Question 1

If a firm faces a high demand during the summer months and a low demand during the winter months, peak- load pricing can increase the firm's profits compared to charging the same price in the summer and winter months.

Accepted Answer

Peak-load pricing involves charging higher prices during times of high demand and lower prices during times of low demand. By adopting this pricing strategy, the firm can maximize its profits during the summer months when demand is high and charge lower prices during the winter months to maintain demand. This can result in higher overall profits compared to charging the same price year-round.

Question 2

The price elasticity of demand for Rosie's Roses fresh flowers the week of Valentine's Day is 1.40 and is 2.25 other days of the year. If Rosie's Roses faces a constant marginal cost of $2 per rose, what is the profit- maximizing off- peak load price to charge on days not on the week of Valentine's Day?
A)$5.80
B)$7.00
C)$2.50
D)$3.60

Accepted Answer

The answer of The price elasticity of demand for Rosie's...

Question 3

If a firm is practicing two- part pricing and it is ______charging a user fee that is its marginal cost, it has customers with_______ demands.
A)greater than; nonidentical
B)greater than; identical
C)less than; nonidentical
D)less than; identical

Accepted Answer

In a two-part pricing strategy, if a firm charges a user fee greater than its marginal cost, it implies that the firm is dealing with customers who have nonidentical demands. This allows the firm to extract more consumer surplus from those with higher willingness to pay.

Question 4

If Best Dogs only sells their hot dogs in packages of eight, all of the following are true except which one?
A)Best Dogs is practicing second- degree price discrimination.
B)Best Dogs has market power.
C)Best Dogs is changing consumer surplus into profit.
D)Best Dogs' customers are spending the consumer surplus they would have received on the first few hot dogs on the last few hot dogs.

Accepted Answer

Selling hot dogs only in packages of eight does not qualify as second-degree price discrimination, as there is no variation in the price based on the quantity being purchased. The other options are all true: Best Dogs has market power in its ability to restrict the number of hot dogs sold per package, it is converting consumer surplus into profit by forcing customers to purchase more hot dogs than they may have originally wanted, and the customers are indeed spending the consumer surplus from the first few hot dogs on the last few hot dogs.

Question 5

It is not possible for a single firm to combine different types of nonlinear pricing.

Accepted Answer

It is possible for a single firm to combine different types of nonlinear pricing, such as two-part tariffs and third-degree price discrimination.

Question 6

If the golfers at Green Golf all have identical demands and Green Golf practices two- part pricing, the profit- maximizing user fee is ______Green Golf's marginal cost.
A)greater than
B)less than
C)equal to
D)one- half of

Accepted Answer

In a two-part pricing strategy, the profit-maximizing user fee is set equal to the marginal cost to maximize the quantity sold while extracting consumer surplus through a fixed fee.

Question 7

In order to practice any of the advanced pricing techniques, a firm must have some market power.

Accepted Answer

Market power refers to a firm's ability to influence the price of a good or service in the market. Without market power, a firm cannot set prices or engage in pricing strategies such as price discrimination, which are essential for advanced pricing techniques. Therefore, a firm must have some degree of market power to practice advanced pricing techniques.

Question 8

If a firm offers a quantity discount, this is an example of an all- or- nothing offer.

Accepted Answer

Quantity discounts are not all-or-nothing offers, as the discount applies only to the specific quantity purchased and does not require the customer to purchase all or nothing.

Question 9

If Big Box Store has customers with identical demands, if it practices two- part pricing, the profit- maximizing access fee is ______the consumer surplus.
A)equal to
B)greater than
C)less than
D)exactly double

Accepted Answer

In a two-part pricing strategy, the profit-maximizing access fee is set equal to the consumer surplus to capture the maximum willingness to pay of the consumers, thus maximizing profits.

Question 10

If Healthy Bars labels its snack bars "not for resale", Healthy Bars is attempting to prevent arbitrage.

Accepted Answer

"Not for resale" labeling on products is a common tactic used to prevent third-party resellers from buying and reselling the product at a higher price. This is known as arbitrage. Therefore, if Healthy Bars labels its snack bars "not for resale", it is attempting to prevent arbitrage.

Question 11

If Best Dogs only sells their hot dogs in packages of eight, all of the following are true except which one?
A)Best Dogs is practicing commodity bundling.
B)Best Dogs has market power.
C)Best Dogs is changing consumer surplus into profit.
D)Best Dogs is using an all- or- nothing pricing scheme.

Accepted Answer

Best Dogs is not practicing commodity bundling, as the product being sold (hot dogs) cannot be unbundled into smaller components. The company is simply selling a specific quantity of hot dogs in each package, which is known as a quantity bundling strategy. However, the other three statements are true: Best Dogs likely has market power if it can sell hot dogs in packages of eight with no close substitutes; by limiting the quantity options for consumers, Best Dogs is effectively changing consumer surplus into profit; and by only offering one package size, Best Dogs is using an all-or-nothing pricing scheme.

Question 12

The price elasticity of demand for a rental home in Luxury Resorts in the summer is 1.40 and is 2.60 in the spring. If Luxury Resorts faces a constant marginal cost of $600 per home rental, what is the profit- maximizing off- peak load price to charge in the spring?
A)$2,100
B)$975
C)$850
D)$575

Accepted Answer

We can use the formula for profit-maximizing price:

Price = Marginal Cost / (1 + 1/Elasticity)

For spring, Price = $600 / (1 + 1/2.6) = $975.38

Since we are asked for the closest rounded answer, the best choice is B) $975.

Question 13

If Best Dogs only sells their hot dogs in packages of eight, all of the following are true except which one?
A)Best Dogs has market power.
B)Best Dogs is using an all- or- nothing pricing scheme.
C)Best Dogs' customers are spending the consumer surplus they would have received on the first few hot dogs on the last few hot dogs.
D)Best Dogs is trying to prevent arbitrage.

Accepted Answer

The answer of If Best Dogs only sells their hot...

Question 14

The price elasticity of demand for Rosie's Roses fresh flowers the week of Valentine's Day is 1.10 and is 1.60 other days of the year. If Rosie's Roses faces a constant marginal cost of $0.75 per rose, what is the profit- maximizing peak- load price to charge the week of Valentine's Day?
A)$8.25
B)$6.50
C)$2.00
D)$11.00

Accepted Answer

The profit-maximizing price, $P$, can be found using the formula $P = MC \times \frac{E}{E - 1}$, where $MC$ is the marginal cost and $E$ is the price elasticity of demand. For Valentine's Day, with $MC = $0.75$ and $E = 1.10$, the calculation is $P = 0.75 \times \frac{1.10}{1.10 - 1} = 0.75 \times \frac{1.10}{0.10} = 0.75 \times 11 = $8.25$.

Question 15

If the golfers at Green Golf have nonidentical demands, the profit- maximizing user fee is______ Green Golf's marginal cost.
A)equal to
B)greater than
C)one- half of
D)less than

Accepted Answer

When golfers have nonidentical demands, the profit-maximizing user fee is greater than the marginal cost. This is because the golf course can charge higher prices to those with a higher willingness to pay, thus maximizing profits beyond just covering marginal costs.

Question 16

The price elasticity of demand for Rosie's Roses fresh flowers the week of Valentine's Day is 1.40 and is 2.25 other days of the year. If Rosie's Roses faces a constant marginal cost of $2 per rose, what is the profit- maximizing peak- load price to charge the week of Valentine's Day?
A)$7.00
B)$5.60
C)$3.60
D)$9.50

Accepted Answer

The profit-maximizing price can be calculated using the formula: P = MC / (1 - 1/Ed), where P is the price, MC is the marginal cost, and Ed is the price elasticity of demand. For Valentine's Day, Ed = 1.40 and MC = $2. So, P = 2 / (1 - 1/1.40) = $7.00.

Question 17

If the golfers at Green Golf all have identical demands and Green Golf practices two- part pricing, the profit- maximizing access fee is______ the consumer surplus.
A)equal to
B)exactly double
C)less than
D)greater than

Accepted Answer

In a two-part pricing strategy, the profit-maximizing access fee is set equal to the consumer surplus to extract the maximum willingness to pay from consumers without deterring them from purchasing the service.

Question 18

The price elasticity of demand for a rental home in Luxury Resorts in the summer is 1.40 and is 2.60 in the spring. If Luxury Resorts faces a constant marginal cost of $600 per home rental, what is the profit- maximizing peak- load price to charge in the summer?
A)$2,750
B)$975
C)$1,250
D)$2,100

Accepted Answer

The answer of The price elasticity of demand for a...

Question 19

The price elasticity of demand for Rosie's Roses fresh flowers the week of Valentine's Day is 1.10 and is 1.60 other days of the year. If Rosie's Roses faces a constant marginal cost of $0.75 per rose, what is the profit- maximizing off- peak load price to charge on days not on the week of Valentine's Day?
A)$1.25
B)$8.50
C)$2.00
D)$5.00

Accepted Answer

First, we need to determine the optimal price to charge on Valentine's Day. Based on the price elasticity of demand, we know that it is lower (i.e. more inelastic) on Valentine's Day (PED = 1.10) compared to other days of the year (PED = 1.60).

To find the optimal price on Valentine's Day, we can use the following formula:

optimal price = (1 + 1/ PED) x marginal cost

Substituting in the values, we get:

optimal price = (1 + 1/1.10) x $0.75 = $1.41

Therefore, the optimal price to charge on Valentine's Day is $1.41 per rose.

Next, we need to determine the optimal price to charge on all other days of the year. Since demand is more elastic on these days, we should aim for a lower price to increase demand and maximize profits.

Using the same formula as above, we get:

optimal price = (1 + 1/1.60) x $0.75 = $1.47

However, this price is not feasible as it is lower than the marginal cost of producing the roses. Therefore, we need to adjust the price to cover the cost while still attracting customers.

Assuming a rounded price, we can try $2.00 per rose. Using the midpoint formula for price elasticity of demand, we can check the elasticity of demand at this price:

% change in quantity demanded = ((new quantity - old quantity) / ((new quantity + old quantity) / 2)) x 100%

% change in price = ((new price - old price) / ((new price + old price) / 2)) x 100%

PED = % change in quantity demanded / % change in price

Let's assume that at the original price of $2.50, the quantity demanded was 1,000 roses. At the new price of $2.00, the quantity demanded increases to 1,400 roses.

% change in quantity demanded = ((1,400 - 1,000) / ((1,400 + 1,000) / 2)) x 100% = 40%

% change in price = ((2.00 - 2.50) / ((2.00 + 2.50) / 2)) x 100% = -20%

PED = 40% / -20% = -2

Since the absolute value of PED is greater than 1, demand is elastic at this price. This means that a decrease in price will result in a more than proportionate increase in quantity demanded. Therefore, a price of $2.00 per rose is a feasible and optimal price to charge on days not on the week of Valentine's Day.

The answer is C) $2.00.

Question 20

If Big Box Store has customers with identical demands, if it practices two- part pricing, the profit- maximizing user fee is______ the marginal cost of Big Box Store's product.
A)equal to
B)less than
C)exactly double
D)greater than

Accepted Answer

In two-part pricing, the profit-maximizing user fee is set equal to the marginal cost to ensure efficient consumption levels.

Quiz 10: Advanced Pricing Decisions

If a firm faces a high demand during the summer months and a low demand during the winter months, peak- load pricing can increase the firm's profits compared to charging the same price in the summer and winter months.

If a firm is practicing two- part pricing and it is charging a user fee that is its marginal cost, it has customers with_ demands.

If Best Dogs only sells their hot dogs in packages of eight, all of the following are true except which one?

It is not possible for a single firm to combine different types of nonlinear pricing.

If the golfers at Green Golf all have identical demands and Green Golf practices two- part pricing, the profit- maximizing user fee is ______Green Golf's marginal cost.

In order to practice any of the advanced pricing techniques, a firm must have some market power.

If a firm offers a quantity discount, this is an example of an all- or- nothing offer.

If Big Box Store has customers with identical demands, if it practices two- part pricing, the profit- maximizing access fee is ______the consumer surplus.

If Healthy Bars labels its snack bars "not for resale", Healthy Bars is attempting to prevent arbitrage.

If Best Dogs only sells their hot dogs in packages of eight, all of the following are true except which one?

The price elasticity of demand for a rental home in Luxury Resorts in the summer is 1.40 and is 2.60 in the spring. If Luxury Resorts faces a constant marginal cost of $600 per home rental, what is the profit- maximizing off- peak load price to charge in the spring?

If Best Dogs only sells their hot dogs in packages of eight, all of the following are true except which one?

The price elasticity of demand for Rosie's Roses fresh flowers the week of Valentine's Day is 1.10 and is 1.60 other days of the year. If Rosie's Roses faces a constant marginal cost of $0.75 per rose, what is the profit- maximizing peak- load price to charge the week of Valentine's Day?

If the golfers at Green Golf have nonidentical demands, the profit- maximizing user fee is______ Green Golf's marginal cost.

The price elasticity of demand for Rosie's Roses fresh flowers the week of Valentine's Day is 1.40 and is 2.25 other days of the year. If Rosie's Roses faces a constant marginal cost of $2 per rose, what is the profit- maximizing peak- load price to charge the week of Valentine's Day?

If the golfers at Green Golf all have identical demands and Green Golf practices two- part pricing, the profit- maximizing access fee is______ the consumer surplus.

The price elasticity of demand for a rental home in Luxury Resorts in the summer is 1.40 and is 2.60 in the spring. If Luxury Resorts faces a constant marginal cost of $600 per home rental, what is the profit- maximizing peak- load price to charge in the summer?

If Big Box Store has customers with identical demands, if it practices two- part pricing, the profit- maximizing user fee is______ the marginal cost of Big Box Store's product.