Question 1

Suppose a firm produces identical goods for two separate markets and practices third-degree price discrimination.In the first market the firm charges $30 per unit,and it charges $22 per unit in the second market.Which of the following represents the ratio of price elasticities of demand in the two markets?
A)E2 = (21/29)E1
B)E2 = (29/21)E1
C)E2 = E1
D)E2 = (22/30)E1
E)none of these

Accepted Answer

The correct ratio of price elasticities of demand in the two markets under third-degree price discrimination cannot be determined solely based on the prices charged in each market. The formula for determining the ratio of price elasticities involves not just the prices but also the marginal cost and quantities sold in each market, none of which are provided in the question.

Question 2

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 3

A firm sells an identical product to two groups of consumers,A and B.The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits.Which of the following best describes the price and output strategy that will maximize profits?
A)PA = PB = MC.
B)MRA = MRB.
C)MRA = MRB = MC.
D)(MRA - MRB)= (1 - MC).

Accepted Answer

In third-degree price discrimination, different groups of consumers are charged different prices for an identical product. The goal is to maximize profits by setting prices that reflect each group's willingness to pay. To achieve this, the firm should set prices such that the marginal revenue (MR) from each group is equal to the marginal cost (MC) of production. In this case, the optimal strategy would be to set both MRA and MRB equal to the marginal cost, which is the same for both groups, as the product being sold is identical. Therefore, the correct answer is C.

Question 4

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 5

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 6

Your local grocery store offers a coupon that reduces the price of milk during the coming week.The regular retail price of milk in the store is $3.00 per gallon,and the coupon price is $2.00 per gallon for the next week.If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users,what is the price elasticity of demand for non-users?
A)-0.67
B)-1.0
C)-1.5
D)We do not have enough information to answer the question.

Accepted Answer

Since the price elasticity of demand for coupon users is -2, the price reduction of $1.00 per gallon (from $3.00 to $2.00) will lead to an increase in quantity demanded of 2 times. Therefore, the demand is elastic. The formula for cross-price elasticity of demand for substitute goods is % change in quantity demanded of good A / % change in price of good B. Using this formula, we know that the price reduction of milk would make it more attractive to non-users, and they may switch from their preferred alternative to milk. Hence, non-users would become like substitute goods to coupon users who are buying milk. Therefore, the cross-price elasticity of demand for non-users with respect to coupon users is positive. The absolute value of the cross-price elasticity of demand is equal to the ratio of the percentage of coupon users' quantity demanded and the percentage of non-users quantity demanded. Since we know the percentage change of quantity demanded for coupon users is -2, we can calculate that any switch from non-users to users would increase the quantity demanded of milk by 0.67 times (1 / 2). Therefore, the price elasticity of demand for non-users is -1.5 ([0.67 / ((1-0.67) / 0.67)] x -2).

Question 7

When a monopolist engages in perfect price discrimination,
A)the marginal revenue curve lies below the demand curve.
B)the demand curve and the marginal revenue curve are identical.
C)marginal cost becomes zero.
D)the marginal revenue curve becomes horizontal.

Accepted Answer

In perfect price discrimination, the monopolist charges each customer the maximum they are willing to pay, so the demand curve and the marginal revenue curve are identical. This allows the monopolist to capture all the consumer surplus and maximize profits. The marginal cost does not become zero and the marginal revenue curve does not become horizontal.

Question 8

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 9

Under perfect price discrimination,consumer surplus
A)is less than zero.
B)is greater than zero.
C)equals zero.
D)is maximized.

Accepted Answer

Under perfect price discrimination, a seller charges each buyer their maximum willingness to pay, thus capturing all the consumer surplus and leaving the consumer surplus equal to zero.

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, the price is higher during peak periods when demand is high and lower during off-peak periods when demand is low. As a result, marginal revenue in the peak period is generally greater than in the off-peak period. This allows businesses to maximize their profits by charging higher prices during times of high demand.

Question 11

For a perfect first-degree price discriminator,incremental revenue is
A)greater than price if the demand curve is downward sloping.
B)the same as the marginal revenue curve if the firm is a non-discriminating monopolist.
C)equal to the price paid for each unit of output.
D)less than the marginal revenue for a non-discriminating monopolist.

Accepted Answer

Incremental revenue for a perfect first-degree price discriminator is equal to the price paid for each unit of output because the firm can charge each consumer the maximum price they are willing to pay. As such, there is no decrease in revenue from lowering the price for any given consumer, as the price charged already reflects their maximum willingness to pay. Therefore, incremental revenue is equal to the price paid for each unit of output.

Question 12

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 13

The manager of a firm is attempting to practice third degree price discrimination.She has equated the marginal revenue in each of her markets.By doing this her
A)profits are maximized.
B)costs are minimized given her level of output.
C)revenues are maximized given her level of output.
D)all of the above

Accepted Answer

The answer of The manager of a firm is attempting...

Question 14

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, as the company is charging different prices for the same product at different points in time. The initial high price is charged to capture profits from early adopters and those willing to pay a premium, while the lower price later on is intended to attract more price-sensitive customers who are willing to wait for a better deal.

Question 15

Under perfect price discrimination,marginal profit at each level of output equal
A)0)
B)P - AC.
C)P - MC.
D)P - AR.

Accepted Answer

Under perfect price discrimination, the producer charges a different price for each unit of output sold, and the price charged is equal to the willingness to pay of each customer. Therefore, the marginal revenue (MR) curve is equivalent to the demand curve, and it is downward sloping. The producer will produce up to the point where marginal cost (MC) equals marginal revenue (MR).

Since under perfect price discrimination, the producer charges the willingness to pay of each customer, the price is equal to the marginal revenue. Therefore, marginal profit is equal to marginal revenue minus marginal cost (MR - MC).

Option A is incorrect because it implies that the marginal profit is zero, which is not true.

Option B is incorrect because it implies that the marginal profit is equal to the difference between the price and the average cost, which is not true under perfect price discrimination.

Option D is incorrect because it implies that the marginal profit is equal to the difference between the price and the average revenue, which is not true under perfect price discrimination.

Therefore, the correct answer is C, where the marginal profit is equal to the difference between the price and the marginal cost (P - MC).

Question 16

Bindy,an 18-year-old high school graduate,and Luciana,a 40-year-old college graduate,just purchased identical hot new sports cars.Acme Insurance charges a higher rate to insure Bindy than Luciana.This practice is an example of:
A)collusion.
B)price discrimination.
C)two-part tariff.
D)bundling.
E)none of the above

Accepted Answer

The answer of Bindy,an 18-year-old high school graduate,and Luciana,a 40-year-old...

Question 17

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 18

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 the time of day or time of year when demand is highest. In this case, the theater charges a lower price for matinee tickets when demand is lower, and a higher price for evening tickets when demand is higher. This is a common strategy used by many businesses to maximize profits.

Question 19

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 an example of a two-part tariff because there are two parts to the price: a fixed fee of $75 per person for entrance and a variable fee of $2.50 per ride. Two-part tariffs are commonly used by businesses to capture more consumer surplus and increase profits.

Question 20

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...

Quiz 11: Pricing With Market Power

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 firm sells an identical product to two groups of consumers,A and B.The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits.Which of the following best describes the price and output strategy that will maximize profits?

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

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:

When a monopolist engages in perfect price discrimination,

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

Under perfect price discrimination,consumer surplus

In peak-load pricing,

For a perfect first-degree price discriminator,incremental revenue is

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

The manager of a firm is attempting to practice third degree price discrimination.She has equated the marginal revenue in each of her markets.By doing this her

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

Under perfect price discrimination,marginal profit at each level of output equal

Bindy,an 18-year-old high school graduate,and Luciana,a 40-year-old college graduate,just purchased identical hot new sports cars.Acme Insurance charges a higher rate to insure Bindy than Luciana.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

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