Deck 5: Pricing Techniques and Analysis

Question 1

In ____ price discrimination, the entire consumer surplus is captured by the producer.

A) first-degree
B) second-degree
C) third-degree
D) a and b
E) none of the above

Answer 1

first-degree

Question 2

A manufacturer produces two types of computer software, Word processing (W) and Spreadsheet (S), which is offered to two different retail outlets (1 and 2). The following table shows the maximum price each retail outlet is willing to pay for each individual software product. What is the optimal pricing strategy that will maximize revenue for the manufacturer, given the maximum the retail outlets are willing to pay?

A) Bundle both products (W and S) and sell them at $230.
B) Price product W at $170 and Product S at $135.
C) Price product W at $170 and Product S at $170.
D) Price product W at $95 and Product S at $105.
E) Bundle both products (W and S) and sell them at $275.

Answer 2

Bundle both products (W and S) and sell them at $230.

Question 3

Consolidated Salt Company sells table salt to both retail grocery chains and commercial users (e.g., bakeries, snack food makers, etc.). The demand function for each of these markets is: where P₁ and P₂ are the prices charged and Q₁ and Q₂ are the quantities sold in the respective markets. Consolidated's total cost function (which includes a "normal"return to the owners) for salt is:TC = 50 + 20(Q₁ + Q₂)
(a)Determine Consolidated's total profit function.
(b)Assuming that Consolidated is effectively able to charge different prices in the two markets, what are the profit-maximizing price and output levels for the product in the two markets? What is Consolidated's total profit under this condition?
(c)Assuming that Consolidated is required to charge the same price in each market, what are the profit-maximizing price and output levels? What is Consolidated's total profit under this condition?

Answer 3

(a)
(b)
(c)

Question 4

When airlines post prices on an electronic bulletin board at 8:00 a.m. each morning, the decision-makers are engaged in

A) a single play game
B) a sequential game
C) an entry decision
D) a simultaneous game
E) an infinite repetition game

Question 5

Exhibit : Consider the information below when answering the following question(s): (Note: Payoffs in the upper right corner go to Pizza Spinners and payoffs in the lower left go to Harry's).
-In choosing whether to deliver to six or seven neighborhoods, Pizza Spinners has to take into account not only its own costs, but also the delivery area response of its competitor Harry's Pizzeria. If the payoffs per week from delivering in six and seven neighborhoods are as displayed in Exhibit above, what will Pizza Spinner's choose and why?

Question 6

Retailers A and B anticipate many repetitions of the following pricing game in which they must choose between discounting or maintaining higher prices. Under what circumstances will store A resist discounting and choose MAINTAIN?

Question 7

Two companies (A and B) are duopolists that produce identical products. Demand for the products is given by the following demand function:
P = 10,000 - Q_A- Q_B
where Q_A and Q_B are the quantities sold by the respective firms and P is the selling price.Total cost functions for the two companies are:
TC_A = 500,000 + 200Q_A + .5Q_A²
TC_B = 200,000 + 400Q_B + Q_B²
Assume that the two firms act independently as in the Cournot model (that is, each firm assumes that the other firm's output will not change). Determine the long-run equilibrium output and selling price for each firm.

Question 8

Two companies (A and B) are duopolists that produce identical products. Demand for the products is given by the following demand function:
P = 10,000 - Q_A-Q_B
where Q_A and Q_B are the quantities sold by the respective firms and P is the selling price.Total cost functions for the two companies are:
TC_A = 500,000 + 200Q_A + .5Q_A²
TC_B = 200,000 + 400Q_B + Q_B²
Assume that the firms form a cartel to maximize total industry profits (sum of Firm A and Firm B profits). Determine the optimum output and selling price for each firm.

Question 9

The Winston Tobacco Company feels that it is faced with the following segmented demand function for its cigarettes: where Q is the number of cartons sold and P is the price per carton.
(a)Why is such a segmented demand function likely to exist? What type of industry structure is indicated by this relationship?
(b)Determine Winston's marginal revenue function.
(c)Given that Winston's total cost function (including a "normal"return to the owners) is TC₁ = 80 + 2.6Q + .05Q² determine Winston's profit maximizing price and output level.
(d)Given that Winston's total cost function increases to TC₂ = 90 + 3.4Q + .05Q² what is their profit maximizing price and output level?

Question 10

The Zinger Company manufactures and sells a line of sewing machines. Demand per period (Q) for a particular model is given by the following relationship: Q = 400 - .5P where P is price. Total costs (including a "normal"return to the owners) of producing Q units per period are: TC = 20,000 + 50Q + 3Q²
(a)Express total profits ( $\pi$ ) in terms of Q.
(b)At what level of output are total profits maximized? What price will be charged? What are total profits at this output level?
(c)What model of market pricing has been assumed in this problem? Justify your answer.

Question 11

Sunrise Juice Company sells its output in a perfectly competitive market. The firm's total cost function is given in the following schedule: Total costs include a "normal"return on the time (labor services) and capital that the owner has invested in the firm. The prevailing market price is $7 per unit.
(a)Prepare (i) marginal cost and (ii) average total cost schedules for the firm.
(b)What is the firm's profit maximizing output level?
(c)Is the industry in long-run equilibrium? Justify your answer.

Question 12

Superior Metals Company has seen its sales volume decline over the last few years as the result of rising foreign imports. In order to increase sales (and hopefully, profits), the firm is considering a price reduction on luranium-a metal that it produces and sells. The firm currently sells 60,000 pounds of luranium a year at an average price of $10 per pound. Fixed costs of producing luranium are $250,000. Current variable costs per pound are $5. The firm has determined that the variable cost per pound could be reduced by $.50 if production volume could be increased by 10 percent (fixed costs would remain constant). The firm's marketing department has estimated the arc elasticity of demand for luranium to be -1.5.
(a)How much would Superior Metals have to reduce the price of luranium in order to achieve a 10 percent increase in the quantity sold?
(b)What would the firm's (i) total revenue, (ii) total cost, and (iii) total profit be before and after the price cut?