Exam 11: Pricing With Market Power

Merriwell Corporation has a virtual monopoly in the ultra-high speed computer market. Merriwell has recently introduced a new computer that will be used by satellite installations around the world. The installations have identical demands for the computers. Merriwell's managers have decided to lease rather than sell the computer, but they have been unable to decide whether to use a single hourly rental charge or a two-part tariff. Under the two-part tariff, users would be levied an "access charge" plus an hourly rental rate. Merriwell's marketing staff estimates the demand and marginal revenue curves below for each potential user: P = 45 - 0.025Q MR = 45 - 0.05Q, where P = price per hour of computer time, and Q = the number of hours of computer time leased per month. Merriwell offers their users extensive maintenance assistance and technical support. The firm's engineers estimate that marginal cost is $30 per computer hour. a. Assuming that Merriwell chooses to set a single price, what are the firm's profit maximizing price and output? b. Assuming that Merriwell uses a two-part tariff, what "access charge" and hourly rental fee should the firm set? Compare the firm's revenues under the options in (a) and (b). c. Briefly describe how differing demand curves among the various buyers would alter the two-part tariff.

Club Med, which operates a number of vacation resorts, offers vacation packages at a lower price in the winter (i.e., the "off season") than in the summer. This practice is an example of:

Which of the following is NOT a condition for third degree price discrimination?

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.

Which of the following strategies are used by business firms to capture consumer surplus?

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?

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?

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:

Trisha's Fashion Boutique sells earrings and pendants. Trisha has two types of customers. Their willingness-to-pay for earrings and pendants are given in the table below. If Trisha bundles the earrings and pendants together, could she increase revenue?

When a monopolist engages in perfect price discrimination,

For a perfect first-degree price discriminator, incremental revenue is:

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:

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?

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

What is the profit maximizing condition for a vertically integrated firm?

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

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

A lower east-side cinema charges $3.00 per ticket for children under 12 years of age and $5.00 per ticket for anyone 12 years of age or older. The firm has estimated that the price elasticity of demand for tickets purchased by those 12 years of age or older is -1.5. Calculate the elasticity of demand for tickets purchased for children under 12 years of age if prices are optimal.

Which of the following statements about setting optimal two-part tariffs for many consumers is NOT true?

Which of the following is NOT a potential objective of tying strategies used by firms?