that it has some discretion in pricing - that is, it can raise price marginally without drastic reductions in volume. Based on statistical estimates of demand, and assuming external factors stay constant (e.g. price of competitors' services, income levels, etc.), the following relationship exists between the hourly rate for a personal training session (P), and the number of sessions demanded per day (Q):
P = 140 - Q
Costs: The fitness center finds that its variable costs (e.g. labor) increase at a constant rate of $40 with each additional training session provided per day. Fixed costs such as rent total $200 per day. This yields the following total variable cost (TVC) and Total Fixed Cost (TFC) equations:
TVC = 40Q
TFC = 200
(a) What is the approximate minimum number(s) of personal training sessions needed to break even (earn zero total profit).
(b) Find the price and quantity demanded (P and Q) that maximize total profit.
(c) What is the maximum possible profit?

Question 12

If Tiger Toys faces a demand curve of P = 85 - .25Q and a MC = ATC = 20, then the economic profits would be:

A) $130.00.
B) $6,825.00.
C) $2,600.00.
D) $4,225.00.

Question 13

The simple case of pricing with market power assumes (a) all consumers are charged the same price, (b) the firm sells one product, (c) demand exists in one time period, and (d) competitors do not pursue pricing games. Economists insist on reviewing what happens as each assumption is relaxed one at a time. But it is clear that in real world all four are relaxed simultaneously. Why does economic analysis insist on such an unrealistic analysis?

Question 14

P = 50 - 1/500 Q is the demand curve for tickets. MC = $10 per ticket. What is the optimal price and calculate the consumer surplus at this price?

Question 15

Wet-n-Wild Indoor Water Park offers family fun year-round in the Northstar state to locals and out-of-state visitors to the nearby Mall of America. The demand for day-passes to the water park for each market segment is independent of the other market segment. The marginal cost of providing service to each visitor is $5 per day. Suppose the daily demand curves for the two market segments are:

Question 16

Two consumers 1 and 2 of the same product have the following demand curves
Q₁ = 500 - 10 P and Q₂ = 500 - 20 P. MC for the firm is $10. Calculate the prices when the firm discriminates between the two consumers. Is this a good strategy, or should the firm charge the same price to both of them?

Question 17

Give examples of block pricing, bundling, price discrimination and two-part tariffs.

Question 18

If Tiger Toys faces a demand curve of P = 85 - .25Q and a MC = ATC = 20, then the output would be:

A) 65 units.
B) 85 units.
C) 130 units.
D) 32.5 units.

Question 19

If Tiger Toys faces a demand curve of P = 85 - .25Q and a MC = ATC = 20, then the markup would be:

A) $52.50.
B) $20.00.
C) $32.50.
D) $65.00.

Question 20

If a firm prices its output at marginal cost - the competitive solution - then the gains from trade are:

A) all in producer surplus.
B) split between producer and consumer surplus.
C) all in consumer surplus.
D) split in a Nash solution.

Question 21

Bio seeds offers free genetically modified seeds (GMS) to farmers in developing countries the first season. The land accepts only GMS in any other cropping season. So providing free seeds in the first season is a strategic way to

A) bundle
B) administer a two-part tariff
C) enforce price discrimination
D) regulate future demand

Question 22

Price discrimination is usually defined as selling a product to different customers at:

A) the same price even though costs of service are different.
B) different prices even though costs of service are different.
C) the same price even though the costs of service are the same.
D) different prices even though the costs of service are the same.

Question 23

Third degree price discrimination is defined by selling:

A) to every customer at a different price.
B) at different prices by volume.
C) every unit at the same price.
D) to different groups at different prices.

Question 24

Season tickets for sporting events is an example of:

A) Bundling
B) Two-part tariff
C) Price Discrimination
D) Block Pricing

Question 25

A company might charge a customer different prices per unit, depending upon the number of units purchased. This is called:

A) Bundling
B) Two-part tariff
C) Price Discrimination
D) Block Pricing

Question 26

Many college basketball programs require alumni to join a booster club before they can buy season tickets. This is an example of:

A) a two-part tariff.
B) first degree price discrimination.
C) block pricing.
D) cost-plus pricing.

Question 27

Price discrimination requires that different customers have different levels of price sensitivity and that:

A) the cost of production is different for every customer.
B) customers cannot resell the product amongst themselves.
C) demand is homogeneous amongst customers.
D) marginal costs are falling.

Question 28

A customer pays an admission fee to get into the local YMCA, and also a monthly membership fee. This is called:

A) Bundling
B) Two-part tariff
C) Price Discrimination
D) Block Pricing

Question 29

In the 1950s and 1960s, cigarette company representatives stood at the edge of University campuses and gave away free cigarettes to anyone who would take them. This policy:

A) bought customer goodwill.
B) established student identity.
C) helped forge volunteerism .
D) helped politicians

Question 30

In the 1950s and 1960s, cigarette company representatives stood at the edge of University campuses and gave away free cigarettes to anyone who would take them. This policy:

A) bought political groups together.
B) established student identity.
C) helped forge addiction.
D) reduced alcohol consumption

Question 31

Under Block pricing, a company might

A) charge a customer different prices per unit, depending upon the customer's loyalty.
B) charge a customer different prices per unit, depending upon the number of units purchased.
C) provide a customer different units, depending upon the price the consumer bids.
D) charge a customer different prices per unit, depending upon the price the consumer bids.

Question 32

Electric generator companies did not raise their prices when there was a huge demand for their products, due to a power shortage. The companies were:

A) concerned with being sued by consumer activists
B) concerned with political backlash
C) concerned with peoples' welfare
D) concerned with reputation and future demand

Question 33

Hickey-Freeman will sell a second suit to the same person for a $100 discount. This attempt to take advantage of an individual's falling additional utility for more consumption is called:

A) a two-part tariff.
B) first degree price discrimination.
C) block pricing.
D) cost-plus pricing.

Question 34

The Robinson-Patman Act limits the ability of the firms to

A) charge different prices to retailers
B) produce certain products
C) Price Discriminate
D) undertake Block Pricing

Question 35

The higher the price elasticity the

A) the more sensitive price changes is to quantity demanded
B) the less sensitive price changes is to quantity demanded
C) the more sensitive quantity demanded to price changes
D) the less sensitive quantity demanded to price changes

Question 36

The cost plus pricing formula tends to ignore:

A) incremental costs.
B) customer quantity sensitivity.
C) fixed costs.
D) quotas

Question 37

Calculate the markup price if MC = $10.00 and price elasticity equals 1.7.

A) $5.88
B) $17.24
C) $24.27
D) $32.42

Question 38

Many firms offer substantial rebates by mail or coupons for discounts at the point of sale. The people who use the rebates or coupons have _______ than the people who don't use them.

A) greater price sensitivity
B) the same price sensitivity
C) less price sensitivity
D) inverted price sensitivity

Question 39

In the 1950s and 1960s, cigarette company representatives stood at the edge of University campuses and gave away free cigarettes to anyone who would take them. This policy:

A) helped political groups
B) established brand identity.
C) helped forge volunteerism
D) reduced alcohol consumption

Question 40

Disney sold The Little Mermaid for $20.00 with a $5.00 mail in rebate. The rebate should have:

A) reduced overall customer demand.
B) stabilized overall customer demand.
C) increased overall customer demand.
D) inverted overall customer demand.