Deck 11: Pricing Strategies for Firms With Market Power

Question 1

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs.It faces an inverse demand function given by P = 50 − Q.Suppose fixed costs rise to $400.What happens in the market?

A) The firm will raise the price.
B) The firm will shut down immediately.
C) The firm continues to produce the same output and charge the same price.
D) The firm will reduce its output and raise price.

Answer 1

C

Question 2

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

A) MC = MR
B) P = MC
C) Positive long run profits
D) P = MC and positive long run profits

Answer 2

B

Question 3

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

A) Purely because entrepreneurs are benevolent.
B) Senior citizens have a more elastic demand for movies than ordinary citizens.
C) Senior citizens lack recreational activities.
D) None of the preceding statements is correct.

Answer 3

B

Question 4

Suppose P = 20 − 2Q is the market demand function for a local monopoly.The marginal cost is 2Q.The firm currently uses a standard pricing strategy.Which of the following will allow the firm to enhance the profits?

A) Engage in two-part pricing.
B) Engage in commodity bundling.
C) Engage in randomized pricing.
D) Engage in two-part pricing and engage in commodity bundling.

Question 5

Which of the following pricing strategies does NOT usually enhance the profits of firms with market power?

A) Price matching
B) Cross-subsidies
C) Two-part pricing
D) Marginal cost pricing

Question 6

The idea of charging two different groups of consumers two different prices is practiced in:

A) price discrimination.
B) two-part pricing.
C) price matching.
D) None of the preceding statements is correct.

Question 7

You are the manager of a gas station and your goal is to maximize profits.Based on your past experience,the elasticity of demand by Texans for a car wash is −4,while the elasticity of demand by non-Texans for a car wash is −6.If you charge Texans $20 for a car wash,how much should you charge a man with Oklahoma license plates for a car wash?

A) $1.50
B) $15.00
C) $18.00
D) $20.00

Question 8

Which of the following statements is true?

A) The more elastic the demand, the higher the profit-maximizing markup.
B) The more elastic the demand, the lower the profit-maximizing markup.
C) The higher the marginal cost, the lower the profit-maximizing price.
D) The higher the average cost, the lower the profit-maximizing price.

Question 9

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

A) ability to identify consumer types.
B) inability to resell the good.
C) differences in demand elasticities.
D) All of the statements associated with this question are correct.

Question 10

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:

A) $5.
B) $10.
C) $25.
D) $50.

Question 11

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs.It faces an inverse demand function given by P = 50 − Q.Which of the following is the marginal revenue function for the firm?

A) MR = 60 − 2Q
B) MR = 50 − Q
C) MR = 100 − Q
D) MR = 50 − 2Q

Question 12

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs.It faces an inverse demand function given by P = 50 − Q.What are the profits of the monopoly in equilibrium?

A) $300
B) $400
C) $500
D) $600

Question 13

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs.It faces an inverse demand function given by P = 50 − Q.The demand elasticity of a widget at the monopoly price and quantity is:

A) −1.5.
B) −2.
C) −2.5.
D) 2.

Question 14

A new firm successfully enters a three-firm Cournot oligopoly without changing the demand and cost structures.The new price becomes:

A) 75 percent of the original price.
B) 50 percent of the original price.
C) the same as the original price.
D) unknown for lack of other information.

Question 15

Which of the following is NOT a condition for a firm to engage in price discrimination?

A) Consumers are partitioned into two or more types, with one type having a more elastic demand than the other.
B) The firm has a means of identifying consumer types.
C) The consumers are sincere in revealing their true natures.
D) There is no resale market for the good.

Question 16

A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs.It faces an inverse demand function given by P = 50 − Q.The monopoly price is:

A) $30.
B) $20.
C) $10.
D) $40.

Question 17

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?

A) $6 per unit
B) $8 per unit
C) $10 per unit
D) $12 per unit

Question 18

In a Cournot oligopoly with N firms and identical marginal costs,the relationship between the price elasticity of market demand and that of the firm is:

A) E_M = E_F.
B) E_M = NE_F.
C) E_M = E_F/N.
D) No deterministic relationship.

Question 19

Suppose P = 20 − 2Q is the market demand function for a local monopoly.The marginal cost is 2Q.The local monopoly tries to maximize its profits by equating MC = MR and charging a uniform price.What will be the equilibrium price and output?

A) $6.33, 3.33 units
B) $6.33, 5 units
C) $13.33, 3.33 units
D) $10, 5 units

Question 20

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:

A) $2.00.
B) $2.50.
C) $4.00.
D) $5.00.

Question 21

If your demand for renting videos is Q = 5 − 2P,should you purchase the annual membership from a video store that charges $0.5 per rental,plus an annual membership fee of $12?

A) Definitely yes
B) Definitely no
C) Probably yes
D) Cannot be decided

Question 22

Which group of policies aims at extracting all consumer surplus?

A) Price discrimination and peak load pricing.
B) Cross-subsidization and brand loyalty.
C) Price matching and randomized pricing.
D) Two-part pricing and commodity bundling.

Question 23

Which group of policies aims at discouraging rivals from starting a price war?

A) Price matching and randomized pricing
B) Price matching, brand loyalty, and commodity bundling
C) Randomized pricing, price discrimination, and cross-subsidization
D) Peak-peak pricing, two-part pricing, and price matching

Question 24

Brand loyalty can be enhanced through:

A) an advertising campaign.
B) a price war.
C) neither an advertising campaign nor a price war.
D) an advertising campaign and a price war.

Question 25

Which of the following strategies will most likely NOT enhance profits in a Bertrand oligopoly?

A) Two-part pricing
B) Price matching
C) Randomized pricing
D) Brand loyalty

Question 26

Firms that use a price-matching strategy attempt to keep price at:

A) marginal cost.
B) the oligopoly price.
C) the monopoly price.
D) the oligopoly price or the monopoly price.

Question 27

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 an annual membership in order to extract the entire consumer surplus via an optimal two-part pricing strategy?

A) $9
B) $10
C) $11
D) $12

Question 28

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) $0.35
B) $0.5
C) $0.7
D) $1.00

Question 29

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.What is the annual profit that the video store expects to make on an average customer if it engages in optimal two-part pricing?

A) $6
B) $7
C) $8
D) $9

Question 30

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

A) price discrimination.
B) peak-load pricing.
C) price discrimination or peak-load pricing.
D) None of the preceding statements is correct.

Question 31

A campus auditorium sells tickets at half price to students during the last 30 minutes before a concert starts.This is an example of:

A) price discrimination.
B) peak-load pricing.
C) price discrimination or peak-load pricing.
D) None of the preceding statements is correct.

Question 32

Price-matching strategies may fail to enhance profits when:

A) firms cannot prevent customers from making deceptive claims.
B) firms have different marginal costs.
C) firms cannot prevent customers from making deceptive claims or firms have different marginal costs.
D) None of the statements are correct.

Question 33

Which of the following statements about a price-matching strategy is incorrect?

A) It may be applied in situations besides Bertrand oligopoly.
B) It requires that the firms can monitor their rival's prices.
C) It reduces the incentive for a rival firm to initiate a price war.
D) It only guarantees to match prices that are advertised publicly.

Question 34

During spring break,students have an elasticity of demand for a trip to Florida of −3.How much should an airline charge students for a ticket if the price it charges the general public is $360? Assume the general public has an elasticity of −2.

A) $240
B) $250
C) $260
D) $270

Question 35

The special cost structure that is necessary for a firm to adopt a peak-load pricing policy is:

A) economies of scale.
B) economies of scope.
C) constant marginal cost.
D) limited capacity.

Question 36

Which of the following pricing policies compensate customers if the firm fails to provide the best price in the market?

A) Price matching
B) Beat-or-pay
C) Brand loyalty
D) Randomized pricing

Question 37

Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal cost,but the high equipment rental fee keeps generating big profits.Which pricing strategy is the management using?

A) Price discrimination
B) Two-part pricing
C) Commodity bundling
D) Cross-subsidization

Question 38

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?

A) $2
B) $6
C) $8
D) $10

Question 39

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

A) perfect substitution among products.
B) imperfect substitution among products.
C) independent demand for products.
D) interdependent demand for products.

Question 40

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

A) economies of scale.
B) economies of scope.
C) constant marginal cost.
D) limited capacity.

Question 41

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?

A) $20
B) $21
C) $24
D) Not enough information to determine

Question 42

Which of the following pricing policies enhances profits by creating brand-loyal consumers?

A) Frequent flyer programs
B) Beat-or-pay strategies
C) Trigger strategies
D) Frequent flyer programs and beat-or-pay strategies

Question 43

When two or more divisions mark up prices in excess of marginal cost:

A) double marginalization occurs.
B) two-part pricing occurs.
C) second-degree price discrimination occurs.
D) None of the answers are correct.

Question 44

If a monopolist claims his profit-maximizing markup factor is 3,what is the corresponding price elasticity of demand?

A) −1.5.
B) −2.0.
C) −2.5.
D) −3.0.

Question 45

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:

A) type A consumers.
B) type B consumers.
C) type A consumers and type B consumers.
D) None of the answers are correct.

Question 46

The average consumer at a firm with market power has an inverse demand function of P = 10 − Q.The firm's cost function is C = 2Q.If the firm engages in two-part pricing,what is the optimal fixed fee to charge each consumer?

A) $2
B) $32
C) $64
D) None of the answers are correct.

Question 47

To circumvent the problem of double marginalization:

A) transfer prices must be set that maximize the overall value of the firm rather than the profits of the upstream division.
B) firms should engage in two-part pricing, unless it is possible to engage in either first- or second-degree price discrimination.
C) firms should vertically integrate.
D) None of the answers are correct.

Question 48

The purpose of randomized pricing is to reduce:

A) consumer price information only.
B) competitor price information only.
C) both customer and competitor information about price.
D) the firm's pricing inflexibility.

Question 49

A firm with market power has an individual consumer demand of Q = 20 − 4P and costs of C = 4Q.What is optimal price to charge for a block of 20 units?

A) $18
B) $36
C) $72
D) $90

Question 50

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 can identify each consumer type and can price discriminate,what is the optimal price for a pair of pants?

A) Charge both types $150.
B) Charge both types $75.
C) Charge type A consumers $50, and type B consumers $75.
D) Charge type A consumers $50, and type B consumers $50.

Question 51

The average consumer at a firm with market power has an inverse demand function of P = 10 − Q.The firm's cost function is C = 2Q.If the firm engages in two-part pricing,what is the optimal price to charge a consumer for each unit purchased?

A) $0
B) $1
C) $4
D) None of the answers are correct.

Question 52

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

A) −1.0
B) −1.2
C) −2.0
D) None of the preceding statements is correct.

Question 53

A firm with market power has an individual consumer demand of Q = 20 − 4P and costs of C = 4Q.What is the optimal amount of this product to package in a single block?

A) 2
B) 3
C) 4
D) 5

Question 54

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) 0
B) 1
C) 2
D) Insufficient information

Question 55

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

A) −1.5
B) −2.0
C) −2.5
D) None of the answers are correct.

Question 56

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

A) −1/2
B) −2/3
C) −1.0
D) −2.0

Question 57

The average consumer at a firm with market power has an inverse demand function of P = 10 − Q.The firm's cost function is C = 2Q.If the firm engages in optimal two-part pricing,it will earn profits of:

A) $2.
B) $32.
C) $64.
D) None of the answers are correct.

Question 58

If a product is perceived by consumers as homogeneous,which of the following strategies will work to induce brand loyalty?

A) Intensive advertising campaign
B) Price wars with competitors
C) Frequent buyer rebate programs
D) None of the answers are correct.

Question 59

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.The optimal commodity bundling strategy is:

A) Charge $150 for a suit.
B) Charge $75 for a suit.
C) Charge $100 for a suit.
D) Charge $125 for a suit.

Question 60

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:

A) type A consumers.
B) type B consumers.
C) type A consumers and type B consumers.
D) None of the answers are correct.

Question 61

Which of the following is a true statement about the process of cross-subsidization,given that a firm is selling two products?

A) The two products cannot have interdependent demand functions.
B) The firm will sell both of its products at prices set above costs.
C) The firm needs cost complementarities in the production of the two goods.
D) The firm will sell both of its products at prices set above costs and the firm needs cost complementarities in the production of the two goods.

Question 62

Which of the following statements is true regarding profit-maximizing markup for a Cournot oligopoly with N identical firms?

A) P[NE_F / (1 + NE_F)] = MC
B) P = [(1 + NE_F) / NE_F]MC
C) P[N(1 + E_F) / NE_F] = MC
D) P = [NE_F / (1 + NE_F)]MC

Question 63

Which of the following pricing strategies does NOT usually enhance the profits of firms with market power?

A) Marginal cost pricing
B) Price discrimination
C) Block pricing
D) Commodity bundling

Question 64

A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs.It faces an inverse demand function given by P = 38 - Q.What are the profits of the monopoly in equilibrium?

A) $225
B) $120
C) $345
D) None of the preceding statements is correct.

Question 65

Firms will often implement randomized pricing in an attempt to reduce:

A) only competitor price information.
B) only consumer price information.
C) both customer and competitor information about price.
D) Randomized pricing does not affect information available to consumers or competitors.

Question 66

Which of the following is true regarding the relationship between the elasticity of demand for an individual firm and the elasticity of demand for the market in a Cournot oligopoly with five identical firms?

A) E_F = (df(p) / dP) × (5P / Q)
B) E_F = (df(p) / dP) × (5Q / P)
C) E_M = 5E_F
D) E_F = (1/5)E_M

Question 67

A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs.It faces an inverse demand function given by P = 38 − Q.The monopoly price is:

A) $30.
B) $23.
C) $15.
D) $8.

Question 68

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

A) First-degree price discrimination
B) Peak load pricing
C) Two-part pricing
D) Block pricing

Question 69

You are the manager of a Mom and Pop store that can buy milk from a supplier at $2.00 per gallon.If you believe the elasticity of demand for milk by customers at your store is −3,then your profit-maximizing price is:

A) $1.33.
B) $2.75.
C) $3.00.
D) $4.50.

Question 70

Which of the following statements is true regarding a simple pricing rule for monopoly and monopolistic competition?

A) P[E_F / (1 + E_F)] = MC
B) P = [(1 + E_F) / E_F]MC
C) P[(1 + E_F) / E_F] = MC
D) All of the statements associated with this question are correct.

Question 71

First-degree price discrimination:

A) occurs when a firm charges each consumer the maximum price he or she would be willing to pay for each unit of the good purchased.
B) results in the firm extracting all surplus from consumers.
C) occurs when a firm charges each consumer the maximum price he or she would be willing to pay for each unit of the good purchased and results in the firm extracting all surplus from consumers.
D) None of the answers are correct.

Question 72

To avoid the problem of double marginalization:

A) transfer prices must be set that maximize the overall value of the firm rather than the profits of the upstream division.
B) firms should put more emphasis on vertical integration.
C) firms should engage in two-part pricing.
D) firms should engage in commodity bundling, unless it is possible to engage in either first- or second-degree price discrimination.

Question 73

Which of the following is a correct statement?

A) The lower the marginal cost, the higher the profit-maximizing price.
B) The lower the average cost, the higher the profit-maximizing price.
C) The less elastic the demand, the higher the profit-maximizing markup.
D) The more elastic the demand, the higher the profit-maximizing markup.

Question 74

The idea of charging two different groups of consumers two different prices is practiced in:

A) two-part pricing.
B) price matching.
C) commodity bundling.
D) None of the answers are correct.

Question 75

In a Cournot oligopoly with N firms and identical marginal costs,the relationship between the price elasticity of demand for the firm and that of the market is:

A) E_F = E_M.
B) E_F = NE_M.
C) E_F = E_M/N.
D) E_F = N/E_M.

Question 76

A local video store estimates its average customer's demand per year is Q = 20 − 4P,and it knows the marginal cost of each rental is $1.00.How much should the store charge for an annual membership in order to extract the entire consumer surplus via an optimal two-part pricing strategy?

A) $20
B) $32
C) $40
D) $64

Question 77

What price should a firm charge for a package of two shirts given a marginal cost of $4 and an inverse demand function P = 8 − 2Q by the representative consumer?

A) $4
B) $8
C) $12
D) $16

Question 78

A monopoly produces widgets at a marginal cost of $8 per unit and zero fixed costs.It faces an inverse demand function given by P = 38 − Q.Suppose fixed costs rise to $200.What will happen in the market?

A) The firm will decrease its output and lower its price.
B) The firm will increase the price.
C) The firm will shut down immediately.
D) The firm continues to produce the same output and charge the same price.

Question 79

Second-degree price discrimination:

A) is the practice of posting a discrete schedule of declining prices for different ranges of quantities.
B) eliminates the problem of double marginalization.
C) results in transfer pricing.
D) None of the answers are correct.

Question 80

During spring break,students have an elasticity of demand for a trip to Cancun,Mexico,of −4.How much should an airline charge students for a ticket if the price it charges the general public is $420? Assume the general public has an elasticity of −2.

A) $210
B) $280
C) $160
D) $105