Question 1

The purpose of randomized pricing is to reduce:

Accepted Answer

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 2

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

Accepted Answer

A)  -1/2 
B)  -2/3 
C)  -1.0 
D)  -2.0

Question 3

What price should a firm charge for a package of five ties given a marginal cost of $5 and an inverse demand function P = 10 - Q by the representative consumer?

Accepted Answer

A)  $12.50 
B)  $25 
C)  $37.50 
D)  $50

Question 4

You are the only pharmacist in a small town; the next closest drugstore is 50 miles away. The population in your town consists of young farmers and older retired families. You have noticed that the young farmers are less sensitive to price changes than the retired population. Specifically, you have found that the working population has an own price elasticity of demand of -2 and the retired farmers have an own price elasticity of -4. How can you use this information to your advantage?

Accepted Answer

The answer of You are the only pharmacist in a...

Question 5

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?

Accepted Answer

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

Question 6

A monopoly produces widgets at a marginal cost of $20 per unit and zero fixed costs. It faces an inverse demand function given by P = -100 - 4Q. Suppose fixed costs rise to $401. What happens in the market?

Accepted Answer

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

Question 7

Suppose that Verizon Wireless has hired you as a consultant to determine what price it should set for calling services. Suppose that an individual's inverse demand for wireless services in the greater Boston area is estimated to be P = 100 - 33Q and the marginal cost of providing wireless services to the area is $1 per minute. Compute consumer surplus when Verizon Wireless charges an optimal two-part price.

Accepted Answer

A)  $0 
B)  $74.25 
C)  $148.50 
D)  There is insufficient information to compute consumer surplus.

Question 8

Suppose a typical consumer's inverse demand function for bottled water at a resort area where one firm owns all the rights to a local spring is given by P = 15 - 3Q. The marginal cost for gathering and bottling the water is $3 per gallon. Find the optimal number of bottles to package together for sale and the profit-maximizing price to charge for the package. Show the solution graphically.

Accepted Answer

The answer of Suppose a typical consumer's inverse demand function...

Question 9

Refer to the figure below. During low-peak times, what price-quantity combination should the firm charge to maximize profit?

Accepted Answer

A)  P1 and Q1 
B)  P3 and Q1 
C)  P1 and Q2 
D)  P2 and Q1

Question 10

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:

Accepted Answer

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

Question 11

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

Accepted Answer

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

Question 12

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?

Accepted Answer

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 13

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?

Accepted Answer

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

Question 14

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

Accepted Answer

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

Question 15

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:

Accepted Answer

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

Question 16

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?

Accepted Answer

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

Question 17

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?

Accepted Answer

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

Question 18

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?

Accepted Answer

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

Question 19

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?

Accepted Answer

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 20

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

Accepted Answer

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

Exam 11: Pricing Strategies for Firms With Market Power