Exam 11: Pricing With Market Power

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:

American Tire and Rubber Company sells identical radial tires under the firm's own brand name and private label tires to discount stores. The radial tires sold in both sub-markets are identical, and the marginal cost is constant at $10 per tire for both types. The firm has estimated the following demand curves for each of the markets. PB = 70 - 0.0005QB (brand name) PP = 20 - 0.0002QP (private label). Quantities are measured in thousands per month and price refers to the wholesale price. American currently sells brand name tires at a wholesale price of $28.50 and private label tires for a price of $17. Are these prices optimal for the firm?

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing

Internet service in the local market is supplied by Laura's Internet Service. The demand is Q_D = 6,500 - 100P $\iff$ P = 65 - 0.01Q. Laura's marginal cost function is MC(Q) = 6.67 + 0.0067Q 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?

The Genetron Electric Company provides electric power service to a three state region in the US. The annual demand for electric power in this region is Q = 4500 - 100P where quantity (Q) is measured in millions of kilowatt hours (kWh) and the price (P) is cents per kWh. The firm operates in a decreasing cost industry. a. If the firm's marginal cost curve crosses the demand curve at P = 4 (i.e., 4 cents per kWh), what is the quantity demanded at this price? Why wouldn't the firm want to operate under marginal cost pricing? b. If the firm's average cost curve crosses the demand curve at P = 5, what is the quantity demanded at this price? What are the firm's profits under average cost pricing? c. Suppose Genetron uses a block pricing scheme with prices P1 = 15, P2 = 10, and P3 = AC. What quantity levels are associated with the first, second, and third blocks of annual electricity demanded?

Third-degree price discrimination involves

A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits?

You interview with an athletic footwear manufacturer that has annual advertising expenditures of $32 million and total sales revenue of $100 million, and the firm selects the profit maximizing level of advertising expenditures. If the advertising elasticity of demand is 0.4, then you know that "Rule of Thumb for Advertising" implies that the demand for the firm's products is:

The Tire Shed is a regional chain that sells tires and other automobile parts. The company sells its own brand of tires under a block pricing scheme that charges $100 per tire if the customer buys one or two tires and $75 per tire if the customer buys three or four tires. The monthly demand curve facing the typical store is Q = 1000 - 4P, and the marginal cost of the tires is constant at $40 per tire. a. What are the monthly profits for the typical store under the block pricing scheme? What is the consumer surplus enjoyed by customers of the typical store? b. Suppose the firm is considering a uniform pricing scheme with P = $90 per tire. How does the firm profit and consumer surplus under uniform pricing compare to the profit and consumer surplus outcomes under block pricing?

One Guy's Pizza advertising expenditures are $1,200 and sales are $30,000. When the advertising expenditure increases to $1,400, pizza sales increase to $32,000. The arc advertising elasticity of demand is approximately ________.

Marge's Beauty Salon sells shampoo and conditioner. Marge has two types of customers. Their willingness-to-pay for shampoo and conditioner are given in the table below. If Marge bundles the shampoo and conditioner, could she increase revenue?

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?

Internet service in the local market is supplied by Laura's Internet Service. Laura has two types of consumers. The first type of customers is local businesses, and their demand for internet service is = 6,500 - 100P $\iff$ P = 65 - 0.01 . The resulting marginal revenue function for business customers is MR(Q^B) = 65 - 0.02 . The second type is residential customers, and residential demand is = 12,500 - 500P $\iff$ P = 25 - . The resulting marginal revenue function for residential customers is MR(Q^R) = 25 - Q^R. Laura's marginal cost function is MC(Q^B + Q^R) = + . If Laura practices third-degree price discrimination, what are the profit maximizing prices she charges business and residential customers?

Which of the following statements is true?

The price elasticity of demand for nursery products is -10. The advertising elasticity of demand is 0.4. Using the "Rule of Thumb for Advertising," the profit maximizing level of advertising will be set at ________ of sales.

Which of the following statements is NOT compatible with explanations for why peak-load pricing is more profitable than charging a single price?

The authors note that advertising can make the consumer demand for a product more elastic (price responsive) by expanding the potential range of consumers. As this change in demand occurs (ceteris paribus), what happens to the optimal advertising-sales ratio?

After graduation, you start an internet-based firm that allows people to buy and sell books online. Based on your market research, you believe there are two basic types of customers. The first type is the casual reader who has relatively low willingness-to-pay for your services, and their annual demand is Q1 = 30 - 40P where Q1 is the number of books traded per year and P is the price you charge per book traded. The second type of customer is the avid reader who has relatively high willingness-to-pay for your services, and their demand is Q2 = 100 - 50P. The marginal cost of your online service is $0.40 per book traded. a. If you set your usage fee equal to the marginal cost, how many books will each type of customer trade on your system? What is the consumer surplus enjoyed by each type of customer? b. What is the optimal entry fee that you should charge under a two-part tariff pricing scheme for access to your online market? How much consumer surplus is left for the two types of customers after they pay the entry fee and usage fee?

Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct?

Some grocery stores are now offering customers coupons which entitle them to a discount on certain items on their next visit when they go through the check-out line. This practice is an example of: