Exam 10: Pricing Strategies for the Firm

Is the profit-maximizing price-taking firm able to mark up price above the marginal costs of production at the profit-maximizing level of output? Why or why not?

The goal of "personalized pricing" is to determine how much each individual customer is willing to pay for a product. As such, it is an application of first-degree price discrimination.

The practice of setting price by increasing the average costs of production by some percentage is referred to as:

Price discrimination strategies that cause considerable consumer resentment or a negative reaction from competitors can reduce or eliminate the effectiveness of such strategies.

Which of the following would not be categorized as a form of third-degree price discrimination?

All else constant, there is an inverse relationship between the price elasticity of demand and the marginal revenue resulting from a decrease in price.

Automobile manufacturers often use incentive programs, including special financing rates and cash rebates, to increase sales. However, a customer is usually restricted to choosing either the low financing rate or the rebate, but not both. Is this an example of price discrimination? If so, what type? Explain your reasoning.

Assume the price elasticity of demand for a product is -4. In this case, the firm's optimal markup is approximately):

Certain hotels offer promotional strategies in which kids under 12 eat free at the hotel's restaurant. This is an example of second-degree price discrimination.

Which of the following is considered a necessary condition for successful price discrimination?

In many areas of the country, electricity customers pay a set per unit price for each of the first X kilowatts and a lower per unit price for any additional kilowatts of electricity consumed in a month. This is an illustration of second-degree price discrimination.

The fixed fee a firm is able to charge as part of a two-part pricing strategy is inversely related to the amount of consumer surplus the customer realizes at the profit-maximizing level of output.

Assume a change in price causes the price elasticity of demand for a good in absolute value) and marginal revenue to decrease. In this case we can conclude that the price of the good was:

Because it is based on differences in the price elasticity of demand among different groups of consumers, third-degree price discrimination is a more profitable price discrimination strategy than is first-degree price discrimination.

The total willingness to pay for a given number of units of a good or service is determined by multiplying the equilibrium price of the good by the number of units purchased.

Assume an automobile manufacturer can sell its sport utility vehicle SUV) with or without a trailer towing package. One group of customers, group A, is willing to pay a maximum of $30,000 for the SUV and $1,100 for the towing package. A second group, B, is willing to pay $29,000 for the SUV and $1,000 for the towing package. Assuming the manufacturer cannot price discriminate, to maximize its revenues the manufacturer should:

What role does the price elasticity of demand play in markup pricing, i.e., how does it affect the firm's ability to mark up price over marginal cost?

A firm's profits will be greatest when it practices:

As macroeconomic conditions improve and consumers' incomes and wealth increase, their demand for many products tends to become price inelastic. As such, the ability of firms to mark up price above cost will .

To the extent that customers can resell products to each other, the effectiveness of a price discrimination strategy will be undermined.