Exam 14: Price Discrimination and Pricing Strategy

Bundling is expected to provide greater profits when the two bundled goods are: I. substitutes. II. goods that have high fixed costs and low marginal costs. III. very close complements.

What conditions are necessary for a firm to practice price discrimination?

Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets- Market A and Market B-if the monopolist were to charge a uniform price of $10 in both markets, how much profit would the monopolist lose?

Perfect price discrimination causes the demand curve to become the marginal revenue curve.

Although price discrimination may increase the profits of drug companies, it reduces the incentive for drug companies to develop new drugs.

(Figure: PPD Monopolist) Refer to the figure. A monopolist who cannot price discriminate earns profit equal to area(s) ________, and a monopolist practicing perfect price discrimination earns profit equal to areas ________.

Reference: Ref 14-6 (Table: Willingness to Pay) Refer to the table. Assume the firm has zero costs. If the firm were to set individual prices for each of the two goods, how much total profit does it earn from Good A?

Arbitrage is ________ in one market and ________ in another market.

Which of the following statements is FALSE? I. If the demand curves are different, it is more profitable to set a single price than different prices in markets. II. To maximize profit the firm should set a lower price in markets with more elastic demand. III. The presence of arbitrage makes it easy for a firm to price discriminate.

(Table: PPD Monopolist) The table that shows demand and cost data for a monopolist to answer the following questions. Assume the monopolist is able to practice perfect price discrimination. a. What quantity does the monopolist produce? b. What is the dollar amount of consumer surplus in the market? c. How does this compare with the case of a firm in a competitive industry?

Explain how firms practice tying and bundling, and specify the difference between the two pricing schemes.

Reference: Ref 14-6 (Table: Willingness to Pay) Refer to the table. If the firm were to engage in bundling, its profits would increase by how much relative to setting individual prices for each good?

Mark has a maximum willingness to pay for Word and Excel of $200 and $30, respectively. Beth has a maximum willingness to pay of $50 and $190, respectively. At a bundle price of $230, Mark and Beth receive total consumer surplus of $10.

(Table: Value Meals) The table shows James and Chris' willingness to pay at a local fast-food restaurant. Use this information to answer the following questions: a. If the fast-food restaurant is trying to maximize profits by pricing separately, what price will they charge for a cheeseburger? French fries? Soft drink? b. Assuming that it costs the restaurant only $0.10 to produce a cheeseburger, $0.15 to produce one order of french fries, and $0.05 to produce a soft drink, what will be their total profits if they price separately using the prices determined above? c. Suppose the restaurant is trying to decide whether or not to offer a value meal, which would include a cheeseburger, french fries, and a soft drink. What price should they charge for this value meal? Would profits be higher or lower than if the restaurant sets prices individually? Explain.

Charging each customer his or her maximum willingness to pay is:

Which of the following lists of products and services would be the most resistant to arbitrage?

Reference: Ref 14-5 (Table: Myrtle Beach Golf) Refer to the table. Assume that marginal costs of production are zero. If the resort bundles a one-night stay with a round of golf, how much profit will it make on David and John?

Rohm and Haas were considering:

A firm that spends extra money to practice tying does so to:

Why is it important for firms practicing price discrimination to prevent arbitrage of their product?