55 terms

Chapter 11

STUDY
PLAY

Terms in this set (...)

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 - Q. Suppose fixed costs rise to $400. What happens in the market?
The firm continues to produce the same output and charge the same price.
Which of the following is NOT a condition for a firm to engage in price discrimination?
The consumers are sincere in revealing their true natures.
Suppose P = 20 - 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. The firm currently uses a standard pricing strategy. Which of the following will allow the firm to enhance the profits?
Engage in two-part pricing.
Cinemas sometimes give senior citizens discounts. What is the possible privately motivated purpose for them to do so?
Senior citizens have a more elastic demand for movies than ordinary citizens.
Which of the following pricing strategies does NOT usually enhance the profits of firms with market power?
Marginal cost pricing
Which of the following statements is true?
A. The more elastic the demand, the higher the profit-maximizing markup. B. The more elastic the demand, the lower the profit-maximizing markup. C. The higher the marginal cost, the lower the profit-maximizing price. D. The higher the average cost, the lower the profit-maximizing price.
B. The more elastic the demand, the lower the profit-maximizing markup.
in a Cournot oligopoly with N firms and identical marginal costs, the relationship between the price elasticity of market demand and that of the firm is:
EM = EF/N
The idea of charging two different groups of consumers two different prices is practiced in:
price discrimination.
One of the conditions under which price discrimination is profitable is:
All of the statements associated with this question are correct.
If your demand for renting videos is Q = 5 - 2P, should you purchase the annual membership from a video store that charges $0.5 per rental, plus an annual membership fee of $12?
Definitely no
A Broadway theater sells weekday show tickets at a lower price than for a weekend show. This is an example of:
price discrimination or peak-load pricing
A campus auditorium sells tickets at half price to students during the last 30 minutes before a concert starts. This is an example of:
price discrimination or peak-load pricing.
A necessary cost-side condition for a firm to implement a cross-subsidization pricing strategy is
economies of scope
The special cost structure that is necessary for a firm to adopt a peak-load pricing policy is
limited capacity
The special demand structure that induces a firm to use a cross-subsidization strategy is
interdependent demand for products.
Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal cost, but the high equipment rental fee keeps generating big profits. Which pricing strategy is the management using?
Cross-subsidization
Which of the following strategies will most likely NOT enhance profits in a Bertrand oligopoly?
Two-part pricing
Firms that use a price-matching strategy attempt to keep price at:
the monopoly price.
Price-matching strategies may fail to enhance profits when:
firms cannot prevent customers from making deceptive claims or firms have different marginal costs.
Which of the following statements about a price-matching strategy is incorrect?
It requires that the firms can monitor their rival's prices.
Which of the following pricing policies compensate customers if the firm fails to provide the best price in the market?
Beat-or-pay
Which group of policies aims at discouraging rivals from starting a price war?
Price matching and randomized pricing
Which group of policies aims at extracting all consumer surplus?
Two-part pricing and commodity bundling.
Brand loyalty can be enhanced through:
an advertising campaign.
If a product is perceived by consumers as homogeneous, which of the following strategies will work to induce brand loyalty?
Frequent buyer rebate programs
The purpose of randomized pricing is to reduce:
both customer and competitor information about price.
Which of the following pricing policies enhances profits by creating brand-loyal consumers?
Frequent flyer programs
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?
Charge type A consumers $50, and type B consumers $75.
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:
type A consumers and type B consumers.
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:
type A consumers and type B consumers.
When two or more divisions mark up prices in excess of marginal cost
double marginalization occurs.
To circumvent the problem of double marginalization:
transfer prices must be set that maximize the overall value of the firm rather than the profits of the upstream division.
First-degree price discrimination:
occurs when a firm charges each consumer the maximum price he or she would be willing to pay for each unit of the good purchased and results in the firm extracting all surplus from consumers.
Second-degree price discrimination:
is the practice of posting a discrete schedule of declining prices for different ranges of quantities
A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs. It faces an inverse demand function given by P = 38 - Q. Suppose fixed costs rise to $200. What will happen in the market?
The firm continues to produce the same output and charge the same price.
Which of the following pricing strategies does NOT usually enhance the profits of firms with market power?
Marginal cost pricing
Which of the following is a correct statement?

A. The lower the marginal cost, the higher the profit-maximizing price. B. The lower the average cost, the higher the profit-maximizing price. C. The less elastic the demand, the higher the profit-maximizing markup. D. The more elastic the demand, the higher the profit-maximizing markup.
D. The more elastic the demand, the higher the profit-maximizing markup.
The idea of charging two different groups of consumers two different prices is practiced in:

A. two-part pricing. B. price matching. C. commodity bundling. D. None of the answers are correct.
D. None of the answers are correct.
Which of the following pricing policies does NOT extract the entire consumer surplus from the market?
Peak load pricing
Firms will often implement randomized pricing in an attempt to reduce:
both customer and competitor information about price.
To avoid the problem of double marginalization:
transfer prices must be set that maximize the overall value of the firm rather than the profits of the upstream division.
In a Cournot oligopoly with N firms and identical marginal costs, the relationship between the
price elasticity of demand for the firm and that of the market is:
EF = NEM
Which of the following is a true statement about the process of cross-subsidization, given that a firm is selling two products?
The firm needs cost complementarities in the production of the two goods.
Which of the following statements is true regarding a simple pricing rule for monopoly and
monopolistic competition?
P[(1 + EF)/EF] = MC
Which of the following statements is true regarding profit-maximizing markup for a Cournot oligopoly with N identical firms?
P = [NEF/(1 + NEF)]MC
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 five identical firms?
EF = (df(p)/dP) × (5P/Q)
To engage in first-degree price discrimination, a firm must
All of the answers are correct.
Refer to the figure below. During low-peak times, what price-quantity combination should the firm charge to maximize profit?
P3 and Q1
Refer to the figure below. During high-peak times, what price-quantity combination should the
firm charge to maximize profit?
P4 and Q3
Revenues when a firm engages in peak-load pricing based on the figure below will be:
(P3 × Q1) + (P4 × Q3)
Suppose a manager is interested in implementing third-degree price discrimination. The manager knows that the price elasticity of demand for Group 1 is -2 and the price elasticity of demand for Group 2 is -1.2. Based on this information alone we can conclude that the price
charged to Group 2 will be:
higher than the price charged to Group 1.
Which of the following pricing strategies is NOT used in markets characterized by intense price competition?
Transfer pricing
Which of the following pricing strategies is NOT used in markets with special cost and demand structures?
Low-price guarantees
Consider a monopoly facing a demand structure where the price elasticity of demand is -1.25. The optimal markup factor is:
5 times marginal cost.
A monopoly produces widgets at a marginal cost of $20 per unit and zero fixed costs. It faces an inverse demand function given by P = -100 - 4Q. Suppose fixed costs rise to $401. What
happens in the market?
The firm will shut down immediately.