Exam 11: Pricing With Market Power

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 from the increased sales that advertising brings about.

A local restaurant sells strawberry pie for $3.00 per slice. However, if you order the prime rib dinner, you can get a slice of pie for only a dollar. This is an example of:

Figure 11.5.1 -The pricing technique known as tying:

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:

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?

Larry's Carpet Cleaners can influence demand by advertising. Larry charges $50 per carpet, and he cleans 150 carpets per month. The price elasticity of demand is -4, and Larry spends $500 per month on advertising. If Larry is maximizing profits, calculate the advertising elasticity of demand.

Suppose we advertise up to the point where the last dollar spent on advertising generates an additional dollar of sales revenue (i.e, the marginal revenue of advertising equals one). If the full marginal cost of advertising is greater than one, then we will generate:

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

Louey's Greasy Spoon restaurant charges $15 for each dinner entree and $5 for each dessert selection, and they offer a dinner special that provide an entree and dessert for $18. If a diner at Louey's assigns zero value to dessert and $19 to an entree, what is their optimal decision?

Figure 11A.1 -Refer to Figure 11A.1 above. After the firms that produce cars and engines merge,

Your company sells health food products, and you have recently developed a new high-protein drink (HPD) as well as a high-carbohydrate energy bar (HCE). As the product manager for the firm, you are responsible for setting the pricing policy for the new products. You are considering a bundled package that includes both products, and you assume the marginal cost of production is zero for planning purposes. You have identified four basic types of consumers who may buy these new products, and their reservation prices for the two new products are provided in the following table: a. Suppose you sell the two products separately, and each buyer is expected to purchase one unit of the product per day. Which prices for HPD and HCE maximize daily revenue? What is your daily revenue from selling both products to the four customers under separate pricing? b. If you offer the two products under a pure bundling strategy, what is the revenue maximizing bundle price? What is the daily sales revenue from the pure bundling scheme? c. Please develop a mixed bundling strategy that generates higher daily sales revenue than the pure bundling strategy. What is the daily sales revenue generated under mixed bundling?

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?

What is net marginal revenue?

The BCY Corporation provides accounting services to a wide variety of customers, most of whom have had a business association with BCY for more than five years. BCY's demand and marginal revenue curves are: P = 10,000 - 10Q MR = 10,000 - 20Q. BCY's marginal cost of service is: MC = 5Q. a. If BCY charges a uniform price for a unit of accounting service, Q, what price must it charge per unit, and how many units must it produce per time period in order to maximize profit? Calculate the consumer surplus. b. If BCY could enforce first-degree price discrimination, what would be the lowest price that it would charge and how many units would it produce per time period? c. With perfect price discrimination and ignoring any fixed cost, what is total profit? How much additional consumer surplus is captured by switching from a uniform price to first-degree price discrimination?

If there are open first-class seats available on a particular flight, some airlines allow customers with coach (discount) tickets to upgrade to first-class tickets during the electronic check-in process. Suppose the regular price of a first-class ticket is $800, the total price of the upgrade ticket (original price plus the upgrade) is $400, the marginal cost of serving both types of customers (full-fare and upgrade first-class flyers) is $100, and the airline maximizes profits. Which of the following statements is true?

A local restaurant offers "early bird" price discounts for dinners ordered from 4:30 to 6:30 PM. This is an example of:

A national chain of bookstores has initiated a frequent buyer program. If you buy a frequent buyer card for $10, you are entitled to a 10 percent discount on all purchases for 1 year. This practice is an example of:

There are two types of consumers of High Definition Television (HDTV) sets. The first type of consumer is highly eager to purchase the sets. Their demand is The resulting marginal revenue function is After the first month the HDTV sets are on the market, the first-type demand goes to zero at any price. The second type of consumer is more sensitive to price and will be the same one month after the sets are on the market. Their demand is The resulting marginal revenue function is Suppose that the marginal cost of producing HDTV sets are constant at $200. What pricing strategies might the manufacturer of HDTV sets consider to maximize profits?

Figure 11.1.1 -Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. By engaging in this practice, the firm:

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: