Exam 10: Pricing Practices

Dumping occurs when a firm charges a higher price for a product on foreign markets than on domestic markets.

Transfer pricing refers to the determination of prices of intermediate products sold by one semiautonomous division of a firm and purchased by another semiautonomous division of the same firm.

A firm that sells on two markets and engages in third-degree price discrimination will increase the quantity sold on each market until marginal revenue is the same on both markets and is equal to marginal cost.

Skimming refers to the practice of introducing several variations on a basic product and charging different prices for each.

A firm has two semi-autonomous divisions: production and marketing. The production division manufactures a product that is purchased and then resold by the marketing division. The marginal cost functions for the production division and for the value added by the marketing division are defined below. MC_P = 100 + 6Q MC_M = 4Q The demand function for the product is: QD = 120 - 0.20P (i) Assume that there is no external market for the output of the production division. How many units should be produced and what transfer price should be paid to the production division by the marketing division? (ii) Assume that the external market for the output of the production division is perfectly competitive and that the market price is $292. How many units should be produced by the production division, how many should be purchased by the marketing division, what transfer price should be paid to the production division by the marketing division, and what price should be charged for the product by the marketing division?

Additional products should be introduced by a single-plant firm in order of decreasing profitability up to the point where the marginal revenue of the least profitable product is equal to its marginal cost.

Tax laws require that transfer prices be established, but they have little effect on the operation of a firm.

A single-plant, multi-product, imperfectly competitive firm with excess plant capacity should continue to introduce new products until the price of the last product introduced is equal to its marginal cost or until all capacity is employed.

Incremental analysis states that a firm should take an action if the resulting change in revenue exceeds the corresponding change in cost.

If the optimal level of output where products are jointly produced in fixed proportions occurs where the marginal revenue for one product is negative, then the firm will maximize profit by disposing of some or all of the output of that product rather than by selling it.

The harassment thesis holds that the threat of filing a dumping complaint against a foreign producer discourages the producer from aggressively competing in the domestic market.

A firm that sells on two markets and engages in third-degree price discrimination will adjust the quantity sold on each market until the same price holds on both markets.

A firm has two semi-autonomous divisions: production and marketing. The production division manufactures a product that is purchased and then resold by the marketing division. The marginal cost functions for the production division and for the value added by the marketing division are defined below. MC_P = 2Q MC_M = Q The demand function for the product is: QD = 100 - P (i) Assume that there is no external market for the output of the production division. How many units should be produced and what transfer price should be paid to the production division by the marketing division? (ii) Assume that the external market for the output of the production division is perfectly competitive and that the market price is $52. How many units should be produced by the production division, how many should be purchased by the marketing division, what transfer price should be paid to the production division by the marketing division, and what price should be charged for the product by the marketing division?