Question 1

A pricing strategy that requires consumers pay an up-front fee plus an additional fee for each unit of product purchased is a
A) tying contract.
B) two-part tariff.
C) form of perfect price discrimination.
D) none of these.

Accepted Answer

This is because a two-part tariff involves charging an up-front fee (fixed fee) and an additional fee per unit consumed (variable fee). Option A (tying contract) refers to a practice where a buyer is required to purchase one product in order to get access to another product, which is not relevant to the question. Option C (form of perfect price discrimination) is also not applicable as price discrimination involves charging different prices to different consumers based on their willingness to pay, which is not the case here. Option D (none of these) is not the best choice as there is a correct answer among the given options.

Question 2

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
A) a two-part tariff.
B) second-degree price discrimination.
C) intertemporal price discrimination.
D) first-degree price discrimination.

Accepted Answer

This is an example of intertemporal price discrimination, where the company sets a high price initially to capture early adopters who are willing to pay a premium, and then lowers the price later to attract more price-sensitive customers. This strategy allows the company to maximize profits by capturing as much consumer surplus as possible over time.

Question 3

A local restaurant offers "early bird" price discounts for dinners ordered from 4:30 to 6:30 PM. This is an example of
A) peak-load pricing.
B) second-degree price discrimination.
C) a two-part tariff.
D) tying.
E) none of the above

Accepted Answer

Peak-load pricing involves adjusting prices based on the demand at different times, which is what the restaurant is doing by offering discounts during early dining hours to encourage more customers during what might otherwise be a slower period.

Question 4

The authors explain that the marginal cost of production does not have to be constant in order to maximize profits under intemporal price discrimination. Which of the following is NOT an example of changing marginal costs under profit-maximizing intertemporal price discrimination?
A) Marginal cost increases sharply after the initial marketing stages when the product is sold to the broader market of consumers.
B) Marginal costs decline over time due to learning-by-doing.
C) Marginal costs decline over time because the producer sells less expensive versions of the product in later stages of marketing (e.g., hard-cover versus paper-cover books).
D) Marginal costs decline over time due to economies of scale.

Accepted Answer

Marginal cost increasing after the initial marketing stages does not align with the typical pattern of declining marginal costs seen in intertemporal price discrimination, where costs often decrease due to factors like learning-by-doing or economies of scale.

Question 5

Which of the following statements is NOT compatible with explanations for why peak-load pricing is more profitable than charging a single price?
A) Consumer willingness to pay for the product varies a lot across different time periods.
B) Marginal cost of production is much higher under peak demand.
C) Marginal revenue changes a lot across different time periods.
D) Marginal revenue must be the same across different time periods.

Accepted Answer

Peak-load pricing relies on charging different prices at different times to maximize profits, which is only possible if marginal revenue varies across time periods. Therefore, statement D, which suggests that marginal revenue must be the same across different time periods, is not compatible with the explanation for peak-load pricing. Statements A and C support the explanation by suggesting that consumer willingness to pay and marginal revenue vary across time periods, while statement B implies that peak demand drives up marginal cost, making peak-load pricing more profitable.

Question 6

The Catawba River City Park has a low demand D₁ during work days, but on Saturday and Sunday demand increases to D₂ on Saturday and Sunday. The demand and marginal revenue functions are: D₁ = P₁ = 2 - 0.001Q₁ MR₁ = 2 - 0.002Q₁ D₂ = P₂ = 20 - 0.01Q₂ MR₂ = 20 - 0.01Q₂ where Q = number of cars entering the park each day. The marginal cost of operating the park is the same on weekdays and weekends: MC = 1 + 0.004Q. a. In order to control crowds, the park's management uses peak-load pricing. This scheme controls crowds and makes sure the park is self-supporting. Calculate the appropriate prices to charge, and determine the number of cars entering the park, Q₁ and Q₂. b. Explain how switching from a uniform pricing scheme to a peak load pricing scheme affects the market.

Accepted Answer

The answer of The Catawba River City Park has a...

Question 7

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
A) bundling.
B) second-degree price discrimination.
C) a two-part tariff.
D) tying.
E) none of the above

Accepted Answer

This pricing strategy does not fit the definitions of bundling, second-degree price discrimination, a two-part tariff, or tying. Instead, it's a form of time-based pricing, where the cost varies depending on the time of day or week, which is not listed among the provided options.

Question 8

Shooting Star Books is a small publishing company that specializes in science fiction books. Like most publishers, Shooting Star releases new books in hardcover form and later releases paperback versions of the books. The marginal cost of printing both types of books is $2 per book, and Shooting Star maximizes profits by practicing intertemporal price discrimination. The annual demand for recently released (hardcover) books is Q1 = 400 - 10P1 where quantity demanded is measured in thousands of books and price is measured in dollars per book. The annual demand for the paperback version of previously released books is Q2 = 800 - 40P2.
a. What are the marginal revenue curves associated with the two demand curves for books?
b. What are the profit maximizing prices for hardcover and paperback books? What are the quantities of books demanded at these prices for hardcover and paperback books?
c. Suppose the market demand for paperback books shifts to Q2 = 150 - 100P2. How does this change affect the profit maximizing price and quantity in the paperback book market? Does this change affect the profit maximizing outcome in the hardcover book market?

Accepted Answer

The answer of Shooting Star Books is a small publishing...

Question 9

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) limit pricing.
B) a two-part tariff.
C) second-degree price discrimination.
D) two stage price discrimination.

Accepted Answer

A two-part tariff involves charging customers both a fixed fee for access to the service and a variable fee for the actual usage. This is exactly the pricing scheme described in the question, where customers pay a monthly fee for access to the telephone company's line (the fixed fee) and a fee for each call made (the variable fee). Therefore, the telephone company is using a two-part tariff.

Question 10

In peak-load pricing,
A) marginal revenue is equal in both periods.
B) marginal revenue in the peak period is greater than in the off-peak period.
C) marginal revenue in the peak period is less than in the off-peak period.
D) the sum of the marginal revenues is greater than the sum of the marginal costs.

Accepted Answer

In peak-load pricing, demand is higher during the peak period, leading to a higher price and therefore a greater marginal revenue in the peak period compared to the off-peak period. Therefore, choice B is correct. Choices A and D are incorrect as they do not reflect the unequal marginal revenues in the peak and off-peak periods. Choice C is also incorrect as it is the opposite of what occurs in peak-load pricing.

Question 11

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:
A) peak-load pricing.
B) intertemporal price discrimination.
C) two-part tariff.
D) bundling.
E) Both A and B are correct.

Accepted Answer

Club Med's practice of charging different prices for vacation packages in the winter versus the summer is an example of both peak-load pricing and intertemporal price discrimination. Peak-load pricing involves adjusting prices in response to demand fluctuations at different times, while intertemporal price discrimination involves charging different prices at different times for the same product or service.

Question 12

An amusement park charges an entrance fee of $75 per person plus $2.50 per ride. This is an example of
A) first-degree price discrimination.
B) a two-part tariff.
C) second-degree price discrimination.
D) bundling.
E) tying.

Accepted Answer

This is a two-part tariff because the amusement park is charging an entrance fee (a fixed cost) and then adding on an additional fee per ride. This is different from first-degree price discrimination because the entrance fee is the same for everyone and different from second-degree price discrimination because the per-ride fee is constant and not based on the consumer's willingness to pay. It is also not an example of bundling or tying.

Question 13

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?
A) MR for the full-fare customers must be higher than the MR from upgrade customers.
B) MR for the full-fare customers may be higher or lower than the MR from upgrades.
C) MR = MC for the full-fare customers, but the airline is willing to collect any positive amount from the upgrade customers.
D) MR must be the same for both full-fare and upgrade customers.

Accepted Answer

In a profit-maximizing scenario, the marginal revenue (MR) from selling an additional unit (in this case, a seat) must equal the marginal cost (MC) of that unit, regardless of the customer segment (full-fare or upgrade). Since the airline is willing to sell upgrades at a lower price, it indicates that filling the seat (even at a lower price) is preferable to leaving it empty, as long as the price covers the marginal cost. This approach maximizes profit by ensuring all seats generate revenue above their marginal cost, leading to the conclusion that MR must be the same for both full-fare and upgrade customers to achieve profit maximization.

Question 14

A national chain of bookstores has initiated a frequent buyer program. If you buy a frequent buyer card for $10, you are entitled to a 10 percent discount on all purchases for 1 year. This practice is an example of:
A) peak-load pricing.
B) intertemporal price discrimination.
C) two-part tariff.
D) bundling.
E) Both A and B are correct.

Accepted Answer

This practice is an example of a two-part tariff because customers are charged a fee (buying the frequent buyer card) for the right to receive a discount on all purchases for a year.

Question 15

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?
A) The firms practice peak-load pricing by charging a higher price in the initial sales period.
B) Early buyers have higher reservation prices for the new models, and the manufacturers maximize profits by charging these buyers a higher price.
C) The marginal revenue from buyers who purchase these cars after the initial sales period must be lower that the marginal revenue from early buyers.
D) To maximize profits, the firms equate the buyers' reservation prices across time.

Accepted Answer

The answer of Automobile manufacturers commonly sell new car models...

Question 16

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
A) peak-load pricing.
B) second-degree price discrimination.
C) a two-part tariff.
D) bundling.
E) none of the above

Accepted Answer

Peak-load pricing involves charging different prices depending on when the service is used, with higher prices during times of high demand and lower prices during times of low demand. The fact that the theater charges a lower price for matinee tickets indicates that they are using peak-load pricing.

Question 17

What is the key characteristic of profit maximizing price discrimination that distinguishes intertemporal price discrimination from peak-load pricing?
A) Peak-load pricing does not require MC = MR.
B) Marginal revenue may be different across different groups of buyers under intertemporal price discrimination.
C) Marginal costs are independent across time periods under peak-load pricing.
D) Marginal revenue must be constant under both pricing schemes.

Accepted Answer

The answer of What is the key characteristic of profit...

Question 18

The Genetron Electric Company provides electric power service to a three state region in the US. The annual demand for electric power in this region is Q = 4500 - 100P where quantity (Q) is measured in millions of kilowatt hours (kWh) and the price (P) is cents per kWh. The firm operates in a decreasing cost industry.
a. If the firm's marginal cost curve crosses the demand curve at P = 4 (i.e., 4 cents per kWh), what is the quantity demanded at this price? Why wouldn't the firm want to operate under marginal cost pricing?
b. If the firm's average cost curve crosses the demand curve at P = 5, what is the quantity demanded at this price? What are the firm's profits under average cost pricing?
c. Suppose Genetron uses a block pricing scheme with prices P1 = 15, P2 = 10, and P3 = AC. What quantity levels are associated with the first, second, and third blocks of annual electricity demanded?

Accepted Answer

The answer of The Genetron Electric Company provides electric power...

Question 19

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
A) peak-load pricing.
B) second-degree price discrimination.
C) a two-part tariff.
D) tying.
E) none of the above

Accepted Answer

The reduction in ticket price from $7.50 to $4.00 after several months does not fit the definitions of peak-load pricing, second-degree price discrimination, a two-part tariff, or tying. This scenario likely reflects a standard pricing strategy to attract more viewers as the initial demand decreases over time, rather than a specific pricing model mentioned in the options.

Question 20

Travelers driving through Gotham City can use a freeway or the Cross Town Tollway to get through the city. The tollway charges $1.00 per car during the morning rush hour (6-9 AM) and the afternoon rush hour (4-7 PM), and the toll is $0.40 per car at all other times. The weekly demand for using the tollway during rush hour is Q1 = 800 - 200P1 where quantity demanded is measured in thousands of cars, and the weekly demand for the non-rush hour period is Q2 = 2000 - 1000P2. Gotham City's marginal cost of operating the tollway is MC = 0.02 + 0.001Q per car.
a. What are the marginal revenue curves associated with the two demand curves?
b. Has the city set the profit maximizing tolls for the Cross Town Tollway? If not, do the current tolls generate too much or too little traffic on the tollway?

Accepted Answer

The answer of Travelers driving through Gotham City can use...

Quiz 11: Pricing With Market Power

A pricing strategy that requires consumers pay an up-front fee plus an additional fee for each unit of product purchased is a

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

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

The authors explain that the marginal cost of production does not have to be constant in order to maximize profits under intemporal price discrimination. Which of the following is NOT an example of changing marginal costs under profit-maximizing intertemporal price discrimination?

Which of the following statements is NOT compatible with explanations for why peak-load pricing is more profitable than charging a single price?

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

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

In peak-load pricing,

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:

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

A national chain of bookstores has initiated a frequent buyer program. If you buy a frequent buyer card for $10, you are entitled to a 10 percent discount on all purchases for 1 year. This practice is an example of:

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

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

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