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Exam 11: Pricing With Market Power

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Question 51

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Many cellular phone rate plans are structured as a combination of __________ price discrimination.

A) first-degree and second-degree
B) first-degree and third-degree
C) second-degree and third-degree
D) peak-load pricing and third-degree

E) A) and B)
F) A) and C)

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Question 52

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Mixed bundling is more profitable than pure bundling when

A) the marginal cost of each good being sold is positive.
B) the consumers' reservation values of each good being sold are not perfectly negatively correlated with one or another.
C) Both A and B are correct.
D) the marginal cost of one good is zero.

E) A) and B)
F) A) and C)

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Question 53

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In peak-load pricing,

The Happy Mountain Brewing Company sells ground organic coffee in one pound containers through several grocery chains in the US.The marginal cost of production is constant at $4 per pound,and the advertising elasticity of demand is 0.2.The firm current spends $4 million per year on advertising and sells 4 million pounds of coffee per year. a.What is the firm's full marginal cost of advertising? b.Suppose the firm switches to a more effective advertising agency,and the advertising elasticity of demand increases to 0.3.What is the firm's new full marginal cost of advertising? c.Suppose the firm was maximizing profits from advertising before the change,and the marginal revenue from an additional dollar of advertising remains the same after the change.Is the firm maximizing the profits generated from the advertising expenditures after the change? If not,how can the firm adjust its advertising expenditures to maximize profits?

Which of the following product pairs would NOT be good candidates for price discrimination through tying?

Suppose a firm produces identical goods for two separate markets and practices third-degree price discrimination.In the first market the firm charges $30 per unit,and it charges $22 per unit in the second market.Which of the following represents the ratio of price elasticities of demand in the two markets?

The price of on-campus parking from 8:00 AM to 5:00 PM,Monday through Friday,is $3.00.From 5:00 PM to 10:00 PM,Monday through Friday,the price is $1.00.At all other times parking is free.This is an example of

Internet service in the local market is supplied by Laura's Internet Service.The demand is Laura's marginal cost function is If Laura practices first-degree price discrimination,what are consumer surplus and Laura's producer surplus in this market? Does Laura's market power and first-degree price discrimination result in reduced societal welfare?

When a firm charges each customer the maximum price that the customer is willing to pay,the firm

The Happy Mountain Brewing Company sells ground organic coffee in one pound containers through several grocery chains in the US.The firm has two divisions: the roasting division buys raw organic coffee beans and then blends,roasts,and grinds the beans,and the merchandising division packages and distributes the ground coffee. a.Please draw a carefully labeled figure that illustrates the optimal transfer pricing policy for the firm if there is no outside market and the firm is a monopoly seller (i.e.,there are no other sellers of ground organic coffee).In particular,please show the optimal transfer price that is paid to the roasting division,the optimal retail price charged by the merchandising division,and the optimal amount of coffee sold. b.Suppose poor weather conditions in South American increase the price of raw coffee beans.How does this affect the marginal cost curve for the roasting division? Does this also affect the marginal cost of merchandising (packaging and distribution)? How do the optimal transfer price,retail coffee price,and quantity sold change due to this weather problem?

The Acme Oil Company is a vertically integrated firm.It explores for and extracts crude oil.It also refines the crude oil into gasoline and other products,and sells these products to consumers.There are many other firms that extract and sell crude oil so that the market for crude oil is regarded by Acme Oil as competitive.The internal price that Acme Oil uses when the crude oil that it extracts is "sold" to one of its refineries:

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.

Your local grocery store offers a coupon that reduces the price of milk during the coming week.The regular retail price of milk in the store is $3.00 per gallon,and the coupon price is $2.00 per gallon for the next week.If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users,what is the price elasticity of demand for non-users?

Discrimination based upon the quantity consumed is referred to as __________ price discrimination.

Season ticket holders for the St.Louis Rams received a surprise when they read the applications forms to renew their season tickets.In order to get their season ticket to the Rams' home games,they also had to buy tickets to the preseason games.Many season ticket holders grumbled about this practice as an underhanded way for the St.Louis Rams to get more money from its season ticket holders.This practice is an example of:

Second-degree price discrimination is the practice of charging

An electric power company uses block pricing for electricity sales.Block pricing is an example of

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

Use the following statements to answer this question. I.To maximize profit,a firm will increase its advertising expenditures until the last dollar of advertising generates an additional dollar of revenue. II.The full marginal cost of advertising is the sum of the dollar spent directly on advertising and the marginal production cost that results form the increased sales that advertising brings about.

Classic Programs has purchased distribution rights for two television programs that are ready for syndication.One series,The Detectives,was enormously popular during its prime time run and will command a large rental fee.The second series,Kittie and Alma,was a poor parody of a popular series.Kittie and Alma is not expected to be in demand for syndication.The managers at Classic Programs feel that there are only two legitimate bidders for the two series.One bidder is a large independent television station that is carried across the country by cable TV companies.The other bidder is a youth oriented pay TV network called Kidwork.The independent station and Kidwork are rarely carried by the same cable companies,so that a successful bid by one has almost no impact on the willingness of the other to show the programs.Based upon previous experience,Classic estimates the following reservation prices for each bidder.Bidding is for the right to show the programs on an unlimited basis. Independent Station Kidwork The Detectives 100,000 120,000 Kittie and Alma 15,000 8,000 a.Assuming that Classic's managers set separate prices for the two programs,what is the most profitable pricing strategy? (Because of information that is shared within the industry,different prices for the two bidders are impossible.)How much revenue will be earned? b.Classic's managers are considering bundling the two programs under a single price.Is bundling feasible in this instance? Why or why not? If so,what should the bundled price be? What will total revenue be?