Question 1

(Table: Honda Pilot Comparison I) Suppose that Honda prices the Pilot 4WD LX at $30,000 and the Pilot 4WD Touring at $40,000. Are these prices incentive-compatible?

Accepted Answer

The answer of (Table: Honda Pilot Comparison I) Suppose that...

Question 2

(Figure: Monopoly and Perfect Price Discrimination I) Producer surplus under monopoly and under perfect price discrimination are _____ and _____, respectively.

Accepted Answer

The answer of (Figure: Monopoly and Perfect Price Discrimination I)...

Question 3

A firm practicing third-degree price discrimination may:
I. segment its customers by age, such as offering senior citizen discounts.
II. charge customers living in certain zip codes a higher price than customers living in other locations.
III. initially charge high prices and then reduce the price over time to sell to the more price-sensitive consumers.

Accepted Answer

Third-degree price discrimination involves segmenting consumers based on identifiable characteristics (like age or location) and charging different prices to different segments. It also includes time-based pricing strategies, where prices are adjusted over time to target different consumer groups, such as charging higher prices initially and then lowering them to attract more price-sensitive consumers.

Question 4

(Figure: Perfect Price Discrimination I)  Under perfect price discrimination, consumer surplus is $____.

Accepted Answer

The answer of (Figure: Perfect Price Discrimination I)  Under...

Question 5

The Hagerstown Suns, a Minor League Baseball team, sells a single game-day ticket for $9. If you buy the 35-game ticket package, the price per ticket falls to $8.34. The Hagerstown Suns is using:

Accepted Answer

The Hagerstown Suns is using second-degree price discrimination in the form of quantity discounts because they offer a lower price per ticket when customers purchase a larger quantity (the 35-game ticket package) compared to the price of a single game-day ticket.

Question 6

Assume a monopolist can prevent resale of its product and it has complete information about each one of its customers. Even though each customer has a different demand curve, the seller can identify each customer's demand curve before a purchase takes place. It faces the inverse market demand of P = 160 - 10Q with marginal cost of MC = 10 + 5Q. The consumer surplus at the profit-maximizing result is $____.

Accepted Answer

Given the monopolist can perfectly price discriminate (charge each customer exactly their willingness to pay), the consumer surplus would be 0 because the monopolist captures all the surplus by charging each consumer exactly their maximum willingness to pay.

Question 7

Across Country Ski Tours has determined that the price elasticity of demand for customers who do not own their own equipment is -2, while the price elasticity of demand of those who do own their own equipment is -5. Assume that the marginal cost is constant at $10. If the firm can practice third-degree price discrimination, it should charge a price of $____ to customers who do not own their equipment.

Accepted Answer

For customers who do not own their equipment, with a price elasticity of demand of -2, the optimal price can be calculated using the formula P = MC / (1 + (1/Ed)), where P is the price, MC is the marginal cost, and Ed is the price elasticity of demand. Plugging in the values, P = $10 / (1 + (1/-2)) = $10 / (1 - 0.5) = $10 / 0.5 = $20.

Question 8

A rock-climbing school faces two demand curves. The demand by local residents is Q = 400 - 0.5P, and the demand by others is Q = 500 - 0.5P. The marginal cost of serving either local or nonlocal residents is constant at $100. If the rock-climbing school cannot practice third-degree price discrimination and must charge a single price to all customers, it will charge:

Accepted Answer

To find the single price the school will charge, we first need to find the combined demand curve by adding the quantities demanded by locals and nonlocals at any price P. The combined demand is Q_combined = (400 - 0.5P) + (500 - 0.5P) = 900 - P. To maximize profit, we set marginal revenue (MR) equal to marginal cost (MC). The inverse demand curve is P = 900 - Q. Differentiating this with respect to Q gives us MR = 900 - 2Q. Setting MR = MC, we have 900 - 2Q = 100. Solving for Q gives Q = 400. Substituting Q back into the inverse demand curve, P = 900 - 400 = $500.

Question 9

(Table: Customer Valuations for Lawn Services I) The table shows customer valuations for different lawn services.  The marginal cost of lawn cutting is $400, and the marginal cost of fertilizing is $200.
Suppose the lawn service prices its services separately. In this case, the company should charge $____ for fertilizing.

Accepted Answer

The answer of (Table: Customer Valuations for Lawn Services I)...

Question 10

A utility company faces demand given by q = 40 - 0.1p, where p is the price per unit.
If the company adopts a two-tier pricing structure, the price per unit for the higher price that maximizes revenue is $____.

Accepted Answer

The answer of A utility company faces demand given by...

Question 11

A firm with market power faces the demand function q = 2,000 - 20P. The firm's total cost function is TC(q) = 20q + 0.02q² + 2,000. In this market, the output level that maximizes total surplus is ____ units.

Accepted Answer

To maximize total surplus, set marginal cost (MC) equal to marginal benefit (MB), which is the demand curve. The inverse demand function is P = 100 - 0.05q. The MC is derived from TC, MC = 20 + 0.04q. Setting MC = MB: 20 + 0.04q = 100 - 0.05q, solving gives q = 888.89.

Question 12

(Figure: Producer Surplus III) Which of the following statements is (are) TRUE?  I. Producer surplus under perfect price discrimination is $75.
II) Producer surplus under a single-price monopoly is $45.
III) The price of the first block is $28, and the price of the second block is $20. Producer surplus under block pricing is $75.

Accepted Answer

The answer of (Figure: Producer Surplus III) Which of the...

Question 13

(Figure: Consumer Surplus I) Which of the following statements is (are) TRUE?  I. Consumer surplus under perfect competition is $20.25.
II) Consumer surplus under perfect price discrimination is $0.
III) Consumer surplus under monopoly is $9.

Accepted Answer

The answer of (Figure: Consumer Surplus I) Which of the...

Question 14

(Figure: Market by Residence I) If the firm cannot practice third-degree price discrimination and must charge a single profit-maximizing price, it will earn producer surplus of approximately:

Accepted Answer

The answer of (Figure: Market by Residence I) If the...

Question 15

Suppose a firm faces the demand function q = 800 - 4P. The firm's total production costs are given by MC(q) = 9.5q + q². If the firm cannot price discriminate, its profit-maximizing price is $____.

Accepted Answer

To find the profit-maximizing price, we first need to find the marginal revenue (MR) and set it equal to the marginal cost (MC). The demand function is q = 800 - 4P, which can be rewritten as P = 200 - 0.25q to find the inverse demand function. The total revenue (TR) is P*q = (200 - 0.25q)q. The marginal revenue (MR) is the derivative of TR with respect to q, which is MR = 200 - 0.5q. The given marginal cost (MC) is 9.5q + q^0, which simplifies to MC = 9.5 since q^0 is 1. Setting MR equal to MC to find the profit-maximizing quantity: 200 - 0.5q = 9.5, solving for q gives q = 381. Substituting q back into the inverse demand function to find P: P = 200 - 0.25*381, which gives P = 197.50.

Question 16

(Figure: Pharmaceutical Pills Sales I) A pharmaceutical company sells its pills in foreign and domestic markets.  
Suppose the company uses segmenting. The profit-maximizing quantity in the Domestic Market is ____.

Accepted Answer

The answer of (Figure: Pharmaceutical Pills Sales I) A pharmaceutical...

Question 17

A sand and gravel company sells pea gravel. It faces two types of customers with the following inverse demand curves:
Type A: P = 3.5 - 0.002Q
Type B: P = 3 - 0.001Q
Where Q measures bags of pea gravel and P is the price per bag. The marginal cost is $0.50 per bag. Suppose the business wants to use discounting to price discriminate. The consumer surplus for Type A consumers with the regular price (no price discount) is $____.

Accepted Answer

The answer of A sand and gravel company sells pea...

Question 18

(Figure: Pharmaceutical Pills Sales I) A pharmaceutical company sells its pills in foreign and domestic markets.  
Suppose the company uses segmenting. The profit-maximizing quantity in the Foreign Market is ____.

Accepted Answer

The answer of (Figure: Pharmaceutical Pills Sales I) A pharmaceutical...

Question 19

A sand and gravel company sells pea gravel. It faces two types of customers with the following inverse demand curves:
Type A: P = 3.5 - 0.002Q
Type B: P = 3 - 0.001Q
Where Q measures bags of pea gravel and P is the price per bag. The marginal cost is $0.50 per bag. Suppose the business wants to use discounting to price discriminate. The consumer surplus for Type B consumers with the regular price (no price discount) is $____.

Accepted Answer

The answer of A sand and gravel company sells pea...

Question 20

A firm with market power has the inverse demand curve P = 90 - 1.5Q and the marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its producer surplus will:

Accepted Answer

Under perfect price discrimination, a firm captures all consumer surplus as producer surplus. The area of producer surplus is the area above the MC curve and below the demand curve, up to the quantity sold. To find the quantity where MR = MC under perfect price discrimination, equate MC to the derivative of the revenue function (which is the integral of the inverse demand curve). However, for simplicity in this case, we calculate the increase in producer surplus directly from the given options. The correct calculation involves integrating the area between the MC and the demand curve, which results in an increase in producer surplus, as option B suggests.

Quiz 10: Market Power and Pricing Strategies

(Table: Honda Pilot Comparison I) Suppose that Honda prices the Pilot 4WD LX at $30,000 and the Pilot 4WD Touring at $40,000. Are these prices incentive-compatible?

(Figure: Monopoly and Perfect Price Discrimination I) Producer surplus under monopoly and under perfect price discrimination are _ and _, respectively.

(Figure: Perfect Price Discrimination I) Under perfect price discrimination, consumer surplus is $____.

The Hagerstown Suns, a Minor League Baseball team, sells a single game-day ticket for $9. If you buy the 35-game ticket package, the price per ticket falls to $8.34. The Hagerstown Suns is using:

A utility company faces demand given by q = 40 - 0.1p, where p is the price per unit. If the company adopts a two-tier pricing structure, the price per unit for the higher price that maximizes revenue is $____.

A firm with market power faces the demand function q = 2,000 - 20P. The firm's total cost function is TC(q) = 20q + 0.02q² + 2,000. In this market, the output level that maximizes total surplus is ____ units.

(Figure: Consumer Surplus I) Which of the following statements is (are) TRUE? I. Consumer surplus under perfect competition is $20.25. II) Consumer surplus under perfect price discrimination is $0. III) Consumer surplus under monopoly is $9.

(Figure: Market by Residence I) If the firm cannot practice third-degree price discrimination and must charge a single profit-maximizing price, it will earn producer surplus of approximately:

Suppose a firm faces the demand function q = 800 - 4P. The firm's total production costs are given by MC(q) = 9.5q + q². If the firm cannot price discriminate, its profit-maximizing price is $____.

(Figure: Pharmaceutical Pills Sales I) A pharmaceutical company sells its pills in foreign and domestic markets. Suppose the company uses segmenting. The profit-maximizing quantity in the Domestic Market is ____.

(Figure: Pharmaceutical Pills Sales I) A pharmaceutical company sells its pills in foreign and domestic markets. Suppose the company uses segmenting. The profit-maximizing quantity in the Foreign Market is ____.

A firm with market power has the inverse demand curve P = 90 - 1.5Q and the marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its producer surplus will:

Quiz 10: Market Power and Pricing Strategies

(Table: Honda Pilot Comparison I) Suppose that Honda prices the Pilot 4WD LX at $30,000 and the Pilot 4WD Touring at $40,000. Are these prices incentive-compatible?

(Figure: Monopoly and Perfect Price Discrimination I) Producer surplus under monopoly and under perfect price discrimination are _____ and _____, respectively.

(Figure: Perfect Price Discrimination I) Under perfect price discrimination, consumer surplus is $____.

The Hagerstown Suns, a Minor League Baseball team, sells a single game-day ticket for $9. If you buy the 35-game ticket package, the price per ticket falls to $8.34. The Hagerstown Suns is using:

A utility company faces demand given by q = 40 - 0.1p, where p is the price per unit. If the company adopts a two-tier pricing structure, the price per unit for the higher price that maximizes revenue is $____.

A firm with market power faces the demand function q = 2,000 - 20P. The firm's total cost function is TC(q) = 20q + 0.02q2 + 2,000. In this market, the output level that maximizes total surplus is ____ units.

(Figure: Consumer Surplus I) Which of the following statements is (are) TRUE? I. Consumer surplus under perfect competition is $20.25. II) Consumer surplus under perfect price discrimination is $0. III) Consumer surplus under monopoly is $9.

(Figure: Market by Residence I) If the firm cannot practice third-degree price discrimination and must charge a single profit-maximizing price, it will earn producer surplus of approximately:

Suppose a firm faces the demand function q = 800 - 4P. The firm's total production costs are given by MC(q) = 9.5q + q2. If the firm cannot price discriminate, its profit-maximizing price is $____.

(Figure: Pharmaceutical Pills Sales I) A pharmaceutical company sells its pills in foreign and domestic markets. Suppose the company uses segmenting. The profit-maximizing quantity in the Domestic Market is ____.

(Figure: Pharmaceutical Pills Sales I) A pharmaceutical company sells its pills in foreign and domestic markets. Suppose the company uses segmenting. The profit-maximizing quantity in the Foreign Market is ____.

A firm with market power has the inverse demand curve P = 90 - 1.5Q and the marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its producer surplus will:

(Figure: Monopoly and Perfect Price Discrimination I) Producer surplus under monopoly and under perfect price discrimination are _ and _, respectively.

A firm with market power faces the demand function q = 2,000 - 20P. The firm's total cost function is TC(q) = 20q + 0.02q² + 2,000. In this market, the output level that maximizes total surplus is ____ units.

Suppose a firm faces the demand function q = 800 - 4P. The firm's total production costs are given by MC(q) = 9.5q + q². If the firm cannot price discriminate, its profit-maximizing price is $____.