Deck 11: Pricing With Market Power

Question 1

Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then:

A) producer surplus increases due to new buyers, but the producer surplus from existing customers declines due to the lower price.
B) the change in producer surplus is transferred to consumers.
C) the increase in consumer surplus is only due to the increase in quantity demanded.
D) the sum of producer and consumer surplus remains the same, but surplus value is transferred from the producer to consumers.

Answer 1

producer surplus increases due to new buyers, but the producer surplus from existing customers declines due to the lower price.

Question 2

An electric power company uses block pricing for electricity sales. Block pricing is an example of:

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) Block pricing is not a type of price discrimination.

Answer 2

second-degree price discrimination.

Question 3

Which of the following strategies are used by business firms to capture consumer surplus?

A) Price discrimination
B) Bundling
C) Two-part tariffs
D) all of the above

Answer 3

all of the above

Question 4

McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of:

A) collusion.
B) price discrimination.
C) two-part tariff.
D) bundling.
E) tying.

Question 5

The maximum price that a consumer is willing to pay for each unit bought is the ________ price.

A) market
B) reservation
C) consumer surplus
D) auction
E) choke

Question 6

When a firm charges each customer the maximum price that the customer is willing to pay, the firm:

A) engages in a discrete pricing strategy.
B) charges the average reservation price.
C) engages in second-degree price discrimination.
D) engages in first-degree price discrimination.

Question 7

Figure 11.2.3
Refer to Figure 11.2.3 above. In this case, the firm charges two different prices. This pricing scheme corresponds to:

A) First degree price discrimination.
B) Second degree price discrimination.
C) Third degree price discrimination.
D) Perfect price discrimination.

Question 8

Figure 11.2.1
Refer to Figure 11.2.1 above. When the firm charges the reservation price to each consumer, the additional profit equals area:

A) A
B) B
C) C
D) C + D

Question 9

Figure 11.1.1
Refer to Figure 11.1.1 above. To capture the consumer surplus along the B range, the firm would ideally charge:

A) a higher price to consumers willing to pay more and a lower price to those willing to pay less.
B) the same higher price to all consumers.
C) a higher price to consumers willing to pay less and a lower price to those willing to pay more.
D) a range of random prices along the demand curve.

Question 10

Figure 11.2.2
Refer to Figure 11.2.2 above. If the firm chooses to charge the four prices shown on the figure instead of a single price, P₀, the firm practices:

A) First degree price discrimination.
B) Second degree price discrimination.
C) Third degree price discrimination.
D) Perfect price discrimination.

Question 11

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing:

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) fourth-degree price discrimination.
E) fifth-degree price discrimination.

Question 12

Figure 11.1.1
Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then:

A) consumer and producer surplus must increase.
B) consumer surplus increases, producer surplus may increase or decrease.
C) consumer surplus increases, producer surplus must decline.
D) consumer and producer surplus must decline.

Question 13

A doctor charges two different prices for medical services, and the price level depends on the patients' income such that wealthy patients are charged more than poorer ones. This pricing scheme represents a form of:

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) pricing at each consumer's reservation price.

Question 14

A firm is charging a different price for each unit purchased by a consumer. This is called:

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) fourth-degree price discrimination.
E) fifth-degree price discrimination.

Question 15

Figure 11.1.1
Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. By engaging in this practice, the firm:

A) is trying to reduce its costs and therefore increase its profit.
B) is engaging in an illegal activity that is prohibited by the Sherman Antitrust Act.
C) is attempting to convert producer surplus into consumer surplus.
D) is attempting to convert consumer surplus into producer surplus.
E) Both A and C are correct.

Question 16

In 1994, the Walt Disney Corporation ran a special promotion on tickets to Disneyland. Residents of southern California who lived near the amusement park were offered admission at the special price of $22. Other visitors to Disneyland were charged about $30. This practice is an example of:

A) collusion.
B) price discrimination.
C) two-part tariff.
D) bundling.
E) tying.

Question 17

Second-degree price discrimination is the practice of charging:

A) the reservation price to each customer.
B) different prices for different quantity blocks of the same good or service.
C) different groups of customers different prices for the same products.
D) each customer the maximum price that he or she is willing to pay.

Question 18

Third-degree price discrimination involves:

A) charging each consumer the same two part tariff.
B) charging lower prices the greater the quantity purchased.
C) the use of increasing block rate pricing.
D) charging different prices to different groups based upon differences in elasticity of demand.

Question 19

Discrimination based upon the quantity consumed is referred to as ________ price discrimination.

A) first-degree
B) second-degree
C) third-degree
D) group

Question 20

The maximum price that a consumer is willing to pay for a good is called:

A) the reservation price.
B) the market price.
C) the first-degree price.
D) the block price.
E) the choke price.

Question 21

When a monopolist engages in perfect price discrimination,

A) the marginal revenue curve lies below the demand curve.
B) the demand curve and the marginal revenue curve are identical.
C) marginal cost becomes zero.
D) the marginal revenue curve becomes horizontal.

Question 22

Some grocery stores are now offering customers coupons which entitle them to a discount on certain items on their next visit when they go through the check-out line. This practice is an example of:

A) intertemporal price discrimination.
B) third-degree price discrimination.
C) a two-part tariff.
D) bundling.
E) none of the above

Question 23

Under perfect price discrimination, marginal profit at each level of output equal:

A) 0.
B) P - AC.
C) P - MC.
D) P - AR.

Question 24

For a perfect first-degree price discriminator, incremental revenue is:

A) greater than price if the demand curve is downward sloping.
B) the same as the marginal revenue curve if the firm is a non-discriminating monopolist.
C) equal to the price paid for each unit of output.
D) less than the marginal revenue for a non-discriminating monopolist.

Question 25

Bindy, an 18-year-old high school graduate, and Luciana, a 40-year-old college graduate, just purchased identical hot new sports cars. Acme Insurance charges a higher rate to insure Bindy than Luciana. This practice is an example of:

A) collusion.
B) price discrimination.
C) two-part tariff.
D) bundling.
E) none of the above

Question 26

A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). After selling all of its output, the firm discovers that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30. To maximize profits the firm should:

A) have sold more output in the local market and less at the internet auction site.
B) do nothing until it acquires more information on costs.
C) have sold less output in the local market and more on the internet auction site.
D) sell less in both markets until marginal revenue is zero.
E) sell more in both markets until marginal cost is zero.

Question 27

MNO Limited publishes a magazine targeted at urban professionals who live on the east and west coasts of the U.S., and all of the magazines are printed at a marginal cost of $0.50 per copy at a publishing plant in Kansas. If the East Coast elasticity of demand for the magazine is -1.25 and the West Coast elasticity of demand is -1.50, what prices should MNO Limited charge for the magazines in these two markets in order to maximize profits?

A) Price should be $0.50 in both markets.
B) Price should be $2.50 on the West Coast and $1.50 on the East Coast.
C) Price should be $1.50 on the West Coast and $2.50 on the East Coast.
D) Price should be $0.40 on the West Coast and $0.33 on the East Coast.

Question 28

Your local grocery store offers a coupon that reduces the price of milk during the coming week. The regular retail price of milk in the store is $3.00 per gallon, and the coupon price is $2.00 per gallon for the next week. If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users, what is the price elasticity of demand for non-users?

A) -0.67
B) -1.0
C) -1.5
D) We do not have enough information to answer the question.

Question 29

Calloway Shirt Manufacturers sells knit shirts in two sub-markets. In one sub-market, the shirts carry Calloway's popular label and breast logo and receive a substantial price premium. The other sub-market is targeted toward more price conscious consumers who buy the shirts without a breast logo, and the shirts are labeled with the name Archwood. The retail price of the shirts carrying the Calloway label is $42.00 while the Archwood shirts sell for $25. Calloway's market research indicates a price elasticity of demand for the higher priced shirt of -2.0, and the elasticity of demand for the Archwood shirts is -4.0. Moreover, the research suggests that both elasticities are constant over broad ranges of output.
a. Are Calloway's current prices optimal?
b. Management considers the $25 price to be optimal and necessary to meet the competition. What price should the firm set for the Calloway label to achieve an optimal price ratio?

Question 30

Johnny's Shop-and-Pay is a regional grocery chain, and their marketing manager is trying to determine the profit-maximizing coupon program for the store's laundry detergent brand. Coupon users at the store have an elasticity of demand for this product that equals -3, and the elasticity of demand for non-users of the coupon for the store brand equals -1.5. If the full retail (undiscounted) price of the detergent is $10 per box, what is the optimal discount to provide for coupon users?

A) 25% off
B) 50% off
C) 75% off
D) The optimal strategy is to charge the same price to both groups

Question 31

Under perfect price discrimination, consumer surplus:

A) is less than zero.
B) is greater than zero.
C) equals zero.
D) is maximized.

Question 32

Suppose a firm produces identical goods for two separate markets and practices third-degree price discrimination. In the first market the firm charges $30 per unit, and it charges $22 per unit in the second market. Which of the following represents the ratio of price elasticities of demand in the two markets?

A) E2 = (21/29)E1
B) E2 = (29/21)E1
C) E2 = E1
D) E2 = (22/30)E1
E) none of these

Question 33

The manager of a firm is attempting to practice third degree price discrimination. She has equated the marginal revenue in each of her markets. By doing this, her:

A) profits are maximized.
B) costs are minimized given her level of output.
C) revenues are maximized, given her level of output.
D) all of the above

Question 34

A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits?

A) P_A = P_B = MC.
B) MR_A = MR_B.
C) MR_A = MR_B = MC.
D) (MR_A - MR_B) = (1 - MC).

Question 35

Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct?

A) The Japanese firm will sell more steel abroad than they will sell in Japan.
B) The Japanese firm will sell more steel in Japan than they will sell abroad.
C) The Japanese firm will sell steel at a lower price abroad than they will charge domestic users.
D) The Japanese firm will sell steel at a higher price abroad than they will charge domestic users.
E) Insufficient information exists to determine whether the price or quantity will be higher or lower abroad.

Question 36

American Tire and Rubber Company sells identical radial tires under the firm's own brand name and private label tires to discount stores. The radial tires sold in both sub-markets are identical, and the marginal cost is constant at $10 per tire for both types. The firm has estimated the following demand curves for each of the markets.
PB = 70 - 0.0005QB (brand name)
PP = 20 - 0.0002QP (private label).
Quantities are measured in thousands per month and price refers to the wholesale price. American currently sells brand name tires at a wholesale price of $28.50 and private label tires for a price of $17. Are these prices optimal for the firm?

Question 37

You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. If your firm practices third-degree price discrimination to maximize profits, the marginal revenue:

A) in the foreign market will equal the marginal cost.
B) in the domestic market will equal the marginal cost.
C) in the domestic market will equal the marginal revenue in the domestic market.
D) all of the above
E) none of the above

Question 38

You produce stereo components for sale in two markets, foreign and domestic, and the two groups of consumers cannot trade with one another. You will charge the higher price in the market with the:

A) lower own price elasticity of demand (more inelastic demand).
B) higher own price elasticity of demand (more elastic demand).
C) larger teenage population.
D) greater consumer incomes.

Question 39

A lower east-side cinema charges $3.00 per ticket for children under 12 years of age and $5.00 per ticket for anyone 12 years of age or older. The firm has estimated that the price elasticity of demand for tickets purchased by those 12 years of age or older is -1.5. Calculate the elasticity of demand for tickets purchased for children under 12 years of age if prices are optimal.

Question 40

Which of the following is NOT a condition for third degree price discrimination?

A) Monopoly power
B) Different own price elasticities of demand
C) Economies of scale
D) Separate markets

Question 41

A local theater charges $5.00 for every matinee (daytime) ticket, but the ticket prices are much higher during the evening. This is an example of:

A) peak-load pricing.
B) second-degree price discrimination.
C) a two-part tariff.
D) bundling.
E) none of the above

Question 42

If there are open first-class seats available on a particular flight, some airlines allow customers with coach (discount) tickets to upgrade to first-class tickets during the electronic check-in process. Suppose the regular price of a first-class ticket is $800, the total price of the upgrade ticket (original price plus the upgrade) is $400, the marginal cost of serving both types of customers (full-fare and upgrade first-class flyers) is $100, and the airline maximizes profits. Which of the following statements is true?

A) MR for the full-fare customers must be higher than the MR from upgrade customers.
B) MR for the full-fare customers may be higher or lower than the MR from upgrades.
C) MR = MC for the full-fare customers, but the airline is willing to collect any positive amount from the upgrade customers.
D) MR must be the same for both full-fare and upgrade customers.

Question 43

In peak-load pricing,

A) marginal revenue is equal in both periods.
B) marginal revenue in the peak period is greater than in the off-peak period.
C) marginal revenue in the peak period is less than in the off-peak period.
D) the sum of the marginal revenues is greater than the sum of the marginal costs.

Question 44

Automobile manufacturers commonly sell new car models at the full suggested retail price during the first few years the car is on the market, and they do not offer rebates or discounts. After the initial sales period, the manufacturers typically offer rebates or discounts on these models. The marginal cost of manufacturing the cars is constant across time. Which of the following statements is true?

A) The firms practice peak-load pricing by charging a higher price in the initial sales period.
B) Early buyers have higher reservation prices for the new models, and the manufacturers maximize profits by charging these buyers a higher price.
C) The marginal revenue from buyers who purchase these cars after the initial sales period must be lower that the marginal revenue from early buyers.
D) To maximize profits, the firms equate the buyers' reservation prices across time.

Question 45

Figure 11.3.2
Refer to Figure 11.3.2 above. This figure is a representation of:

A) peak-load pricing, which amounts to first-degree price discrimination.
B) peak-load pricing, which amounts to second-degree discrimination.
C) peak-load pricing, which amounts to third-degree price discrimination.
D) peak-load pricing, which is different from third-degree price discrimination.

Question 46

Which of the following statements is NOT compatible with explanations for why peak-load pricing is more profitable than charging a single price?

A) Consumer willingness to pay for the product varies a lot across different time periods.
B) Marginal cost of production is much higher under peak demand.
C) Marginal revenue changes a lot across different time periods.
D) Marginal revenue must be the same across different time periods.

Question 47

The Genetron Electric Company provides electric power service to a three state region in the US. The annual demand for electric power in this region is Q = 4500 - 100P where quantity (Q) is measured in millions of kilowatt hours (kWh) and the price (P) is cents per kWh. The firm operates in a decreasing cost industry.
a. If the firm's marginal cost curve crosses the demand curve at P = 4 (i.e., 4 cents per kWh), what is the quantity demanded at this price? Why wouldn't the firm want to operate under marginal cost pricing?
b. If the firm's average cost curve crosses the demand curve at P = 5, what is the quantity demanded at this price? What are the firm's profits under average cost pricing?
c. Suppose Genetron uses a block pricing scheme with prices P1 = 15, P2 = 10, and P3 = AC. What quantity levels are associated with the first, second, and third blocks of annual electricity demanded?

Question 48

The BCY Corporation provides accounting services to a wide variety of customers, most of whom have had a business association with BCY for more than five years. BCY's demand and marginal revenue curves are:
P = 10,000 - 10Q
MR = 10,000 - 20Q.
BCY's marginal cost of service is:
MC = 5Q.
a. If BCY charges a uniform price for a unit of accounting service, Q, what price must it charge per unit, and how many units must it produce per time period in order to maximize profit? Calculate the consumer surplus.
b. If BCY could enforce first-degree price discrimination, what would be the lowest price that it would charge and how many units would it produce per time period?
c. With perfect price discrimination and ignoring any fixed cost, what is total profit? How much additional consumer surplus is captured by switching from a uniform price to first-degree price discrimination?

Question 49

The authors explain that the marginal cost of production does not have to be constant in order to maximize profits under intertemporal price discrimination. Which of the following is NOT an example of changing marginal costs under profit-maximizing intertemporal price discrimination?

A) Marginal cost increases sharply after the initial marketing stages when the product is sold to the broader market of consumers.
B) Marginal costs decline over time due to learning-by-doing.
C) Marginal costs decline over time because the producer sells less expensive versions of the product in later stages of marketing (e.g., hard-cover versus paper-cover books).
D) Marginal costs decline over time due to economies of scale.

Question 50

The industry demand curve for a particular market is:
Q = 1800 - 200P.
The industry exhibits constant long-run average cost at all levels of output, regardless of the market structure. Long-run average cost is a constant $1.50 per unit of output. Calculate market output, price (if applicable), consumer surplus, and producer surplus (profit) for each of the scenarios below. Compare the economic efficiency of each possibility.
a. Perfect Competition
b. Pure Monopoly (Hint: MR = 9 - 0.01Q)
c. First Degree Price Discrimination

Question 51

The price of on-campus parking from 8:00 AM to 5:00 PM, Monday through Friday, is $3.00. From 5:00 PM to 10:00 PM, Monday through Friday, the price is $1.00. At all other times parking is free. This is an example of:

A) bundling.
B) second-degree price discrimination.
C) a two-part tariff.
D) tying.
E) none of the above

Question 52

What is the key characteristic of profit maximizing price discrimination that distinguishes intertemporal price discrimination from peak-load pricing?

A) Peak-load pricing does not require MC = MR.
B) Marginal revenue may be different across different groups of buyers under intertemporal price discrimination.
C) Marginal costs are independent across time periods under peak-load pricing.
D) Marginal revenue must be constant under both pricing schemes.

Question 53

When the movie Jurassic Park debuted in Westwood, California, the price of tickets was $7.50. After several months the ticket price had fallen to $4.00. This is an example of:

A) peak-load pricing.
B) second-degree price discrimination.
C) a two-part tariff.
D) tying.
E) none of the above

Question 54

Club Med, which operates a number of vacation resorts, offers vacation packages at a lower price in the winter (i.e., the "off season") than in the summer. This practice is an example of:

A) peak-load pricing.
B) intertemporal price discrimination.
C) two-part tariff.
D) bundling.
E) Both A and B are correct.

Question 55

The Catawba River City Park has a low demand D₁ during work days, but on Saturday and Sunday demand increases to D₂ on Saturday and Sunday. The demand and marginal revenue functions are:
D₁ = P₁ = 2 - 0.001Q₁
MR₁ = 2 - 0.002Q₁
D₂ = P₂ = 20 - 0.01Q₂
MR₂ = 20 - 0.01Q₂
where Q = number of cars entering the park each day. The marginal cost of operating the park is the same on weekdays and weekends:
MC = 1 + 0.004Q.
a. In order to control crowds, the park's management uses peak-load pricing. This scheme controls crowds and makes sure the park is self-supporting. Calculate the appropriate prices to charge, and determine the number of cars entering the park, Q₁ and Q₂.
b. Explain how switching from a uniform pricing scheme to a peak load pricing scheme affects the market.

Question 56

When a company introduces new audio products, it often initially sets the price high and lowers the price about a year later. This is an example of:

A) a two-part tariff.
B) second-degree price discrimination.
C) intertemporal price discrimination.
D) first-degree price discrimination.

Question 57

A local restaurant offers "early bird" price discounts for dinners ordered from 4:30 to 6:30 PM. This is an example of:

A) peak-load pricing.
B) second-degree price discrimination.
C) a two-part tariff.
D) tying.
E) none of the above

Question 58

Figure 11.3.1
Refer to Figure 11.3.1 above. The price-discriminating firm earns a higher profit by:

A) charging a lower price as time goes by.
B) charging a lower price to the consumers who acquire the good first.
C) charging a higher price as time goes by.
D) charging an average of a high price and a low price over time.

Question 59

The Tire Shed is a regional chain that sells tires and other automobile parts. The company sells its own brand of tires under a block pricing scheme that charges $100 per tire if the customer buys one or two tires and $75 per tire if the customer buys three or four tires. The monthly demand curve facing the typical store is Q = 1000 - 4P, and the marginal cost of the tires is constant at $40 per tire.
a. What are the monthly profits for the typical store under the block pricing scheme? What is the consumer surplus enjoyed by customers of the typical store?
b. Suppose the firm is considering a uniform pricing scheme with P = $90 per tire. How does the firm profit and consumer surplus under uniform pricing compare to the profit and consumer surplus outcomes under block pricing?

Question 60

The local zoo has hired you to assist them in setting admission prices. The zoo's managers recognize that there are two distinct demand curves for zoo admission. One demand curve applies to those ages 12 to 64, while the other is for children and senior citizens. The two demand and marginal revenue curves are:
PA = 9.6 - 0.08QA
MRA = 9.6 - 0.16QA
PCS = 4 - 0.05QCS
MRCS = 4 - 0.10QCS
where PA = adult price, PCS = children's/senior citizens' price, QA = daily quantity of adults, and QCS = daily quantity of children and senior citizens. Crowding is not a problem at the zoo, so that the managers consider marginal cost to be zero.
a. If the zoo decides to price discriminate, what are the profit maximizing price and quantity in each market? Calculate total revenue in each sub-market.
b. What is the elasticity of demand at the quantities calculated in (a) for each market. Are these elasticities consistent with your understanding of profit maximization and the relationship between marginal revenue and elasticity?

Question 61

A national chain of bookstores has initiated a frequent buyer program. If you buy a frequent buyer card for $10, you are entitled to a 10 percent discount on all purchases for 1 year. This practice is an example of:

A) peak-load pricing.
B) intertemporal price discrimination.
C) two-part tariff.
D) bundling.
E) Both A and B are correct.

Question 62

Many cellular phone rate plans are structured as a combination of ________ price discrimination.

A) first-degree and second-degree
B) first-degree and third-degree
C) second-degree and third-degree
D) peak-load pricing and third-degree

Question 63

A firm setting a two-part tariff with only one customer should set the entry fee equal to:

A) marginal cost.
B) consumer surplus.
C) marginal revenue.
D) price.

Question 64

Customers attending basketball games at the local arena must pay for parking on the grounds and then pay for a ticket needed to enter the arena. If the arena manager knows that the customers' identical demands can be expressed collectively as
P = 25 - 0.000625Q
how much of a parking fee could the management collect if the marginal cost of providing entertainment were a constant MC = $10 per seat?

Question 65

An amusement park charges an entrance fee of $75 per person plus $2.50 per ride. This is an example of:

A) first-degree price discrimination.
B) a two-part tariff.
C) second-degree price discrimination.
D) bundling.
E) tying.

Question 66

A firm has two customers with non-identical demands and a constant marginal cost of production. At any positive price, the consumer surplus values for the two customers are related as CS₂ ≥ CS₁ . What can we say about the optimal two-part tariff for the firm?

A) The firm sets the price equal to MC and the optimal tariff is equal to CS₂.
B) The firm sets the price equal to MC and the optimal tariff is equal to CS₁.
C) The firm sets the price equal to MC and the optimal tariff is equal to zero.
D) The optimal price is greater than MC and the optimal tariff is equal to CS₁.

Question 67

Travelers driving through Gotham City can use a freeway or the Cross Town Tollway to get through the city. The tollway charges $1.00 per car during the morning rush hour (6-9 AM) and the afternoon rush hour (4-7 PM), and the toll is $0.40 per car at all other times. The weekly demand for using the tollway during rush hour is where quantity demanded is measured in thousands of cars, and the weekly demand for the non-rush hour period is Gotham City's marginal cost of operating the tollway is per car.
a. What are the marginal revenue curves associated with the two demand curves?
b. Has the city set the profit maximizing tolls for the Cross Town Tollway? If not, do the current tolls generate too much or too little traffic on the tollway?

Question 68

After graduation, you start an internet-based firm that allows people to buy and sell books online. Based on your market research, you believe there are two basic types of customers. The first type is the casual reader who has relatively low willingness-to-pay for your services, and their annual demand is Q1 = 30 - 40P where Q1 is the number of books traded per year and P is the price you charge per book traded. The second type of customer is the avid reader who has relatively high willingness-to-pay for your services, and their demand is Q2 = 100 - 50P. The marginal cost of your online service is $0.40 per book traded.
a. If you set your usage fee equal to the marginal cost, how many books will each type of customer trade on your system? What is the consumer surplus enjoyed by each type of customer?
b. What is the optimal entry fee that you should charge under a two-part tariff pricing scheme for access to your online market? How much consumer surplus is left for the two types of customers after they pay the entry fee and usage fee?

Question 69

Laughlin and Sons is a company that provides estate planning services to 100 wealthy clients. Although the clients have different wealth levels, their demands for the hourly estate planning services are identical. The aggregate annual demand for estate planning services facing Laughlin and Sons is where Q is the total hours of estate planning services and P is the hourly rate charged for the services, and the firm's total cost of providing the estate planning services is The firm wants to establish a two-part tariff scheme for charging the clients, and the fees include an annual fixed retainer (entry fee) plus an hourly rate (usage fee).
a. What is the firm's marginal cost of providing estate planning services? What is the demand curve for a representative client?
b. What are the profit maximizing levels for the retainer and hourly rate? What is the firm's aggregate annual profit under the two-part tariff scheme?
c. Suppose Laughlin and Sons has a local monopoly on estate planning services. What are the profit maximizing hourly rate (price) and quantity under a single-price monopoly? How does the profit earned under the single-price monopoly compare to the profit earned under the two-part tariff scheme?

Question 70

Figure 11.5.1
Refer to Figure 11.5.1 above. The points on the figure represent the reservation prices of four different consumers. With mixed bundling:

A) consumers A and D pay $90 for a single good, and consumers B and C pay $120 for a bundle.
B) consumers A and D pay $90 for a bundle, and consumers B and C pay $120 for a single good.
C) consumers A and D pay $90 for a bundle, and consumers B and C pay $120 for a bundle.
D) consumers A and D pay $90 for a single good, and consumers B and C pay $120 for a single good.

Question 71

The local cable TV company charges a "hook-up" fee of $30 per month. Customers can then watch programs on a "pay-per-view" basis (a fee is charged for every program watched). This is an example of:

A) peak-load pricing.
B) second-degree price discrimination.
C) a two-part tariff.
D) intertemporal price discrimination.
E) none of the above

Question 72

A firm has two customers and creates a two-part tariff with a usage fee (P) that exceeds the marginal cost of production and leaves each customer with positive consumer surplus such that CS₂ > CS₁ > 0. If the firm sets the entry fee equal to CS₂, then the number of customers that actually buy the product is equal to:

A) zero.
B) one.
C) two.
D) We don't have enough information to answer this question.

Question 73

Season ticket holders for the St. Louis Rams received a surprise when they read the applications forms to renew their season tickets. In order to get their season ticket to the Rams' home games, they also had to buy tickets to the preseason games. Many season ticket holders grumbled about this practice as an underhanded way for the St. Louis Rams to get more money from its season ticket holders. This practice is an example of:

A) peak-load pricing.
B) intertemporal price discrimination.
C) two-part tariff.
D) bundling.
E) Both A and B are correct.

Question 74

A pricing strategy that requires consumers pay an up-front fee plus an additional fee for each unit of product purchased is a:

A) tying contract.
B) two-part tariff.
C) form of perfect price discrimination.
D) none of these.

Question 75

Which of the following statements about setting optimal two-part tariffs for many consumers is NOT true?

A) The number of buyers (entrants) declines as the entrance fee (tariff) increases.
B) The profit from the entrance fee (tariff) is a concave function of the tariff because it first increases and then decreases as the tariff increases.
C) The profit from the entrance fee (tariff) is a convex function of the tariff because if first declines and then increases as the tariff increases.
D) The total profits is composed of the profit from the entrance fee (tariff) and from the profit from sales to buyers.

Question 76

For a two-part tariff imposed on two consumers, the entry fee is based on the:

A) consumer surplus of the customer with lower willingness-to-pay.
B) consumer surplus of the customer with higher willingness-to-pay.
C) simple average of the consumer surplus for the two buyers.
D) none of the above

Question 77

Figure 11.5.1
The pricing technique known as tying:

A) permits a firm to meter demand.
B) permits a firm to practice price discrimination.
C) enables a firm to extend its monopoly power to new markets.
D) all of the above

Question 78

For most residential telephone service, people pay a monthly fee to have a hookup to the telephone company's line plus a fee for each call actually made. Under this pricing scheme, the telephone company is using:

A) limit pricing.
B) a two-part tariff.
C) second-degree price discrimination.
D) two stage price discrimination.

Question 79

Shooting Star Books is a small publishing company that specializes in science fiction books. Like most publishers, Shooting Star releases new books in hardcover form and later releases paperback versions of the books. The marginal cost of printing both types of books is $2 per book, and Shooting Star maximizes profits by practicing intertemporal price discrimination. The annual demand for recently released (hardcover) books is where quantity demanded is measured in thousands of books and price is measured in dollars per book. The annual demand for the paperback version of previously released books is a. What are the marginal revenue curves associated with the two demand curves for books?
b. What are the profit maximizing prices for hardcover and paperback books? What are the quantities of books demanded at these prices for hardcover and paperback books?
c. Suppose the market demand for paperback books shifts to How does this change affect the profit maximizing price and quantity in the paperback book market? Does this change affect the profit maximizing outcome in the hardcover book market?

Question 80

Merriwell Corporation has a virtual monopoly in the ultra-high speed computer market. Merriwell has recently introduced a new computer that will be used by satellite installations around the world. The installations have identical demands for the computers. Merriwell's managers have decided to lease rather than sell the computer, but they have been unable to decide whether to use a single hourly rental charge or a two-part tariff. Under the two-part tariff, users would be levied an "access charge" plus an hourly rental rate. Merriwell's marketing staff estimates the demand and marginal revenue curves below for each potential user:
P = 45 - 0.025Q
MR = 45 - 0.05Q,
where P = price per hour of computer time, and Q = the number of hours of computer time leased per month. Merriwell offers their users extensive maintenance assistance and technical support. The firm's engineers estimate that marginal cost is $30 per computer hour.
a. Assuming that Merriwell chooses to set a single price, what are the firm's profit maximizing price and output?
b. Assuming that Merriwell uses a two-part tariff, what "access charge" and hourly rental fee should the firm set? Compare the firm's revenues under the options in (a) and (b).
c. Briefly describe how differing demand curves among the various buyers would alter the two-part tariff.