Deck 10: Market Power and Pricing Strategies

Question 1

A profit-maximizing skeet (competitive clay pigeon shooting) club segments its market. It charges juniors $4 per round based on their price elasticity of demand of -2.0. Its adult shooters have a price elasticity of demand of -1.4. The marginal cost per round does not vary by the shooter's age. What price does the skeet club charge adult shooters?

A) $7
B) $8
C) $6
D) $5.75

Answer 1

A

Question 2

Suppose a firm faces the inverse demand curve, P = 100 - Q. Marginal cost is constant at $10.
The producer surplus under monopoly pricing is $____.

A) 2,000
B) 2,025
C) 2,465
D) 2,625

Answer 2

B

Question 3

A firm with market power faces the demand function q = 2,000 - 20P. The firm's total cost function is TC(q) = 20q + 0.02q² + 2,000. If the firm behaves as a single-price monopoly, it will produce an output level of ____ units.

A) 571.43
B) 523.86
C) 483.27
D) 427.63

Answer 3

A

Question 4

(Table: Maximum Willingness to Pay IV) Suppose that the marginal cost of a one-way airfare is $30. Assuming the firm can perfectly price discriminate, the marginal revenue from selling the third quantity is $____.

A) 130
B) 110
C) 90
D) 0

Question 5

If the firm establishes a block-pricing structure with two prices, the relevant system of first-order conditions is:

A) and .
B) and .
C) and .
D) and .

Question 6

A firm with market power faces the demand function q = 2,000 - 20P. The firm's total cost function is TC(q) = 20q + 0.02q² + 2,000. If the firm behaves as a single-price monopoly, it will charge a price of $____.

A) 71.53
B) 52.65
C) 48.34
D) 42.72

Question 7

(Table: Customer Valuations for Lawn Services I) The table shows customer valuations for different lawn services. The marginal cost of lawn cutting is $400, and the marginal cost of fertilizing is $200.
Suppose the lawn service prices its services separately. In this case, the producer surplus from Lawn Cutting and Fertilizing is $____.

A) 800
B) 900
C) 1,000
D) 1,100

Question 8

Assume a monopolist can prevent resale of its product and it has complete information about each one of its customers. Even though each customer has a different demand curve, the seller can identify each customer's demand curve before a purchase takes place. It faces the inverse market demand of P = 160 - 10Q with marginal cost of MC = 10 + 5Q. The total surplus at the profit-maximizing result is $____.

A) 500
B) 400
C) 200
D) 0

Question 9

(Table: Consumer Valuations for Two Software Programs I) Assume that the marginal cost of producing software is zero. If the firm priced and sold each program separately, it would earn total revenues of _____, while a pure bundling strategy would generate the firm total revenues of _____.

A) $450; $900
B) $380; $450
C) $700; $760
D) $600; $660

Question 10

Which of the following is an example of bundling?

A) A shoe store does not sell shoes for just one foot; it sells shoes for the left foot and right foot packaged together.
B) An automobile manufacturer includes Michelin tires on its new cars.
C) A $95 ticket to the Magic Kingdom gives you entrance to the park and free access to all the rides.
D) HP includes a toner cartridge with the purchase of a new laser printer.

Question 11

A rock-climbing school faces two demand curves. The demand by local residents is Q = 400 - 0.5P, and the demand by others is Q = 500 - 0.5P. The marginal cost of serving either local residents or others is constant at $100. If the rock-climbing school practices third-degree price discrimination, it will charge local residents and others a price of _____ and _____, respectively.

A) $400; $800
B) $450; $550
C) $600; $650
D) $275: $325

Question 12

(Figure: Type A and Type B I) Suppose a firm plans to use indirect price discrimination through quantity discounts. The firm cannot identify which customers are Type A or Type B before the purchase, so the firm would like to offer a regular-price plan and a quantity-discount plan to suit the customers' personal price sensitivity.
The minimum number of units customers should have to buy to get the discount is ____.

A) 3
B) 4
C) 5
D) 6

Question 13

(Table: Maximum Willingness to Pay IV) Suppose that the marginal cost of a one-way airfare is $30. Assuming the firm can perfectly price discriminate, the profit-maximizing number of tickets is ____.

A) 6
B) 4
C) 3
D) 2

Question 14

(Table: Maximum Willingness to Pay III) The marginal cost of a one-night stay and one round of golf are $50 and $10, respectively. Which of the following statements is (are) TRUE? I. If a firm is using a pure bundling strategy, the bundle price should be set at $230 to maximize producer surplus.
II) Suppose a firm uses the following mixed bundling strategy: the bundle price is $240, or the price for a one-night stay is $180 and the price per round of golf is $80. With this strategy, producer surplus is $380.
III) If a firm prices each item separately such that the price for a one-night stay is $100 and the price per round of golf is $50, producer surplus will be $270.

A) I, II, and III
B) II and III
C) I and III
D) I

Question 15

A firm with market power faces the demand function q = 1,000 - P. The firm's total cost function is TC(q) = 5q + q² + 500. If a firm behaves like a perfectly price-discriminating monopolist, it will produce ____ units.

A) 421.67
B) 354.25
C) 331.67
D) 248.75

Question 16

Across Country Ski Tours has determined that the price elasticity of demand for customers who do not own their own equipment is -2, while the price elasticity of demand of those who do own their own equipment is -5. Assume that the marginal cost is constant at $10. If the firm can practice third-degree price discrimination, it should charge a price of $____ to customers who own their equipment.

A) 20
B) 17.50
C) 15
D) 12.50

Question 17

A firm with market power faces the demand function q = 1,000 - 100P. The firm's marginal cost function is MC(q) = 2 + 0.08q. If the firm establishes a block-pricing structure to maximize producer surplus, the optimal price for the higher priced block is $____.

A) 3.92
B) 3.79
C) 3.83
D) 3.61

Question 18

For the two-tiered block-pricing structure that maximizes the firm's producer surplus, total cost can be calculated as:

A)
B)
C)
D)

Question 19

A firm with market power faces the demand function q = 2,000 - 20P. The firm's total cost function is TC(q) = 20q + 0.02q² + 2,000. If the firm behaves like a perfectly price-discriminating monopolist, it will produce ____ units.

A) 777.78
B) 888.89
C) 921.91
D) 940.63

Question 20

(Table: Customer Valuations for Lawn Services I) The table shows customer valuations for different lawn services. The marginal cost of lawn cutting is $400, and the marginal cost of fertilizing is $200.
Suppose the lawn service bundles its Lawn Cutting and Fertilizing. The producer surplus earned from bundling is $____.

A) 800
B) 900
C) 1,250
D) 1,200

Question 21

(Figure: Perfect Price Discrimination I) Under perfect price discrimination, the deadweight loss is $____.

A) 0
B) 9
C) 22.50
D) 37.50

Question 22

(Figure: Pharmaceutical Pills Sales I) A pharmaceutical company sells its pills in foreign and domestic markets.
Suppose the company uses segmenting. The profit-maximizing price in the Domestic Market is $____.

A) 12
B) 8.67
C) 7.67
D) 7.00

Question 23

A firm with market power has the inverse demand curve P = 160 - 4Q and the marginal cost curve MC = 8Q. If the firm decides to practice perfect price discrimination, consumer surplus will:

A) increase from $40 to $60.
B) increase from $120 to $200.
C) decrease from $80 to $20.
D) decrease from $200 to $0.

Question 24

If the firm establishes a block-pricing structure with three prices, the relevant system of first-order conditions is:

A) .
B) .
C) .
D) .

Question 25

This table shows the maximum willingness to pay for three consumers of lemonade and hot dogs. The marginal cost of both products is $0.25. A pure bundling strategy would charge $_____for a bundle of 1 lemonade and 1 hot dog.

A) 3
B) 3.25
C) 4.5
D) 6

Question 26

For price discrimination via coupons to be successful, it must be TRUE that:

A) shoppers who use coupons have more elastic demand than shoppers who do not.
B) shoppers who use coupons have more inelastic demand than shoppers who do not.
C) there is a negative correlation between coupon use and the consumer's willingness to shop for price.
D) firms can directly identify which consumers are the most price sensitive before purchase of the good.

Question 27

Suppose that a night club's customers all have the same inverse demand curve for drinks, P = 5 - Q, where P is the price per drink and Q is the number of drinks. The marginal cost of a drink is $1. With the optimal two-part tariff pricing strategy, how much do customers pay to get into the nightclub?

A) $5
B) $10
C) $8
D) $6

Question 28

If a firm practices first-degree price discrimination, the firm must:

A) have customers with identical demand curves.
B) have complete information about each customer's unique demand curve before the customer buys the product.
C) be able to identify each customer's demand curve after the customer buys the product.
D) lack market power but know how its customers differ by their willingness to pay for the product.

Question 29

(Table: Customer Valuations for Lawn Services I) The table shows customer valuations for different lawn services. The marginal cost of lawn cutting is $400, and the marginal cost of fertilizing is $200.
Suppose the lawn service bundles its Lawn Cutting and Fertilizing. In this case, the price for the bundle should be $____.

A) 800
B) 900
C) 1,250
D) 1,200

Question 30

A movie theater faces the following hourly inverse demand curves:
Seniors: P_s = 12 - 0.5Q
Adults: P_a = 19 - Q
The marginal cost is constant at $1. If the movie theater uses segmenting, the ticket price charged to seniors is $____.

A) 10
B) 9
C) 8.50
D) 6.50

Question 31

(Figure: Monopoly and Perfect Price Discrimination I) The deadweight losses under monopoly and perfect price discrimination are _____ and _____, respectively.

A) $16; $0
B) $8; $16
C) $0; $32
D) $8; $0

Question 32

For the case of a perfect price-discriminating monopolist (ppdm), total surplus can be calculated as:

A) .
B) .
C) Both A and B
D) Neither A nor B

Question 33

A utility company faces demand given by q = 40 - 0.1p, where p is the price per unit.
If the company adopts a two-tier pricing structure, the price per unit for the lower price that maximizes revenue is $____.

A) 266.67
B) 233.33
C) 166.67
D) 133.33

Question 34

Owners of a bowling alley have determined that the price elasticity of demand for bowling by seniors is -3.0, while the price elasticity of demand for others is -1.8. How much more should others be charged than seniors?

A) 67%
B) 50%
C) 60%
D) 25%

Question 35

(Figure: Producer Surplus II) Consumer surplus under single-price monopoly and under block pricing are _____ and _____, respectively.

A) $62.50; $82.50
B) $62.50; $40
C) $80; $120
D) $80; $112.50

Question 36

A pizza monopolist employing third-degree price discrimination charges students $10 per pizza and everyone else $15 per pizza. Students must show their ID before they can get the discount. The marginal cost of this monopolist is $5 whether or not the customer is a student. The elasticity of demand for everyone else (non-students) is _____.

A) 2
B) -2
C) 1.5
D) -1.5

Question 37

Sparkling Water Co. has determined that, for Michigan residents, the price elasticity of demand for a case of its purified water is -3.0, while the price elasticity of demand for Florida residents is -2.5. Assume that the marginal cost is constant at $8. What price per case should Sparkling Water Co. charge Michigan and Florida customers?

A) Customers in Michigan and Florida should be charged $16.
B) Michigan customers should be charged $11.94 and Florida customers charged $13.33.
C) Michigan customers should be charged $10 and Florida customers charged $14.
D) Customers in Michigan and Florida should be charged $13.33.

Question 38

The purchase price for Stata version 12 (statistical software used by many economists) is $895. For users of Stata version 11, the price to upgrade to version 12 is $395. Which of the following statements is (are) TRUE?

A) Stata is using a two-part tariff strategy.
B) Stata is segmenting its market by past purchasing behavior.
C) Stata is practicing first-degree price discrimination by charging different groups different prices.
D) The current users of Stata are less price-sensitive than possible future users.

Question 39

(Figure: Pharmaceutical Pills Sales I) A pharmaceutical company sells its pills in foreign and domestic markets.
Suppose the company must charge the same price in each market. The profit-maximizing price is $____.

A) 12
B) 8.67
C) 7.67
D) 7.00

Question 40

A single-price monopolist's objective is to choose q such that:

A) .
B) .
C) .
D) .

Question 41

Versioning is a form of _____ price discrimination because _____.

A) first-degree; the firm can identify its customers' types of demand curves before they buy, allowing the firm to select the profit-maximizing version of the product
B) second-degree; the firm cannot identify its customers' types of demand curves before they buy, so the firm produces various versions of the product in hopes that customers will self-select the appropriate product
C) perfect; each customer buys a unique version of the product that is priced to eliminate all consumer surplus
D) third-degree; the firm can directly determine which customers should buy which version of the product before the sale is made

Question 42

A firm with market power faces the demand function q = 1,000 - P. The firm's total cost function is TC(q) = 5q + q² + 500. The output that maximizes total surplus in this market is ____.

A) 421.67
B) 354.25
C) 331.67
D) 248.75

Question 43

For the case of a perfectly price-discriminating monopolist (ppdm), consumer surplus can be calculated as:

A) .
B) .
C) .
D) .

Question 44

(Figure: Infrequent and Frequent Miniature Golfers I) Little Pinehurst Miniature Golf has two types of customers: infrequent players and frequent players. Using a strategy of second-degree price discrimination, Little Pinehurst offers customers the choice of paying $15 per round of miniature golf or $12 per round for a package of 16 rounds. The pricing scheme is _____ for infrequent players, and is _____ for frequent players.

A) incentive-compatible; not incentive-compatible
B) not incentive-compatible; not incentive-compatible
C) not incentive-compatible; incentive-compatible
D) incentive-compatible; incentive-compatible

Question 45

Suppose a firm has two types of customers but cannot tell which type of buyer a customer is before a purchase is made. One group has an inverse demand of P = 100 - 10Q; another has an inverse demand curve of P = 110 - 22.5Q. The marginal cost of production is constant at $20. If the firm wanted to use quantity discounting, it should charge _____ per unit for any quantity purchased or _____ or more units.

A) $65; $60 for 4
B) $50; $40 for 8
C) $25; $20 for 2
D) $85; $75 for 6

Question 46

(Figure: Groups A and B I) Suppose a firm has two types of customers but cannot tell which type of buyer the customer is before a purchase is made. If the firm wanted to use quantity discounting, it should charge _____ per unit for any quantity purchased or _____.

A) $12; $4 per unit for 4 or more units
B) $12; $7 for 3 or more units, but the pricing scheme would not be incentive-compatible for Type B customers
C) $7; $4 for 2 or more units, but the pricing scheme would not be incentive-compatible for Type A customers
D) $8.50; $4 for 3 or more units

Question 47

A firm with market power faces the demand function q = 150 - 10P. The firm's marginal cost function is MC(q) = 2 + 0.1q. If the firm establishes a block-pricing structure with two prices, the lower price that the firm will use to maximize producer surplus is $____.

A) 9.76
B) 8.63
C) 7.45
D) 6.42

Question 48

For the three-tiered pricing structure that maximizes the firm's producer surplus, total cost can be calculated as:

A) .
B) .
C) .
D) .

Question 49

A firm faces the demand curve Q = 20 - 0.8P and marginal cost MC = 2.5Q.
If the firm can perfectly price discriminate, it will sell ____ units to maximize profit.

A) 0
B) 2.3
C) 4.67
D) 6.67

Question 50

Price discrimination is motivated by the firm's desire to:

A)penalize customers who do not match the racial or ethnic profile of the firm.
B)
Reduce the deadweight loss attributable to monopoly pricing.
C)
Affect social justice through long-run sustainable pricing strategies that benefit all community stakeholders.
D)
Increase producer surplus.

Question 51

This table shows the maximum willingness to pay for three consumers of lemonade and hot dogs. The marginal cost of both products is $0.25. A pure bundling strategy, where each bundle includes 1 lemonade and 1 hot dog, would earn a profit of $____.

A) 3.75
B) 4.50
C) 6.25
D) 8.25

Question 52

The inverse demand curve for a firm with market power is P = 60 - Q, and its marginal cost is given by MC = 2Q. If the firm decides to practice first-degree price discrimination, the deadweight loss will:

A) decrease from $37.50 to $0.
B) decrease from $45 to $15.
C) increase from $0 to $65.
D) increase from $30 to $45.

Question 53

Suppose a firm that can perfectly price discriminate faces the demand function P = 100 - q². The firm's total production costs are given by MC(q) = q + q². If the firm can perfectly price discriminate, the output level that maximizes profit for the firm is ____.

A) 12.64
B) 10.89
C) 9.51
D) 6.83

Question 54

Suppose a firm faces the demand function q = 600 - 6P. The firm's total production costs are given by MC(q) = 5q / 6 + q². Further suppose that the firm can perfectly price discriminate. The output level that maximizes profit for the firm is ____.

A) 12.64
B) 10.89
C) 9.51
D) 7.63

Question 55

A sand and gravel company sells pea gravel. It faces two types of customers with the following inverse demand curves:
Type A: P = 3.5 - 0.002Q
Type B: P = 3 - 0.001Q
Where Q measures bags of pea gravel and P is the price per bag. The marginal cost is $0.50 per bag. Suppose the business wants to use discounting to price-discriminate. The price per bag for all consumers purchasing at least 1,250 bags is $____.

A) 2
B) 1.75
C) 1.5
D) 1.25

Question 56

(Figure: Market by Residence I) If the firm can segment the market by residence, it will earn producer surplus of:

A) $2,680.
B) $4,025.
C) $2,012.50.
D) $1,800.50.

Question 57

(Table: Maximum Willingness to Pay IV) Suppose that the marginal cost of a one-way airfare is $30. Assuming the firm can perfectly price discriminate, the marginal revenue from selling the fourth quantity is $____.

A) 130
B) 110
C) 90
D) 0

Question 58

(Figure: Producer Surplus II) This firm is using block pricing, charging $35 each for the first 5 units, $25 each for units 6 and 7, and $15 for each unit beyond 7. What is the firm's producer surplus?

A) $80
B) $140
C) $100
D) $165

Question 59

For the case of a perfectly price-discriminating monopolist (ppdm), producer surplus can be calculated as:

A) .
B) .
C) .
D) .

Question 60

A firm with market power faces the demand function q = 1,000 - 100P. The firm's marginal cost function is MC(q) = 2 + 0.08q. If the firm behaves as a single-price monopoly, the optimal output to produce is $____.

A) 90
B) 80
C) 70
D) 60

Question 61

(Figure: Tariff Pricing Strategy I) If a firm uses the optimal two-part tariff pricing strategy, the entrance fee is _____ and the per-unit price is _____.

A) $12; $8
B) $8; $12
C) $16; $8
D) $8; $16

Question 62

Assume a monopolist can prevent resale of its product and it has complete information about each one of its customers. Even though each customer has a different demand curve, the seller can identify each customer's demand curve before a purchase takes place. It faces the inverse market demand of P = 160 - 10Q with marginal cost of MC = 10 + 5Q. The deadweight loss at the profit-maximizing result is $____.

A) 500
B) 400
C) 200
D) 0

Question 63

(Figure: Perfect Price Discrimination I) Under perfect price discrimination, producer surplus is $____.

A) 0
B) 9
C) 22.50
D) 37.50

Question 64

Suppose a firm faces the inverse demand curve P = 100 - Q. Marginal cost is constant at $10.
Suppose the firm uses block pricing, selling the first 45 units at $55 per unit, the next 20 units at $35 per unit, and the next 20 units at $15 per unit. The deadweight loss in this case is $____.

A) 0
B) 6.50
C) 9.75
D) 12.50

Question 65

To practice indirect or second-degree price discrimination, a firm must have:
I) a Lerner index equal to zero.
II) market power and the ability to prevent resale.
III) customers with different demand curves, without the firm knowing which customers have which type of demand before purchase of the product.

A) I and II
B) I, II, and III
C) II and III
D) I and III

Question 66

For a perfectly price-discriminating monopolist (ppdm), profit can be calculated as:

A) where .
B) where and
C) where and
D) where .

Question 67

An amusement park's customers have the demand curve for park rides given by Q = 11 - 0.5P, where P is the price per ride and Q is the number of rides. The marginal cost is $4. If the amusement park uses a two-part tariff, the park's entrance fee is _____, and its price per ride is _____.

A) $81; $4
B) $100; $11
C) $40; $4
D) $22; $2

Question 68

Price discrimination is the practice of charging:

A) different prices for different goods.
B) different prices to different customers for the same good.
C) high prices for products with high marginal costs and low prices for products with low marginal costs.
D) the same price for different goods in different regions.

Question 69

(Table: Maximum Willingness to Pay IV) Suppose that the marginal cost of a one-way airfare is $30. Assuming the firm has to charge everyone the same price, the profit-maximizing number of tickets is ____.

A) 6
B) 4
C) 2
D) 0

Question 70

(Figure: Producer Surplus I) Producer surplus using perfect price discrimination is _____ greater than under perfect competition and _____ greater than under monopoly.

A) $800; $400
B) $1,600; $800
C) $3,200; $1,600
D) $4,800; $3,200

Question 71

A sand and gravel company sells pea gravel. It faces two types of customers with the following inverse demand curves:
Type A: P = 3.5 - 0.002Q
Type B: P = 3 - 0.001Q
Where Q measures bags of pea gravel and P is the price per bag. The marginal cost is $0.50 per bag. Suppose the business wants to use discounting to price discriminate. The consumer surplus for Type B consumers with the price discount is $____.

A) 1,093.75
B) 750.00
C) 625.00
D) 562.50

Question 72

(Table: Willingness to Pay II) Assume that the marginal cost of a computer is $500 and the marginal cost of a monitor is $200. Suppose that a mixed bundling strategy sets the price for a computer and a monitor at $1,000 or $725 per computer and $425 per monitor. How much producer surplus is earned by this strategy?

A) $1,050
B) $880
C) $1,250
D) $975

Question 73

(Figure: Type A and Type B I) Suppose a firm plans to use indirect price discrimination through quantity discounts. The firm cannot identify which customers are Type A or Type B before the purchase, so the firm would like to offer a regular-price plan and a quantity-discount plan to suit the customers' personal price sensitivity.
The price the firm should set for the less price-sensitive customers is $____.

A) 3.50
B) 3.00
C) 2.50
D) 2.00

Question 74

A firm with market power faces the demand function q = 1,000 - P. The firm's total cost function is TC(q) = 5q + q² + 500. If the firm behaves as a single-price monopoly, the firm's optimal price is $____.

A) 751.25
B) 510.45
C) 326.75
D) 248.75

Question 75

A firm with market power faces the demand function q = 150 - 10P. The firm's marginal cost function is MC(q) = 2 + 0.1q. If the firm establishes a block-pricing structure with two prices, the higher price that the firm will use to maximize producer surplus is $____.

A) 9.76
B) 8.63
C) 7.45
D) 6.42

Question 76

A firm with market power has the inverse demand curve P = 90 - 1.5Q and marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its profit-maximizing output level will:

A) increase from 14 to 28 units.
B) decrease from 24 to 12 units.
C) increase from 20 to 32 units.
D) decrease from 28 to 14 units.

Question 77

Which of the following requirements is necessary to practice price discrimination?
I) The firm must have market power.
II) The firm must be able to prevent arbitrage of its product.
III) The firm must face a perfectly elastic demand curve.
IV) The firm must operate in a perfectly competitive industry.

A) II, III, and IV
B) I, II, and III
C) I and II
D) III and IV

Question 78

Suppose a firm faces the demand function q = 800 - 4P. The firm's total production costs are given by MC(q) = 9.5q + q². If the firm cannot price discriminate, the deadweight loss is $____.

A) 2
B) 1.97
C) 1.85
D) 1.45

Question 79

A warehouse club has customers with identical demand curves, Q = 100 - 5P, where Q is the annual number of merchandise units and P is the price per merchandise unit. The marginal cost of a merchandise unit is $10. If the warehouse club uses the optimal two-part tariff strategy, it will earn producer surplus of _____ per customer.

A) $1,060
B) $75
C) $450
D) $250

Question 80

(Table: Customer Valuations for Lawn Services I) The table shows customer valuations for different lawn services. The marginal cost of lawn cutting is $400 and the marginal cost of fertilizing is $200.
Suppose the lawn service prices its services separately. In this case, the company should charge $____ for lawn cutting.

A) 800
B) 600
C) 400
D) 250