Question 1

(Table: Hotel Stay and Airfare I) The table shows the consumer's willingness to pay for a hotel stay and airfare.  
Assume that marginal cost is zero for both goods. 
a. If the hotel and airfare are priced separately, what prices maximize producer surplus? What is the level of producer surplus?
b. If the hotel and airfare are bundled, what is the optimal bundle price? What is the level of producer surplus?
c. Suppose the hotel and airfare are mixed-bundled such that the bundle price is $410 and the hotel and airfare are priced separately, each at $180. Why is this mixed-bundling strategy NOT incentive-compatible?

Accepted Answer

The answer of (Table: Hotel Stay and Airfare I) The...

Question 2

(Table: Callaway Golf Shoes I) The table shows consumer valuations for two types of Callaway golf shoes.  
a. Suppose Callaway prices the C-Tech shoes at $85 and the Xtreme shoes at $125. Show that this pricing scheme is incentive-compatible.
b. Suppose Callaway prices the C-Tech shoes at $70 and the Xtreme shoes at $125. Show that this pricing scheme is NOT incentive-compatible.

Accepted Answer

The answer of (Table: Callaway Golf Shoes I) The table...

Question 3

If a firm has market power but cannot prevent its customers from reselling the product, the firm will:

Accepted Answer

A firm with market power will aim to maximize its profits by producing a quantity of output where marginal revenue equals marginal cost. This principle applies regardless of the firm's ability to prevent resale.

Question 4

To ensure maximization and not minimization in the case of the perfectly -price-discriminating monopolist, check that:

Accepted Answer

The answer of To ensure maximization and not minimization in...

Question 5

A firm with market power faces the demand function q = 150 - 10P. The firm's marginal cost function is MC(q) = 2 + 0.1q. If the firm establishes a block-pricing structure with two prices, what two prices will the firm use to maximize producer surplus?

Accepted Answer

The answer of A firm with market power faces the...

Question 6

(Table: Maximum Willingness to Pay IV) Suppose that the marginal cost of a one-way airfare is $30.  Assuming the firm can perfectly price discriminate, the marginal revenue from selling the second quantity is $____.

Accepted Answer

The answer of (Table: Maximum Willingness to Pay IV) Suppose...

Question 7

The price elasticity of demand for coffee by adults and by seniors is -2.3 and -3.6, respectively. In percentage terms, how much is seniors' coffee discounted from the price of adults' coffee?

Accepted Answer

The answer of The price elasticity of demand for coffee...

Question 8

A pizza monopolist employing third-degree price discrimination charges students $10 per pizza and everyone else $15 per pizza. Students must show their ID before they can get the discount. The marginal cost of this monopolist is $5 whether or not the customer is a student. The elasticity of demand for the students is _____ and for everyone else it is _____.

Accepted Answer

The answer of A pizza monopolist employing third-degree price discrimination...

Question 9

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. Identify the type of price discrimination the monopolist should employ and complete the table.

Accepted Answer

The answer of Assume a monopolist can prevent resale of...

Question 10

Suppose a firm that can perfectly price discriminate faces the demand function P = 100 - q². The firm's total production costs are given by MC(q) = q + q². If the firm can perfectly price discriminate, what is its output level?

Accepted Answer

The answer of Suppose a firm that can perfectly price...

Question 11

(Table: Camaro Versions I) The table shows consumer valuations for two versions of the Camaro.  
Select a price for the coupe and ZL1 such that the budget consumer prefers to purchase the coupe and the luxury consumer prefers the ZL1.

Accepted Answer

The answer of (Table: Camaro Versions I) The table shows...

Question 12

The practice of bundling necessitates that a firm:

Accepted Answer

Bundling requires a firm to have market power, prevent arbitrage (to ensure consumers cannot buy products separately at a lower total cost), and sell two products where the demand for one is negatively correlated with the demand for the other. This strategy allows the firm to maximize profit by selling the bundle at a price that captures more consumer surplus. Positive correlation in demand or setting prices equal to marginal cost for identifiable consumer demand after purchase are not necessary conditions for effective bundling.

Question 13

This graph represents a monopolist. Suppose the monopolist decides to practice perfect price discrimination. What will be the change in producer surplus as a result of this decision?

Accepted Answer

The answer of This graph represents a monopolist. Suppose the...

Question 14

(Table: Consumer Valuations for Two Software Programs II) Assume that the marginal cost of producing software is zero. The most profitable bundling strategy would be to sell the statistical and graphical programs together for:

Accepted Answer

The answer of (Table: Consumer Valuations for Two Software Programs...

Question 15

A firm with market power faces the demand function q = 250 - 5P. The firm's marginal cost function is MC(q) = 5 + 0.2q. If the firm establishes a block-pricing structure with two prices, what prices will the firm use to maximize producer surplus?

Accepted Answer

The answer of A firm with market power faces the...

Question 16

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 can perfectly price discriminate, its profit-maximizing output is ____.

Accepted Answer

The answer of Suppose a firm faces the demand function...

Question 17

Disney World charges $140 for one round of golf from morning until 2:00 P.M. and $60 for one round of golf from 2:00 P.M. until closing. Suppose the marginal cost of one round is $20.
a. What does this price differential suggest about the price sensitivities of people who play golf early in the day compared to those who play in the late afternoon?
b. Calculate the price elasticity of demand for the early-morning golfers and for the late-afternoon golfers.

Accepted Answer

The answer of Disney World charges $140 for one round...

Question 18

A firm with market power faces a linear demand curve. With perfect price discrimination, it is producing 1,000 units of output and earning producer surplus of $5,000. Marginal cost is constant at $10. If the firm cannot price discriminate, how much producer surplus will it earn?

Accepted Answer

The answer of A firm with market power faces a...

Question 19

Trick or Treat Candy Company has lots of customers, some of whom have an inverse demand of P = 160 - 10Q, while another group of customers has an inverse demand curve of P = 120 - 5Q. Unfortunately, the owner, Hazel, does not know which customers are which until they buy. She knows that her marginal costs are constant at $25 and that she would like to use quantity discounting. Advise her as to the prices she should set.

Accepted Answer

The answer of Trick or Treat Candy Company has lots...

Question 20

Suppose a firm faces the demand function q = 800 - 4P. The firm's total production costs are given by MC(q) = 9.5q + q². a. If the firm cannot price discriminate, what are its profit-maximizing output and price? b. If the firm maximizes profits but cannot price discriminate, what are its consumer surplus and producer surplus? Calculate the deadweight loss from market power. c. If the firm can perfectly price discriminate, what is its output level? d. If the firm can perfectly price discriminate, what are its consumer surplus and producer surplus? What is the deadweight loss from market power?

Accepted Answer