Exam 11: Pricing Strategies for Firms With Market Power

Grocery stores make most of their profits on soft drinks, beer, chips, and candy. A casual look at prices of these items reveals that these prices change extremely often and can vary as much as 50 percent. Is this because the wholesale price of these items fluctuates this dramatically, or is there some other possible explanation?

Suppose that the inverse demand for a downstream firm is P = 150 - Q. Its upstream division produces a critical input with costs of C_U(Q_d) = 5(Q_d)². The downstream firm's cost is C_d(Q) = 10Q. When there is no external market for the downstream firm's critical input, the downstream firm should produce:

A necessary cost-side condition for a firm to implement a cross-subsidization pricing strategy is:

A Broadway theater sells weekday show tickets at a lower price than for a weekend show. This is an example of:

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 sells coats and pants for $25 each, but offers a bundle containing both a coat and pants for $150, how many bundles will the firm sell?

A local video store estimates its average customer's demand per year is Q = 7 - 2P, and it knows the marginal cost of each rental is $0.5. How much should the store charge for each rental if it engages in optimal two-part pricing?

A local dentist read an article published by the American Dental Association estimating that the elasticity of demand for the representative dentist's services is -2.5. How much should the dentist mark up her price over marginal cost?

In 1990, Chrysler offered rebates on almost all of its cars. In May of that year it announced that the rebate program would end on June 30. It also announced that no further rebates would be offered for the rest of the year. Chrysler guaranteed this by promising that if it did offer any rebates larger than those offered between May 1 and June 30, all customers who purchased cars before the new rebate would get the full rebate. How should this announcement have affected the pricing behavior of other car manufacturers?

Price-matching strategies may fail to enhance profits when:

Second-degree price discrimination:

You are the manager of a Mom and Pop store that can buy milk from a supplier at $3.00 per gallon. If you believe the elasticity of demand for milk by customers at your store is -4, then your profit-maximizing price is:

Before the breakup of AT&T, the firm charged a price for local telephone services that was roughly one-half of its cost of providing the services. In contrast, it charged almost two times it cost for long-distance services. Why do you think AT&T adopted this pricing strategy?

Which group of policies aims at extracting all consumer surplus?

Three consumers who want to buy a new car have the following valuations for dealer options: Assuming costs are zero, how much would the dealer make if it priced power brakes at $800, priced air conditioners at $200, and sold the bundle for $1,300?

Which of the following statements is true?

Which of the following is true for perfect competition but not true for monopolistic competition and monopoly?

Cinemas sometimes give senior citizens discounts. What is the possible privately motivated purpose for them to do so?

Which of the following pricing policies does NOT extract the entire consumer surplus from the market?

Many restaurants have found that it is advantageous to offer free appetizers with a two-drink minimum during a limited number of hours. Is this profit-maximizing behavior? Why or why not?

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 $100 for a suit (which includes both pants and a coat), the firm will sell a suit to: