Question 1

Most supermarkets charge the same price for the majority of goods sold. This suggest that
A) the government regulates prices of most products sold in supermarkets.
B) supermarkets have colluded to fix prices on most of the goods sold.
C) mark-ups reflect the degree of competition in the supermarket industry.
D) the large supermarket chains are price leaders and smaller grocers take these prices as given.

Accepted Answer

The fact that most supermarkets charge the same price for the majority of goods sold suggests that mark-ups reflect the degree of competition in the supermarket industry. In a highly competitive industry, firms will compete on price and this will lead to similar mark-ups and prices. Therefore, this suggests that there is a high degree of competition in the supermarket industry. The other options are less likely as there is generally little government regulation of prices in the retail sector, collusion between firms is illegal and difficult to maintain, and smaller grocers may have different cost structures and pricing strategies than larger chains.

Question 2

If marginal cost is zero, with an optimal two-part tariff,
A) total revenue is maximized.
B) consumers maximize their surplus
C) the firm does not have to charge a fixed-fee portion.
D) firms may not maximize profit.

Accepted Answer

With a marginal cost of zero, the optimal two-part tariff would involve charging the consumer a fixed fee and a per-unit fee. By setting the per-unit fee equal to zero, the firm is able to maximize total revenue. This is because the fixed fee component allows the firm to capture consumer surplus while the zero per-unit fee allows for maximum consumption and therefore maximum revenue.

Question 3

Figure 16-5 
-Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the monopoly price. What is the quantity it should produce?
A) 240 units
B) 320 units
C) 480 units
D) 560 units

Accepted Answer

To determine the quantity the firm should produce, we need to find the point at which marginal revenue (MR) equals marginal cost (MC). From the graph, we can see that the monopoly price is $40 and the quantity demanded at that price is 320 units. Thus, we know that the demand curve intersects the marginal cost curve at a quantity of 320 units. Since the firm will charge a fixed fee on top of the per-unit price, it will still want to produce the quantity at which MR = MC to maximize profit. Therefore, the firm should produce 320 units.

Question 4

Suppose the per-unit production cost of a book is $4.00 and the retail price is $32. If the book publisher sells books to a bookstore at a 40 percent discount, what is the amount of the publisher's markup per book? Assume that bookstores sell books at the retail price.
A) $12.80
B) $15.20
C) $19.20
D) $21.60

Accepted Answer

The publisher's cost per book is $4.00, and the retail price is $32.00, so the markup is:

Markup = Retail price - Cost
Markup = $32.00 - $4.00
Markup = $28.00

If the publisher sells books to a bookstore at a 40% discount, then the bookstore pays only:

Price paid by the bookstore = Retail price - 40% discount
Price paid by the bookstore = $32.00 - 0.40($32.00)
Price paid by the bookstore = $19.20

Therefore, the publisher's markup per book is:

Publisher's markup per book = Retail price - Price paid by the bookstore
Publisher's markup per book = $32.00 - $19.20
Publisher's markup per book = $12.80

So the answer is B, $15.20.

Question 5

Some firms practice odd pricing because
A) they believe that customers will buy a larger quantity with an odd price.
B) it is a way to price discriminate.
C) it is too difficult for sellers to reeducate buyers into accepting even prices.
D) it lowers transactions costs.

Accepted Answer

Some firms practice odd pricing because they believe that customers will buy a larger quantity with an odd price. This is because odd prices are often perceived as being closer to a bargain or discount, leading customers to feel like they are getting a better deal. Additionally, odd pricing can help create a pricing anchor for customers, making it easier for them to remember the price and making it more difficult for competitors to undercut.

Question 6

Which of the following describes two-part tariff pricing?
A) A firm charges two different prices for the same good.
B) An importer has to pay a tax at the nation's borders, and a sales tax when the good is sold.
C) A buyer pays an initial price for entrance to the market and an additional fee for each unit of the product purchased.
D) A buyer must pay a down payment and monthly payments to buy big-ticket items such as a car, a plasma television or a suite of furniture.

Accepted Answer

Two-part tariff pricing involves a fixed cost or entrance fee (the initial price) and a variable cost per unit of product purchased (the additional fee). This strategy is commonly used in industries such as amusement parks or subscription services, where customers pay an initial fee for access and then pay a fee for each additional use or unit of product purchased.

Question 7

A firm using a two-part tariff can produce the economically efficient outcome by
A) making the fixed-fee portion of the price as low as possible.
B) setting the per-unit portion of the price equal to the marginal cost of production.
C) setting the per-unit portion of the price equal to the average cost of production.
D) setting the fixed-fee portion of the price at some proportion to the fixed cost of production.

Accepted Answer

In a two-part tariff, the firm charges a fixed fee and a per-unit price. The economically efficient outcome is achieved when the per-unit price equals the marginal cost of production. This is because the marginal cost represents the additional cost of producing each unit, and charging this price ensures that the firm is not overcharging for each unit produced. The fixed-fee portion of the price can be set at any level as long as it covers the fixed cost of production, but it does not affect the efficiency of the pricing strategy.

Question 8

Compared to monopoly pricing, an optimal two-part tariff
A) reduces economic efficiency.
B) eliminates the deadweight loss.
C) equates marginal revenue and average revenue.
D) increases consumer surplus.

Accepted Answer

An optimal two-part tariff charges a fixed fee along with a per-unit price and eliminates the deadweight loss by maximizing profit at the point where the marginal cost equals marginal revenue. This pricing strategy increases economic efficiency by maximizing consumer surplus while also ensuring the producer earns a profit. Therefore, it is better than monopoly pricing.

Question 9

Figure 16-5 
-Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the monopoly price. What is the per-unit price?
A) $28
B) $24
C) $12
D) $8

Accepted Answer

The monopoly price is shown at the output level where the marginal revenue curve intersects the demand curve, which is $32. The fixed fee is shown as the vertical distance between the demand curve and the point where the marginal cost curve intersects the vertical line at the monopoly price, which is $8. Therefore, the per-unit price under the two-part pricing strategy would be $24 ($32 monopoly price minus $8 fixed fee).

Question 10

Book publishers often use price discrimination across time to increase profits. Toni Morrison's book, A Mercy, was published as a hardcover edition in November 2008 at a price of $23.95. In August 2009, the paperback version was published at a price of $15.00. Assume that 100,000 hardcover books were sold to hard-core Toni Morrison fans in November 2008, and 400,000 paperback books were sold to casual readers in August 2009. Illustrate each of these situations graphically. Assume that the marginal cost of the hardcover version is $2.00 and the marginal cost of the paperback version is $0.75.

Accepted Answer

The answer of Book publishers often use price discrimination across...

Question 11

Arnold's Airport Transport provides passenger transportation to and from the local airport. Arnold charges a flat rate of $30 per person for round-trip service, and he gives a $5 discount to senior citizens. Assume Arnold's marginal cost is $3.00 per person. Draw two graphs, one showing demand and marginal cost for his $30 customers, of which he has 300 per month, and the other graph showing demand and marginal cost for his senior citizen customers, of which he has 100 per month. If Arnold charged all of his customers $30, he would have 325 customers per month.

Accepted Answer

The answer of Arnold's Airport Transport provides passenger transportation to...

Question 12

Cost-plus pricing is a reasonable way to determine the optimal price when
A) marginal cost and average cost are roughly equal.
B) fixed cost and variable costs are roughly equal.
C) fixed costs vary.
D) fixed costs are high.

Accepted Answer

Cost-plus pricing adds a markup to the cost of production, which is usually determined by calculating the average cost or marginal cost. When marginal cost and average cost are roughly equal, it is reasonable to use cost-plus pricing to determine the optimal price.

Question 13

If demand is taken into account, firms that use cost-plus pricing can adjust price by
A) letting sales fall, but hold the markup constant if demand falls.
B) lowering markups on price-elastic goods and raising markups on price-inelastic goods.
C) raising markups on price-elastic goods and lowering markups on price-inelastic goods.
D) letting sales rise, but hold the markup constant if demand rises.

Accepted Answer

Firms that use cost-plus pricing can adjust prices based on demand by lowering markups on price-elastic goods (i.e. goods where demand is very sensitive to changes in price) and raising markups on price-inelastic goods (i.e. goods where demand is not very sensitive to changes in price). This allows the firm to remain competitive in the market while still ensuring a profit margin. Letting sales fall or rise while holding the markup constant does not take into account demand, and therefore may not be effective in maximizing profits.

Question 14

Which of the following is not an advantage cost-plus pricing?
A) It leads to profit maximization.
B) It is an easy method to implement if a firm produces multiple products and has overhead costs that are difficult to allocate to a particular good.
C) It could lead to price stability if the industry is made up of identical firms all using the same method of pricing.
D) It is easy to justify price increases when total costs of production increase.

Accepted Answer

While cost-plus pricing is easy to implement and can lead to price stability, it does not necessarily lead to profit maximization. In fact, it may result in lower profits if companies are not able to accurately estimate costs and sales volumes.

Question 15

Figure 16-4 
-Refer to Figure 16-4. Graph (a) represents a monopolist who cannot price discriminate and graph (b) represents a monopolist practicing perfect price discrimination. On each graph, identify the monopoly price, the monopoly output, the efficient output, and the areas representing profit, consumer surplus, and deadweight loss.

Accepted Answer

The answer of Figure 16-4 
-Refer to Figure 16-4. Graph...

Question 16

Until the early 1980s, The Walt Disney Company used a pricing strategy in which visitors to its theme parks paid a low admission fee and also paid for rides. This pricing strategy is an example of
A) perfect price discrimination.
B) cost-plus pricing.
C) a two-part tariff.
D) monopoly pricing.

Accepted Answer

The pricing strategy used by Disney before the 1980s is a two-part tariff, where visitors pay a low admission fee to enter the park and then pay for rides separately. This allows the company to capture more consumer surplus while still attracting a large number of visitors with a low entry fee. It is not perfect price discrimination as different visitors pay the same admission fee, not tailored to their willingness to pay. It is also not cost-plus pricing as the company does not set prices based on production costs. Finally, it is not monopoly pricing as the theme park industry is highly competitive.

Question 17

One method of setting price using the cost-plus method is to add
A) a given percentage of marginal cost to marginal cost of production.
B) a given percentage of fixed cost to total fixed cost.
C) a given percentage of average total cost to average total cost.
D) a given percentage of average variable cost to average total cost.

Accepted Answer

The answer of One method of setting price using the...

Question 18

A firm using a two-part tariff faces a tradeoff because
A) the only way to increase the fixed-fee portion of the price is to lower the per-unit portion of the price.
B) the only way to increase total revenue is to lower per-unit profit.
C) any increase in consumer surplus must be offset by a decrease in producer surplus.
D) the smaller the variation between the parts of the price, the greater the deadweight loss generated by the pricing scheme.

Accepted Answer

A firm using a two-part tariff has to decide how to allocate the total revenue between the fixed-fee portion and the per-unit portion. If it wants to increase the fixed-fee portion, it may have to lower the per-unit portion to maintain demand. This represents a tradeoff between the two pricing components.

Question 19

All of the following are disadvantages of cost-plus pricing except
A) It ignores the price elasticity of demand: for example, it may be possible to increase profits by raising or lowering price.
B) If the industry comprises identical firms (with identical costs), markups could be consistent among firms leading to no one firm having a competitive edge in terms of price.
C) Allocating and apportioning business overheads to individual products could be somewhat arbitrary.
D) The business has less incentive to cut or control costs: if costs increase, then selling prices increase. Consequently, this might further erode a firm's competitiveness.

Accepted Answer

This is actually an advantage of cost-plus pricing as it ensures consistent profit margins among firms with identical costs, preventing a price war. A, C, and D are all disadvantages of cost-plus pricing.

Question 20

With an optimal two-part tariff,
A) consumer surplus equals producer surplus.
B) all consumer surplus is transformed into profit.
C) consumers maximize consumer surplus.
D) the firm earns zero profit.

Accepted Answer

The answer of With an optimal two-part tariff,
A) consumer surplus...

Quiz 16: Pricing Strategy

Most supermarkets charge the same price for the majority of goods sold. This suggest that

If marginal cost is zero, with an optimal two-part tariff,

Figure 16-5 -Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the monopoly price. What is the quantity it should produce?

Suppose the per-unit production cost of a book is $4.00 and the retail price is $32. If the book publisher sells books to a bookstore at a 40 percent discount, what is the amount of the publisher's markup per book? Assume that bookstores sell books at the retail price.

Some firms practice odd pricing because

Which of the following describes two-part tariff pricing?

A firm using a two-part tariff can produce the economically efficient outcome by

Compared to monopoly pricing, an optimal two-part tariff

Figure 16-5 -Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the monopoly price. What is the per-unit price?

Cost-plus pricing is a reasonable way to determine the optimal price when

If demand is taken into account, firms that use cost-plus pricing can adjust price by

Which of the following is not an advantage cost-plus pricing?

Until the early 1980s, The Walt Disney Company used a pricing strategy in which visitors to its theme parks paid a low admission fee and also paid for rides. This pricing strategy is an example of

One method of setting price using the cost-plus method is to add

A firm using a two-part tariff faces a tradeoff because

All of the following are disadvantages of cost-plus pricing except

With an optimal two-part tariff,