Question 1

First-degree price discrimination

Accepted Answer

First-degree price discrimination is the practice of charging each individual customer the maximum price that they would be willing to pay for each unit of a good or service. This allows the seller to capture all of the available consumer surplus and maximize their profits. Therefore, C is the correct choice as it combines both parts of the definition.

Question 2

Firms will often implement randomized pricing in an attempt to reduce

Accepted Answer

Randomized pricing is implemented to reduce the amount of information available to both customers and competitors about the price. By constantly changing prices, competitors cannot easily determine the pricing strategy of the company and customers cannot compare prices easily, thus reducing the likelihood of price wars and loss of sales to competitors.

Question 3

In a Cournot oligopoly with N-firms and identical marginal costs, the relationship between the price elasticity of demand for the form and that of the market is

Accepted Answer

In a Cournot oligopoly, the firm's price elasticity of demand (E_F) is N times the market price elasticity of demand (E_M) because each firm considers the output of other firms as given, leading to a more elastic demand for its own product.

Question 4

The idea of charging two different groups of consumers two different prices is practiced in:

Accepted Answer

The practice of charging two different groups of consumers two different prices is known as price discrimination, which is not listed among the options provided.

Question 5

Which of the following statements is true regarding a simple pricing rule for monopoly and monopolistic competition?

Accepted Answer

The correct formula for a simple pricing rule for monopoly and monopolistic competition is P[(1 + E_F) / E_F] = MC. This formula takes into account the elasticity of demand (ES), the percentage markup over marginal cost (FS), and the share of fixed costs in total costs (U1B1) and allows the firm to set a profit-maximizing price. Choice A is incorrect because it includes the denominator of (1 + E_F), which would result in a higher price. Choice B is incorrect because it swaps the positions of the numerator and denominator of the correct formula. Choice D is incorrect because only one statement is correct.

Question 6

The monopoly price is:

Accepted Answer

The monopoly price is where marginal revenue equals marginal cost. From the given information, the marginal cost is $5. At a price of $30, the firm would have a quantity of 7 and therefore a marginal revenue of $7 (given the linear demand curve). At a price of $23, the firm would have a quantity of 12 and a marginal revenue of $3. Therefore, the price that maximizes profit for the monopolist is $23.

Question 7

Which of the following pricing strategies does not usually enhance the profits of firms with market power?

Accepted Answer

Marginal cost pricing is when a firm sets its price equal to its marginal cost, which means that the firm earns no profit. This strategy is usually used by firms in competitive markets to drive out rivals or by firms with the government as a customer. However, firms with market power (ability to set prices above marginal costs) would not use this strategy as it would not enhance their profits. The other pricing strategies listed (price discrimination, block pricing, and commodity bundling) all have the potential to enhance the profits of firms with market power.

Question 8

Suppose fixed costs rise to $200.What will happen in the market?

Accepted Answer

Fixed costs do not affect the firm's marginal cost or decision to produce in the short run, so the firm will continue to produce the same output and charge the same price.

Question 9

What price should a firm charge for a package of two shirts given a marginal cost of $4 and an inverse demand function P = 8 - 2Q by the representative consumer?

Accepted Answer

The answer of What price should a firm charge for...

Question 10

Which of the following is a correct statement?

Accepted Answer

The answer of Which of the following is a correct...

Question 11

Which of the following is true regarding the relationship between the elasticity of demand for an individual firm and the elasticity of demand for the market in a Cournot oligopoly with 5 identical firms?

Accepted Answer

The answer of Which of the following is true regarding...

Question 12

You are the manager of a Mom and Pop store that can buy milk from a supplier at $2.00 per gallon.If you believe the elasticity of demand for milk by customers at your store is -3, then your profit-maximizing price is

Accepted Answer

The formula to calculate the profit-maximizing price is: 
price = (1 + 1/|Elasticity of demand|) x cost
Substituting the values given: 
price = (1 + 1/3) x 2
price = 4/3 x 2
price = $2.67 (rounded off to nearest cent)

Since the given options do not match the calculated value, the closest option is $3.00, which is the best choice for maximizing profit.

Question 13

Second-degree price discrimination

Accepted Answer

Second-degree price discrimination involves charging different prices for different quantities or blocks of a product, often with declining prices for larger quantities.

Question 14

Which of the following statements is true regarding profit-maximizing markup for a Cournot oligopoly with N identical firms?

Accepted Answer

The profit-maximizing markup for a Cournot oligopoly with N identical firms is given by the formula P = [Nε / (1 + Nε)] MC, where ε is the price elasticity of demand. Since in a Cournot oligopoly, each firm faces a downward-sloping demand curve that depends on the output of the other firms, the effective price elasticity of demand is higher than in a monopoly or perfect competition. Therefore, the markup is lower and approaches zero as the number of firms increases. Choice D is the correct formulation of the markup for a Cournot oligopoly with N identical firms.

Question 15

During spring break, students have an elasticity of demand for a trip to Cancun, Mexico of -4.How much should an airline charge students for a ticket if the price it charges the general public is $420? Assume the general public has an elasticity of -2.

Accepted Answer

Using the formula: 
% Change in Quantity Demanded / % Change in Price = Elasticity of Demand

For students: 
-4 = % Change in Quantity Demanded / % Change in Price 
% Change in Quantity Demanded = -4 x % Change in Price

For the general public: 
-2 = % Change in Quantity Demanded / % Change in Price

To find the optimal price for students, we need to find the price that will generate the same percentage change in revenue (i.e. price times quantity) for both the general public and students.

Let's assume a starting price of $420.

For the general public: 
-2 = % Change in Quantity Demanded / % Change in Price 
-2 = % Change in Quantity Demanded / (420 - P) / 420 
-0.0042P = % Change in Quantity Demanded

For students: 
-4 = % Change in Quantity Demanded / % Change in Price 
-4 = % Change in Quantity Demanded / (420 - P) / P 
-1.68P = % Change in Quantity Demanded

We want the % Change in Revenue for both groups to be the same:

% Change in Revenue (General Public) = -2 x [(420 - P)/420] x P 
% Change in Revenue (Students) = -4 x [(420 - P)/P] x P

% Change in Revenue (General Public) = % Change in Revenue (Students) 
-2 x [(420 - P)/420] x P = -4 x [(420 - P)/P] x P 
2 x (420 - P) = 4 x (420 - P) / P 
P = $280

Question 16

To avoid the problem of double marginalization

Accepted Answer

The answer of To avoid the problem of double marginalization
...

Question 17

Which of the following pricing policies does not extract the entire consumer surplus from the market?

Accepted Answer

Peak load pricing does not extract the entire consumer surplus as it involves charging higher prices during peak demand times and lower prices during off-peak times, rather than capturing all consumer surplus.

Question 18

A local video store estimates their average customer's demand per year is Q = 20 - 4P, and knows the marginal cost of each rental is $1.00.How much should the store charge for an annual membership in order to extract the entire consumer surplus via an optimal two-part pricing strategy?

Accepted Answer

To extract the entire consumer surplus, the store should set the price per rental equal to the marginal cost ($1) and charge an annual membership fee equal to the total consumer surplus. The demand equation is Q = 20 - 4P. Setting P = $1, Q = 20 - 4(1) = 16. The consumer surplus is the area of the triangle with base 16 and height (5 - 1) = 4, which is (1/2) * 16 * 4 = $32.

Question 19

What are the profits of the monopoly in equilibrium?

Accepted Answer

In a monopoly, profits in equilibrium are maximized when marginal revenue (MR) equals marginal cost (MC). From the graph, the point where MR intersects MC is at a quantity of 3, and at this quantity, the price is $75. Therefore, the total revenue (TR) is $225 (3 x $75). The total cost (TC) at a quantity of 3 is $100, so the profit is TR - TC, which is $225 - $100 = $125. Therefore, the correct answer is A) $225, which represents the total revenue earned by the monopolist at the profit-maximizing quantity.

Question 20

Which of the following is a true statement about the process of cross-subsidization, given a firm is selling two products?

Accepted Answer

Cross-subsidization often involves cost complementarities, where the cost of producing two goods together is less than producing them separately, allowing the firm to subsidize one product with the profits from another.

Quiz 11: Pricing Strategies for Firms With Market Power