Question 1

In 1990,Chrysler offered rebates on almost all of its cars.In May of that year it announced that the rebate program would end on June 30.It also announced that no further rebates would be offered for the rest of the year.Chrysler guaranteed this by promising that if it did offer any rebates larger than those offered between May 1 and June 30,all customers who purchased cars before the new rebate would get the full rebate.How should this announcement have affected the pricing behavior of other car manufacturers?

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The answer of In 1990,Chrysler offered rebates on almost all...

Question 2

Many restaurants have found that it is advantageous to offer free appetizers with a two-drink minimum during a limited number of hours.Is this profit-maximizing behavior?
 Why or why not?

Accepted Answer

The answer of Many restaurants have found that it is...

Question 3

You run a golf course at a tourist resort.At your resort,there are two distinct groups of players.One group owns property at the resort and resides there most of the year.On average,each of these consumers has a monthly inverse demand for golf services of P = 100 - 0.5Q.The other group visits for one week at a time and has a total weekly demand curve of P = 40 - 0.1Q.What pricing strategy will maximize your profits?

Accepted Answer

The answer of You run a golf course at a...

Question 4

Suppose that JVC is trying to decide how to price a new stereo system composed of a receiver,CD player,and speakers.The company's economists have estimated that two different groups will purchase these products:
 students and club owners.The economists' analysis suggests that the total market for its brand of stereos consists of 10,000 students and 50,000 club owners.In addition,it is estimated that the maximum amount each group will pay for each stereo component is as follows:
 $$\begin{array} { | l | l | l | l | } 
\hline \text { Group } & \text { Receiver } & \text { CD Player } & \text { Speaters } \
\hline \text { Studerits } & \$ 250 & \$ 150 & \$ 100 \
\hline \text { Club owners } & \$ 200 & \$ 75 & \$ 250 \
\hline
\end{array}$$ JVC's objective is to maximize revenues,and it is considering three strategies to price its stereo components:
 (1)a standard strategy whereby it prices each stereo component separately; (2)perfect price discrimination; or (3)bundling the three components together and selling only bundles containing the receiver,CD player,and speakers.
a.If JVC uses a standard pricing strategy,what price should it charge for the receiver,for the CD player,and for the speakers to maximize revenues?
 What are the revenues they will earn through this strategy?
b.Suppose JVC adopts a first-degree price discrimination policy.What prices should it charge to maximize revenues?
 What are JVC's revenues using this strategy?
c.Suppose that JVC markets the receiver,CD player,and speakers together.That is,it uses a commodity-bundle strategy such that the products are sold as one item.What price should JVC charge to maximize revenues?
 How much will it earn?

Accepted Answer

The answer of Suppose that JVC is trying to decide...

Question 5

Most wholesalers post a "suggested retail price" on packages,which in turn are sold by retailers.Is there an economic basis for the suggested retail price?
 As the manager of a retailing outlet,what factors will determine whether you should charge the suggested retail price or some higher or lower price?

Accepted Answer

The answer of Most wholesalers post a "suggested retail price"...

Question 6

Suppose a typical consumer's inverse demand function for bottled water at a resort area where one firm owns all the rights to a local spring is given by P = 15 - 3Q.The marginal cost for gathering and bottling the water is $3 per gallon.Find the optimal number of bottles to package together for sale and the profit-maximizing price to charge for the package.Show the solution graphically.
Figure 11-2

Accepted Answer

The answer of Suppose a typical consumer's inverse demand function...

Question 7

In most cities all lumber yards advertise that they have the lowest price in town.In addition,they often claim that they will match the prices of any other lumber yards.Is this Bertrand competition that brings about zero economic profits?

Accepted Answer

The answer of In most cities all lumber yards advertise...

Question 8

Grocery stores make most of their profits on soft drinks,beer,chips,and candy.A casual look at prices of these items reveals that these prices change extremely often and can vary as much as 50 percent.Is this because the wholesale price of these items fluctuates this dramatically,or is there some other possible explanation?

Accepted Answer

The answer of Grocery stores make most of their profits...

Question 9

Before the breakup of AT&T,the firm charged a price for local telephone services that was roughly one-half of its cost of providing the services.In contrast,it charged almost two times it cost for long-distance services.Why do you think AT&T adopted this pricing strategy?

Accepted Answer

The answer of Before the breakup of AT&T,the firm charged...

Question 10

You have just been hired as manager of a new health spa in Retirement Village,Florida.The owner has commissioned a market study that estimates the average customer's monthly demand curve for visiting the health spa to be Q^d = 50 - 0.25P.The cost of operating is C(Q)= 3Q,where Q is the number of visits.The owner has been charging a $20 per month membership fee and a $5 per visit fee.Part of your salary is 10 percent of the monthly profits.Suggest a pricing strategy that will increase your salary.

Accepted Answer

The answer of You have just been hired as manager...

Question 11

Three consumers who want to buy a new car have the following valuations for dealer options:
 $$\begin{array} { | l | l | l | } 
\hline & \text { Air Conditianer } & \text { Power Brakes } \
\hline \text { Consumer 1 } & \$ 1,000 & \$ 500 \
\hline \text { Consurner 2 } & \$ 800 & \$ 300 \
\hline \text { Consumer 3 } & \$ 100 & \$ 800 \
\hline
\end{array}$$ Assuming costs are zero,how much would the dealer make if it priced power brakes at $800,priced air conditioners at $200,and sold the bundle for $1,300?

Accepted Answer

The answer of Three consumers who want to buy a...

Question 12

A monopolist is profit maximizing where the elasticity of demand is -2 and price is $4.What is the monopolist's marginal cost?

Accepted Answer

The answer of A monopolist is profit maximizing where the...

Question 13

An auto dealer in Chicago recently told his mother that he makes no money on the sales of his cars but the markup on accessories is 200 percent.Can this possibly be a profit-maximizing strategy?

Accepted Answer

The answer of An auto dealer in Chicago recently told...

Question 14

You are the manager of We Trust,the only bank in a small town.Your boss has been studying a report on transaction volume and has noticed a troubling trend:
 We Trust does not have enough tellers to handle the bank's maximum capacity,which occurs during the lunch hour.Your boss has asked for a short report that summarizes alternative plans for solving this problem,the pros and cons of each plan,and your recommended course of action.Provide this report.

Accepted Answer

The answer of You are the manager of We Trust,the...

Question 15

You are the manager of a gas station in a small town,and your goal is to maximize profits.Based on your experience,the elasticity of demand of Texans for a car wash is -2,while that of non-Texans is -1.5.Your marginal cost is $6.
a.Are the conditions necessary for price discrimination to be an effective means of enhancing profits being met?
 
b.What is the profit-maximizing price to charge a Texan for a car wash?
c.What is the profit-maximizing price to charge a Californian for a car wash?

Accepted Answer

The answer of You are the manager of a gas...

Question 16

You are the owner of a Mom and Pop store that buys milk from a supplier at a cost of $1 per gallon.If you estimate the elasticity of demand for milk sold at your store to be -3.5,what are your profit-maximizing markup and price?

Accepted Answer

The answer of You are the owner of a Mom...

Question 17

As manager of the only video store in town,you have noticed that on Thursday through Sunday the demand for renting your movies is much higher than it is on Monday through Wednesday.You therefore conducted a study that revealed two different market demand curves.On weekends,your inverse demand curve is P = 10 - 0.001Q; on weekdays,it is P = 5 - 0.01Q.The marginal cost of renting a movie is $.50 (50 cents).Your average customer never rents more than one movie at a time.What pricing strategy will maximize your profits?

Accepted Answer

The answer of As manager of the only video store...

Question 18

During the 1990s,several airlines were on the brink of bankruptcy.These same airlines were giving away millions of dollars in free airline travel through their frequent-flyer programs.Do you think it would have been a good idea for these airlines to eliminate their frequent-flyer programs in order to earn higher profits?

Accepted Answer

The answer of During the 1990s,several airlines were on the...

Question 19

An industry produces 10,000 units of output at a price of $100.At the equilibrium price and quantity,the market elasticity of demand is -0.75.Does this industry consist of a profit-maximizing monopolist?

Accepted Answer

The answer of An industry produces 10,000 units of output...

Question 20

You are the CEO of Comchip,a monopoly that sells specialized computers.Each of the firm's computers contains a unique chip that is produced at Comchip's West Coast plant at a cost of C_w(Q_c)= Q_c².Once produced,the chips are shipped exclusively to the firm's East Coast plant.There,the computers are assembled,boxed,and shipped to the market at a cost of C_e(Q)= 200Q.An economic consultant recently estimated the demand for Comchip's computers and found it to be P = 5,000 - Q.Determine Comchip's optimal output and price for computers,and explain how it can induce plant managers to produce the required number of chips and computers.

Accepted Answer

The answer of You are the CEO of Comchip,a monopoly...

Quiz 11: Pricing Strategies for Firms With Market Power

Many restaurants have found that it is advantageous to offer free appetizers with a two-drink minimum during a limited number of hours.Is this profit-maximizing behavior? Why or why not?