Question 1

Suppose two types of consumers buy suits.Consumers of type A will pay $100 for a coat, and $50 for pants.Consumers of type B will pay $75 for a coat, and $75 for pants.The firm selling suits faces no competition and has a marginal cost of zero.The optimal commodity bundling strategy is:
A)Charge $150 for a suit.
B)Charge $75 for a suit.
C)Charge $100 for a suit.
D)Charge $125 for a suit.

Accepted Answer

The answer of Suppose two types of consumers buy suits.Consumers...

Question 2

The average consumer at a firm with market power has an inverse demand function of P = 10 - Q.The firm's cost function is C = 2Q.If the firm engages in optimal two-part pricing, it will earn profits of
A)$2.
B)$32.
C)$64.
D)none of the statements associated with this question are correct.

Accepted Answer

In optimal two-part pricing, the firm sets the price per unit equal to marginal cost (MC = 2) and charges a fixed fee equal to the consumer surplus. The consumer surplus is the area of the triangle under the demand curve above the price line, which is (1/2) * (10 - 2) * 8 = 32. Thus, the firm's profit is $32.

Question 3

The purpose of randomized pricing is to reduce:
A)consumer price information only.
B)competitor price information only.
C)both customer and competitor information about price.
D)the firm's pricing inflexibility.

Accepted Answer

The purpose of randomized pricing is to reduce both customer and competitor information about price. By randomly changing prices, competitors cannot easily determine a firm's pricing strategy and customers cannot predict future prices, reducing their ability to wait for sales or discounts.

Question 4

A firm has capacity limitations and charges $30 for their service during daily peak times.If the market demand elasticity drops from -3 during peak times to -5 at off peak times, how much should the firm charge to earn the maximum profit during off peak times?
A)$20.
B)$21.
C)$24.
D)not enough information to determine.

Accepted Answer

The answer of A firm has capacity limitations and charges...

Question 5

A monopolist claims his profit-maximizing markup factor is 10.What is the price elasticity of demand for the firm's product?
A)-1.5.
B)-2.0.
C)-2.5.
D)none of the statements associated with this question are correct.

Accepted Answer

The answer of A monopolist claims his profit-maximizing markup factor...

Question 6

If the profit-maximizing markup factor in a 3-firm Cournot oligopoly is -2, what is the corresponding market elasticity of demand?
A)-1/2.
B)-2/3.
C)-1.0.
D)-2.0.

Accepted Answer

The markup factor is given by (1/market elasticity of demand) - 1. 
So, putting the given value of markup factor as -2: 
-2 = (1/Ed) - 1 
-1 = 1/Ed 
Ed = -1/1 = -1 
However, elasticity is generally given as a positive value, so taking the absolute value of -1, we get: 
|Ed| = 1 
Therefore, the corresponding market elasticity of demand is 1, which means the answer is option B) -2/3.

Question 7

The average consumer at a firm with market power has an inverse demand function of P = 10 - Q.The firm's cost function is C = 2Q.If the firm engages in two-part pricing, what is the optimal price to charge a consumer for each unit purchased?
A)$0.
B)$1.
C)$4.
D)none of the statements associated with this question are correct.

Accepted Answer

The answer of The average consumer at a firm with...

Question 8

If the profit-maximizing markup factor in a 10-firm Cournot oligopoly is -2, what is the corresponding market elasticity of demand?
A)-1.0.
B)-1.2.
C)-2.0.
D)none of the statements associated with this question are correct.

Accepted Answer

The answer of If the profit-maximizing markup factor in a...

Question 9

The average consumer at a firm with market power has an inverse demand function of P = 10 - Q.The firm's cost function is C = 2Q.If the firm engages in two part pricing, what is the optimal fixed fee to charge each consumer?
A)$2.
B)$32.
C)$64.
D)none of the statements associated with this question are correct.

Accepted Answer

The optimal fixed fee in two-part pricing is the consumer surplus. The consumer surplus is the area of the triangle under the demand curve above the price. The demand curve is P = 10 - Q, and the marginal cost is 2. Setting P = MC gives 10 - Q = 2, so Q = 8. The consumer surplus is (1/2) * (8) * (10 - 2) = 32.

Question 10

A firm with market power has an individual consumer demand of Q = 20 - 4P and costs of C = 4Q.What is optimal price to charge for a block of 20 units?
A)$18.
B)$36.
C)$72.
D)$90.

Accepted Answer

The answer of A firm with market power has an...

Question 11

If a product is perceived by consumers as homogeneous, which of the following strategies will work to induce brand loyalty?
A)Intensive advertising campaign.
B)Price wars with competitors.
C)Frequent buyer rebate programs.
D)None of the statements associated with this question are correct.

Accepted Answer

When consumers perceive a product as homogeneous, i.e. having little differentiation from competitors, offering frequent buyer rebate programs can create incentives for consumers to choose one brand over another. This creates customer loyalty towards the brand, which can lead to repeat purchases and positive word-of-mouth advertising. Intensive advertising campaigns and price wars may not be effective in creating brand loyalty in a homogeneous market.

Question 12

Suppose two types of consumers buy suits.Consumers of type A will pay $100 for a coat, and $50 for pants.Consumers of type B will pay $75 for a coat, and $75 for pants.The firm selling suits faces no competition and has a marginal cost of zero.If the firm charges $75 for pants and $75 for a coat, the firm will sell a coat to:
A)type A consumers.
B)type B consumers.
C)type A consumers and type B consumers.
D)none of the statements associated with this question are correct.

Accepted Answer

Type A consumers will buy a coat because the price is less than what they are willing to pay, and type B consumers will buy a coat because the price is equal to what they are willing to pay.

Question 13

Which of the following pricing policies enhances profits by creating brand-loyal consumers?
A)Frequent flyer programs.
B)Beat-or-pay strategies.
C)Trigger strategies.
D)Frequent flyer programs and beat-or-pay strategies.

Accepted Answer

Frequent flyer programs reward customers with benefits and exclusive offers for their loyalty. By offering incentives to customers to continue doing business with the company, it creates a strong brand-loyal consumer base which enhances profits. Beat-or-pay and trigger strategies focus more on attracting new customers rather than retaining existing ones.

Question 14

To circumvent the problem of double marginalization:
A)transfer prices must be set that maximize the overall value of the firm rather than the profits of the upstream division.
B)firms should engage in two-part pricing, unless it is possible to engage in either first or second degree price discrimination.
C)firms should vertically integrate.
D)none of the statements associated with this question are correct.

Accepted Answer

Transfer prices should be set to maximize the overall value of the firm, not the profits of any one division.

Question 15

Suppose two types of consumers buy suits.Consumers of type A will pay $100 for a coat, and $50 for pants.Consumers of type B will pay $75 for a coat, and $75 for pants.The firm selling suits faces no competition and has a marginal cost of zero.If the firm charges $100 for a suit (which includes both pants and a coat), the firm will sell a suit to:
A)type A consumers.
B)type B consumers.
C)type A consumers and type B consumers.
D)none of the statements associated with this question are correct.

Accepted Answer

Type A consumers will pay $150 for a full suit with coat and pants ($100 for coat + $50 for pants), while Type B consumers will pay $150 as well ($75 for coat + $75 for pants). Therefore, both types of consumers will be willing to buy a suit for $100, resulting in sales to both types of consumers. The firm can capture both types of customers by charging $100 for a suit.

Question 16

When two or more divisions mark up prices in excess of marginal cost,
A)double marginalization occurs.
B)two-part pricing occurs.
C)second-degree price discrimination occurs.
D)none of the statements associated with this question are correct.

Accepted Answer

When two or more divisions mark up prices in excess of marginal cost, it leads to double marginalization, which occurs when each division adds its own profit margin, leading to higher final prices than necessary.

Question 17

Suppose two types of consumers buy suits.Consumers of type A will pay $100 for a coat, and $50 for pants.Consumers of type B will pay $75 for a coat, and $75 for pants.The firm selling suits faces no competition and has a marginal cost of zero.If the firm can identify each consumer type and can price discriminate, what is the optimal price for a pair of pants?
A)Charge both types $150.
B)Charge both types $75.
C)Charge type A consumers $50, and type B consumers $75.
D)Charge type A consumers $50, and type B consumers $50.

Accepted Answer

The firm can use price discrimination to capture the maximum amount of consumer surplus. Type A consumers only value pants at $50, so they will not pay more than that amount. Type B consumers value pants at $75, so they are willing to pay that amount. Therefore, by charging type A consumers $50 and type B consumers $75, the firm captures the entire consumer surplus for both types of consumers. If they charged both types the same price, they would either lose out on potential revenue from type B consumers or lose sales from type A consumers who are not willing to pay the higher price.

Question 18

Suppose two types of consumers buy suits.Consumers of type A will pay $100 for a coat, and $50 for pants.Consumers of type B will pay $75 for a coat, and $75 for pants.The firm selling suits faces no competition and has a marginal cost of zero.If the firm sells coats and pants for $25 each, but offers a bundle containing both a coat and pants for $150, how many bundles will the firm sell?
A)0.
B)1.
C)2.
D)insufficient information.

Accepted Answer

Type A consumers will not buy the bundle because they value it at $150, which is equal to the bundle price, so they are indifferent. Type B consumers value the bundle at $150, which is also equal to the bundle price, so they are also indifferent. Since neither type has an incentive to buy the bundle over individual items, the firm will sell 0 bundles.

Question 19

A firm with market power has an individual consumer demand of Q = 20 - 4P and costs of C = 4Q.What is the optimal amount of this product to package in a single block?
A)2.
B)3.
C)4.
D)5.

Accepted Answer

To find the optimal amount to package, we need to maximize profit. Profit is defined as total revenue minus total cost (P = TR - TC). We can find total revenue by multiplying the price (P) by the quantity sold (Q). 
TR = P x Q = (20 - 4P) x Q 
We can find the quantity that maximizes profit by taking the derivative of profit with respect to Q and setting it equal to zero:

dP/dQ = 20 - 8Q = 0 
Q = 2.5

Since we cannot package half a unit, we round up to the nearest whole number, which is 3. However, if we package 3 units, we would end up throwing away some of the product since the individual consumer demand is only 2 units at a price of $4/unit (Q = 20 - 4P = 20 - 4(4) = 4). Therefore, the optimal amount to package is the highest quantity that is demanded by an individual consumer at some price.

At a price of $3/unit, the individual consumer demand is: 
Q = 20 - 4P = 20 - 4(3) = 8

And the cost of producing 8 units: 
C = 4Q = 4(8) = 32

So, the profit for producing 8 units and selling them at $3/unit: 
TR = P x Q = (3)(8) = $24 
P = TR - TC = 24 - 32 = -$8

This means we are making a loss. We can check the profits for producing 7 and 6 units as well:

At a price of $4/unit: 
Q = 20 - 4P = 20 - 4(4) = 4 
TR = P x Q = (4)(4) = $16 
C = 4Q = 4(4) = $16 
P = TR - TC = 16 - 16 = $0

At a price of $5/unit: 
Q = 20 - 4P = 20 - 4(5) = 0 
TR = P x Q = (5)(0) = $0 
C = 4Q = 4(0) = $0 
P = TR - TC = 0

Therefore, the optimal amount to package is 4 units, which can be sold for $4/unit, resulting in a profit of $4/unit.

Question 20

If a monopolist claims his profit-maximizing markup factor is 3, what is the corresponding price elasticity of demand?
A)-1.5.
B)-2.0.
C)-2.5.
D)-3.0.

Accepted Answer

The answer of If a monopolist claims his profit-maximizing markup...

Quiz 11: Pricing Strategies for Firms With Market Power

Suppose two types of consumers buy suits.Consumers of type A will pay $100 for a coat, and $50 for pants.Consumers of type B will pay $75 for a coat, and $75 for pants.The firm selling suits faces no competition and has a marginal cost of zero.The optimal commodity bundling strategy is:

The average consumer at a firm with market power has an inverse demand function of P = 10 - Q.The firm's cost function is C = 2Q.If the firm engages in optimal two-part pricing, it will earn profits of

The purpose of randomized pricing is to reduce:

A firm has capacity limitations and charges $30 for their service during daily peak times.If the market demand elasticity drops from -3 during peak times to -5 at off peak times, how much should the firm charge to earn the maximum profit during off peak times?

A monopolist claims his profit-maximizing markup factor is 10.What is the price elasticity of demand for the firm's product?

If the profit-maximizing markup factor in a 3-firm Cournot oligopoly is -2, what is the corresponding market elasticity of demand?

The average consumer at a firm with market power has an inverse demand function of P = 10 - Q.The firm's cost function is C = 2Q.If the firm engages in two-part pricing, what is the optimal price to charge a consumer for each unit purchased?

If the profit-maximizing markup factor in a 10-firm Cournot oligopoly is -2, what is the corresponding market elasticity of demand?

The average consumer at a firm with market power has an inverse demand function of P = 10 - Q.The firm's cost function is C = 2Q.If the firm engages in two part pricing, what is the optimal fixed fee to charge each consumer?

A firm with market power has an individual consumer demand of Q = 20 - 4P and costs of C = 4Q.What is optimal price to charge for a block of 20 units?

If a product is perceived by consumers as homogeneous, which of the following strategies will work to induce brand loyalty?

Which of the following pricing policies enhances profits by creating brand-loyal consumers?

To circumvent the problem of double marginalization:

When two or more divisions mark up prices in excess of marginal cost,

A firm with market power has an individual consumer demand of Q = 20 - 4P and costs of C = 4Q.What is the optimal amount of this product to package in a single block?

If a monopolist claims his profit-maximizing markup factor is 3, what is the corresponding price elasticity of demand?