Exam 11: Pricing Strategies for Firms With Market Power

Suppose that the inverse demand for a downstream firm is P = -82 - 2Q. Its upstream division produces a critical input with costs of C_U(Q_d) = 3(Q_d)². The downstream firm's cost is C_d(Q) = 2Q. When there is no external market for the downstream firm's critical input, the downstream firm should produce:

Suppose P = 60 - 3Q is the market demand function for a local monopoly. The marginal cost is 2Q. If fixed costs are zero and the firm engages in two-part pricing, the most profits the firm will earn is:

A monopolist claims his profit-maximizing markup factor is 10. What is the price elasticity of demand for the firm's product?

In most cities all lumber yards advertise that they have the lowest price in town. In addition, they often claim that they will match the prices of any other lumber yards. Is this Bertrand competition that brings about zero economic profits? Explain.

A monopoly producing a chip at a marginal cost of $6 per unit faces a demand elasticity of -2.5. Which price should it charge to optimize its profits?

To engage in first-degree price discrimination, a firm must:

Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a coat and $50 for pants. Consumers of type B will pay $75 for a coat and $75 for pants. The firm selling suits faces no competition and has a marginal cost of zero. If the firm charges $75 for pants and $75 for a coat, the firm will sell a coat to:

One of the conditions under which price discrimination is profitable is:

Most wholesalers post a "suggested retail price" on packages, which in turn are sold by retailers. Is there an economic basis for the suggested retail price? As the manager of a retailing outlet, what factors will determine whether you should charge the suggested retail price or some higher or lower price?

The following table contains different consumers' values for three software titles: PowerPoint, Excel, and Word. Suppose there are 100 consumers of each type. It costs Microsoft $5 to produce each piece of software. If Microsoft wants to devise a pricing strategy that is incentive compatible between consumer types and will maximize its profit, then it should:

What price should a firm charge for a package of two shirts given a marginal cost of $2 and an inverse demand function P = 6 - 2Q by the representative consumer?

During the 1990s, several airlines were on the brink of bankruptcy. These same airlines were giving away millions of dollars in free airline travel through their frequent-flyer programs. Do you think it would have been a good idea for these airlines to eliminate their frequent-flyer programs in order to earn higher profits? Explain.

You are the owner of a Mom and Pop store that buys milk from a supplier at a cost of $1 per gallon. If you estimate the elasticity of demand for milk sold at your store to be -3.5, what are your profit-maximizing markup and price?

Suppose you are the marketing manager for Fruit of the Loom. An individual's inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25 - 3Q (in cents). If the cost to Fruit of the Loom to produce an item of women's underwear is C(Q) = 1 + 4Q (in cents), compute the number of women's underwear items that should be packaged together.

Suppose P = 20 - 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. If fixed costs are zero and the firm engages in two-part pricing, the most profits the firm will earn is:

During spring break, students have an elasticity of demand for a trip to Las Vegas of -5. How much should an airline charge students for a ticket if the price it charges the general public is $660? Assume the general public has an elasticity of -3.

Suppose that JVC is trying to decide how to price a new stereo system composed of a receiver, CD player, and speakers. The company's economists have estimated that two different groups will purchase these products: students and club owners. The economists' analysis suggests that the total market for its brand of stereos consists of 10,000 students and 50,000 club owners. In addition, it is estimated that the maximum amount each group will pay for each stereo component is as follows: JVC's objective is to maximize revenues, and it is considering three strategies to price its stereo components: (1) a standard strategy whereby it prices each stereo component separately; (2) perfect price discrimination; or (3) bundling the three components together and selling only bundles containing the receiver, CD player, and speakers. a. If JVC uses a standard pricing strategy, what price should it charge for the receiver, for the CD player, and for the speakers to maximize revenues? What are the revenues they will earn through this strategy? b. Suppose JVC adopts a first-degree price discrimination policy. What prices should it charge to maximize revenues? What are JVC's revenues using this strategy? c. Suppose that JVC markets the receiver, CD player, and speakers together. That is, it uses a commodity-bundle strategy such that the products are sold as one item. What price should JVC charge to maximize revenues? How much will it earn?

If the profit-maximizing markup factor in a 10-firm Cournot oligopoly is -2, what is the corresponding market elasticity of demand?

A firm has capacity limitations and charges $30 for its service during daily peak times. If the market demand elasticity drops from -3 during peak times to -5 at off-peak times, how much should the firm charge to earn the maximum profit during off-peak times?

The special demand structure that induces a firm to use a cross-subsidization strategy is: