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Exam 11: Pricing With Market Power

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Question 21

Multiple Choice

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A firm has two customers with non-identical demands and a constant marginal cost of production. At any positive price, the consumer surplus values for the two customers are related as CS₂ ≥ CS₁ . What can we say about the optimal two-part tariff for the firm?

A) The firm sets the price equal to MC and the optimal tariff is equal to CS₂.
B) The firm sets the price equal to MC and the optimal tariff is equal to CS₁.
C) The firm sets the price equal to MC and the optimal tariff is equal to zero.
D) The optimal price is greater than MC and the optimal tariff is equal to CS₁.

E) None of the above
F) All of the above

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Question 22

Multiple Choice

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You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. If your firm practices third-degree price discrimination to maximize profits, the marginal revenue

A) in the foreign market will equal the marginal cost.
B) in the domestic market will equal the marginal cost.
C) in the domestic market will equal the marginal revenue in the domestic market.
D) all of the above
E) none of the above

F) A) and B)
G) A) and C)

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Question 23

Multiple Choice

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

MNO Limited publishes a magazine targeted at urban professionals who live on the east and west coasts of the U.S., and all of the magazines are printed at a marginal cost of $0.50 per copy at a publishing plant in Kansas. If the East Coast elasticity of demand for the magazine is -1.25 and the West Coast elasticity of demand is -1.50, what prices should MNO Limited charge for the magazines in these two markets in order to maximize profits?

Cornucopia Media provides cable television service to several cities in the mid-Atlantic region. The firm has access to two new channels that focus on reality television programming, and the marginal cost of providing both new channels is zero. The first channel is Extreme Scottish Sports (ESS) and appeals to younger viewers, and the second channel is Delaware Entertainment and Tourism (DET) and appeals to older viewers. Based on Cornucopia's market research, younger viewers are willing to pay $5 per month for ESS, and their reservation price for DET is $0.50 per month. The same research indicates that older viewers have a reservation price of $1.00 per month for ESS and $4.00 per month for DET. a. Please show how Cornucopia media can increase sales revenue by bundling the two channels rather than selling access to the channels separately. b. The US Congress has recently considered legislation that would allow cable television subscribers to purchase access to separate channels (without bundling). If the law is enacted, what should we expect to happen to sales revenue in cable television markets?

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?

In 1994, the Walt Disney Corporation ran a special promotion on tickets to Disneyland. Residents of southern California who lived near the amusement park were offered admission at the special price of $22. Other visitors to Disneyland were charged about $30. This practice is an example of:

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 firm has two customers and creates a two-part tariff with a usage fee (P) that exceeds the marginal cost of production and leaves each customer with positive consumer surplus such that CS₂ > CS₁ > 0. If the firm sets the entry fee equal to CS₂, then the number of customers that actually buy the product is equal to:

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

The local zoo has hired you to assist them in setting admission prices. The zoo's managers recognize that there are two distinct demand curves for zoo admission. One demand curve applies to those ages 12 to 64, while the other is for children and senior citizens. The two demand and marginal revenue curves are: PA = 9.6 - 0.08QA MRA = 9.6 - 0.16QA PCS = 4 - 0.05QCS MRCS = 4 - 0.10QCS where PA = adult price, PCS = children's/senior citizen's price, QA = daily quantity of adults, and QCS = daily quantity of children and senior citizens. Crowding is not a problem at the zoo, so that the managers consider marginal cost to be zero. a. If the zoo decides to price discriminate, what are the profit maximizing price and quantity in each market? Calculate total revenue in each sub-market. b. What is the elasticity of demand at the quantities calculated in (a) for each market. Are these elasticities consistent with your understanding of profit maximization and the relationship between marginal revenue and elasticity?

The Catawba River City Park has a low demand D₁ during work days, but on Saturday and Sunday demand increases to D₂ on Saturday and Sunday. The demand and marginal revenue functions are: D₁ = P₁ = 2 - 0.001Q₁ MR₁ = 2 - 0.002Q₁ D₂ = P₂ = 20 - 0.01Q₂ MR₂ = 20 - 0.01Q₂ where Q = number of cars entering the park each day. The marginal cost of operating the park is the same on weekdays and weekends: MC = 1 + 0.004Q. a. In order to control crowds, the park's management uses peak-load pricing. This scheme controls crowds and makes sure the park is self-supporting. Calculate the appropriate prices to charge, and determine the number of cars entering the park, Q₁ and Q₂. b. Explain how switching from a uniform pricing scheme to a peak load pricing scheme affects the market.

The Sneed Snack Shop sells hamburgers and french fries. Given that there are 4 different types of customers whose willingness-to-pay are presented in the table below, give a pricing scheme that allows customers to buy combination meals and increases revenues for the Shop. The marginal cost of producing a hamburger is $0.60 and the marginal cost of an order of fries is $0.40.

A firm is charging a different price for each unit purchased by a consumer. This is called

For most residential telephone service, people pay a monthly fee to have a hookup to the telephone company's line plus a fee for each call actually made. Under this pricing scheme, the telephone company is using

Bundling products makes sense for the seller when

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

Your family operates Voltaire's Pizza, which ships frozen hand-made pizzas by over-night delivery to homes within 500 miles of your city. You are asked to determine the optimal monthly advertising expenditures for the business. The total monthly cost of pizza production is TC = 4Q + 0.0005Q² + A where A is the advertising expenditure. The firm's marginal revenue from advertising is constant at MRA = $3, and the advertising elasticity of demand is 0.3. a. What is the firm's marginal cost of production (MC)? What is the firm's full marginal cost of advertising (as a function of Q and A)? b. Suppose you know the profit maximizing level of output is Q = 9,000 pizzas per month. What is the firm's optimal level of advertising expenditure?

For a two-part tariff imposed on two consumers, the entry fee is based on the:

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