Question 1

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

The practice described is an example of a two-part tariff, which involves charging a fee (in this case, the $10 for the frequent buyer card) and then offering a discount on purchases. This allows the seller to extract more consumer surplus by charging a higher price to those willing to pay for the card while also incentivizing more frequent purchases. Peak-load pricing involves charging higher prices during periods of high demand, intertemporal price discrimination involves charging different prices for the same good at different points in time, and bundling involves offering multiple goods or services at a lower price than buying them separately. None of these practices are directly applicable to the frequent buyer program described.

Question 2

Many cellular phone rate plans are structured as a combination of ________ price discrimination.
A) first-degree and second-degree
B) first-degree and third-degree
C) second-degree and third-degree
D) peak-load pricing and third-degree

Accepted Answer

Many cellular phone rate plans offer different prices based on the amount of usage, such as charging a lower rate per minute for higher usage. This is an example of second-degree price discrimination. Additionally, many phone plans also offer different prices for different types of users, such as a lower rate for senior citizens, military personnel, or students. This is an example of third-degree price discrimination. Therefore, many cellular phone rate plans are structured as a combination of second-degree and third-degree price discrimination.

Question 3

A firm setting a two-part tariff with only one customer should set the entry fee equal to:
A) marginal cost.
B) consumer surplus.
C) marginal revenue.
D) price.

Accepted Answer

When setting a two-part tariff with only one customer, the firm should set the entry fee equal to the customer's willingness to pay for the product, which is represented by their consumer surplus. This ensures that the customer is paying the maximum amount they are willing to pay for the product without reducing their demand for the product. The usage fee should be set equal to the marginal cost of producing the product to maximize profit. Therefore, the correct answer is B, set the entry fee equal to consumer surplus.

Question 4

Customers attending basketball games at the local arena must pay for parking on the grounds and then pay for a ticket needed to enter the arena. If the arena manager knows that the customers' identical demands can be expressed collectively as
P = 25 - 0.000625Q
how much of a parking fee could the management collect if the marginal cost of providing entertainment were a constant MC = $10 per seat?

Accepted Answer

The answer of Customers attending basketball games at the local...

Question 5

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 pricing scheme is an example of a two-part tariff, where customers pay an upfront fee (entrance fee) and then pay a per-unit fee (per ride fee). This type of pricing is often used by businesses to capture more consumer surplus and increase revenue.

Question 6

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? A) The firm sets the price equal to MC and the optimal tariff is equal to CS₂. B) The firm sets the price equal to MC and the optimal tariff is equal to CS₁. C) The firm sets the price equal to MC and the optimal tariff is equal to zero. D) The optimal price is greater than MC and the optimal tariff is equal to CS₁.

Accepted Answer

Since the two customers have non-identical demands, a two-part tariff could be optimal for the firm. The firm would set a per-unit price greater than marginal cost in order to capture some of the consumer surplus, but would also charge a fixed fee. Given the inequality relating the two customers' consumer surplus values, it makes sense to set the per-unit price equal to marginal cost, which ensures that the high-value customer (customer 1) pays more. The fixed fee would be set to CS₁, the lower of the two customer surplus values. This ensures that both customers are willing to participate in the market, since their surplus from participating (after paying the fixed fee) is still positive. Therefore, the optimal two-part tariff for the firm is a per-unit price equal to marginal cost and a fixed fee equal to CS₁.

Question 7

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  where quantity demanded is measured in thousands of cars, and the weekly demand for the non-rush hour period is  Gotham City's marginal cost of operating the tollway is  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...

Question 8

After graduation, you start an internet-based firm that allows people to buy and sell books online. Based on your market research, you believe there are two basic types of customers. The first type is the casual reader who has relatively low willingness-to-pay for your services, and their annual demand is Q1 = 30 - 40P where Q1 is the number of books traded per year and P is the price you charge per book traded. The second type of customer is the avid reader who has relatively high willingness-to-pay for your services, and their demand is Q2 = 100 - 50P. The marginal cost of your online service is $0.40 per book traded.
a. If you set your usage fee equal to the marginal cost, how many books will each type of customer trade on your system? What is the consumer surplus enjoyed by each type of customer?
b. What is the optimal entry fee that you should charge under a two-part tariff pricing scheme for access to your online market? How much consumer surplus is left for the two types of customers after they pay the entry fee and usage fee?

Accepted Answer

The answer of After graduation, you start an internet-based firm...

Question 9

Laughlin and Sons is a company that provides estate planning services to 100 wealthy clients. Although the clients have different wealth levels, their demands for the hourly estate planning services are identical. The aggregate annual demand for estate planning services facing Laughlin and Sons is  where Q is the total hours of estate planning services and P is the hourly rate charged for the services, and the firm's total cost of providing the estate planning services is  The firm wants to establish a two-part tariff scheme for charging the clients, and the fees include an annual fixed retainer (entry fee) plus an hourly rate (usage fee).
a. What is the firm's marginal cost of providing estate planning services? What is the demand curve for a representative client?
b. What are the profit maximizing levels for the retainer and hourly rate? What is the firm's aggregate annual profit under the two-part tariff scheme?
c. Suppose Laughlin and Sons has a local monopoly on estate planning services. What are the profit maximizing hourly rate (price) and quantity under a single-price monopoly? How does the profit earned under the single-price monopoly compare to the profit earned under the two-part tariff scheme?

Accepted Answer

The answer of Laughlin and Sons is a company that...

Question 10

Figure 11.5.1
-Refer to Figure 11.5.1 above. The points on the figure represent the reservation prices of four different consumers. With mixed bundling:
A) consumers A and D pay $90 for a single good, and consumers B and C pay $120 for a bundle.
B) consumers A and D pay $90 for a bundle, and consumers B and C pay $120 for a single good.
C) consumers A and D pay $90 for a bundle, and consumers B and C pay $120 for a bundle.
D) consumers A and D pay $90 for a single good, and consumers B and C pay $120 for a single good.

Accepted Answer

Mixed bundling allows consumers to choose between purchasing items separately or as a bundle. Consumers A and D, with lower reservation prices, would likely opt for a single good at a lower price, while B and C, with higher reservation prices, might opt for a bundle at a higher price.

Question 11

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

Accepted Answer

This is an example of a two-part tariff, where customers pay a fixed fee (hook-up fee) and then pay for each additional unit (pay-per-view program).

Question 12

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: A) zero. B) one. C) two. D) We don't have enough information to answer this question.

Accepted Answer

Since the entry fee is set equal to the highest level of consumer surplus, only the customer with the higher consumer surplus (i.e. CS₂) will choose to buy the product. The customer with the lower level of consumer surplus will not buy the product because the entry fee is higher than their consumer surplus, leaving the firm with one customer.

Question 13

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

Accepted Answer

Bundling is the practice of selling two or more goods or services together as a single package. In this case, the St. Louis Rams bundled the season tickets with the preseason tickets, requiring fans to purchase both.

Question 14

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 pricing strategy is known as a two-part tariff, as it consists of two parts: an up-front fee (or fixed fee) and a per-unit fee (or variable fee). This strategy is commonly used in industries such as utilities or membership-based services, where the fixed fee covers the cost of access or membership, while the per-unit fee covers the actual usage or consumption. This strategy can be effective in increasing revenue and encouraging usage, while also capturing consumer surplus through the up-front fee. Options A and C are incorrect, as they describe different pricing strategies, and option D is incorrect, as there is a specific term for this strategy (two-part tariff).

Question 15

Which of the following statements about setting optimal two-part tariffs for many consumers is NOT true?
A) The number of buyers (entrants) declines as the entrance fee (tariff) increases.
B) The profit from the entrance fee (tariff) is a concave function of the tariff because it first increases and then decreases as the tariff increases.
C) 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.
D) The total profits is composed of the profit from the entrance fee (tariff) and from the profit from sales to buyers.

Accepted Answer

The profit from the entrance fee (tariff) is actually a concave function of the tariff, not a convex function as stated in option C. As the fee increases, the number of buyers (entrants) declines, leading to a decrease in profit. This means that at a certain point, increasing the fee will no longer generate additional profit and may actually lead to a decrease in total profit. The total profit is composed of the profit from the entrance fee (tariff) and from the profit from sales to buyers.

Question 16

For a two-part tariff imposed on two consumers, the entry fee is based on the:
A) consumer surplus of the customer with lower willingness-to-pay.
B) consumer surplus of the customer with higher willingness-to-pay.
C) simple average of the consumer surplus for the two buyers.
D) none of the above

Accepted Answer

The entry fee is based on the consumer surplus of the customer with lower willingness-to-pay. This is because the customer with lower willingness-to-pay is more likely to be excluded from the market if the entry fee is too high.

Question 17

Figure 11.5.1
-The pricing technique known as tying:
A) permits a firm to meter demand.
B) permits a firm to practice price discrimination.
C) enables a firm to extend its monopoly power to new markets.
D) all of the above

Accepted Answer

Tying allows a firm to bundle products together and charge a premium, which can help the firm meter demand and practice price discrimination. It can also extend a firm's monopoly power to new markets, as customers who want the desired product will have to purchase the tied product as well. Therefore, all of the above options are correct.

Question 18

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

The pricing scheme described is a two-part tariff, which consists of a fixed fee (monthly fee for hookup) and a variable fee (fee for each call made). This pricing strategy allows the telephone company to capture some of the consumer surplus while still providing services at a competitive price.

Question 19

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  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  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  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 20

Merriwell Corporation has a virtual monopoly in the ultra-high speed computer market. Merriwell has recently introduced a new computer that will be used by satellite installations around the world. The installations have identical demands for the computers. Merriwell's managers have decided to lease rather than sell the computer, but they have been unable to decide whether to use a single hourly rental charge or a two-part tariff. Under the two-part tariff, users would be levied an "access charge" plus an hourly rental rate. Merriwell's marketing staff estimates the demand and marginal revenue curves below for each potential user:
P = 45 - 0.025Q
MR = 45 - 0.05Q,
where P = price per hour of computer time, and Q = the number of hours of computer time leased per month. Merriwell offers their users extensive maintenance assistance and technical support. The firm's engineers estimate that marginal cost is $30 per computer hour.
a. Assuming that Merriwell chooses to set a single price, what are the firm's profit maximizing price and output?
b. Assuming that Merriwell uses a two-part tariff, what "access charge" and hourly rental fee should the firm set? Compare the firm's revenues under the options in (a) and (b).
c. Briefly describe how differing demand curves among the various buyers would alter the two-part tariff.

Accepted Answer

The answer of Merriwell Corporation has a virtual monopoly in...

Quiz 11: Pricing With Market Power

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:

Many cellular phone rate plans are structured as a combination of ________ price discrimination.

A firm setting a two-part tariff with only one customer should set the entry fee equal to:

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

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?

Figure 11.5.1 -Refer to Figure 11.5.1 above. The points on the figure represent the reservation prices of four different consumers. With mixed bundling:

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

Which of the following statements about setting optimal two-part tariffs for many consumers is NOT true?

For a two-part tariff imposed on two consumers, the entry fee is based on the:

Figure 11.5.1 -The pricing technique known as tying:

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: