Question 1

When a monopolist engages in perfect price discrimination,

Accepted Answer

In perfect price discrimination, the monopolist charges each customer their reservation price (the maximum price they are willing to pay), which means the firm captures all consumer surplus. As a result, the demand curve for each individual customer becomes the firm's marginal revenue curve, and they are identical. Therefore, choice B is correct. The marginal revenue curve lies below the demand curve in regular monopoly pricing, and marginal cost becoming zero or the marginal revenue curve becoming horizontal are not necessarily related to perfect price discrimination.

Question 2

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:

Accepted Answer

This is an example of third-degree price discrimination, as the grocery store is offering different prices (discounts) to different groups of customers (those with coupons).

Question 3

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

Accepted Answer

Under perfect price discrimination, marginal profit at each level of output is equal to the difference between price and marginal cost (P - MC), because the producer is able to charge each individual customer the maximum price they are willing to pay. Therefore, the best choice is C.

Question 4

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

Accepted Answer

In a perfect first-degree price discriminator, the firm charges each unit of output at the maximum willingness to pay of the consumer. The incremental revenue is equal to the price paid for each unit of output. Therefore, the correct answer is C.

Question 5

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:

Accepted Answer

The answer of Bindy, an 18-year-old high school graduate, and...

Question 6

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:

Accepted Answer

The firm should sell less output in the local market and more on the internet auction site as the marginal revenue is higher on the auction site. This will increase the overall profit of the firm.

Question 7

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?

Accepted Answer

To maximize profits, MNO Limited should set prices where marginal revenue equals marginal cost. Marginal revenue is equal to the price charged multiplied by the elasticity of demand. Marginal cost for MNO Limited is $0.50 in both markets.

For the West Coast market, the price should be set where:

($1 + $2.50) / 2 = $1.75

The elasticity of demand on the West Coast (-1.50) is more elastic than the East Coast elasticity (-1.25), meaning that a price increase will lead to a larger decrease in demand. Therefore, the price on the West Coast should be lower than the price on the East Coast.

For the East Coast market, the price should be set where:

($1 + $2.50) / 2 = $1.75

Therefore, the optimal prices to maximize profits are $1.50 on the West Coast and $2.50 on the East Coast.

Question 8

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?

Accepted Answer

The answer of Your local grocery store offers a coupon...

Question 9

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?

Accepted Answer

The answer of Calloway Shirt Manufacturers sells knit shirts in...

Question 10

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?

Accepted Answer

To determine the optimal discount, we need to use the formula:

%ΔQ / %ΔP = -E

where %ΔQ is the percentage change in quantity demanded, %ΔP is the percentage change in price, and E is the elasticity of demand.

For coupon users:

-3 = %ΔQ / %ΔP

Solving for %ΔP:

%ΔP = %ΔQ / -3

Now, we can use the formula:

%ΔQ = (Q2 - Q1) / Q1 x 100%

where Q1 is the initial quantity demanded, and Q2 is the quantity demanded after the discount.

Let's assume that initially, Johnny's Shop-and-Pay sells 100 boxes of detergent at $10 per box, for a total revenue of $1000.

If they offer a discount of x%, the new price will be $10 - (x/100) x $10 = $10(1 - x/100).

For coupon users, the new price elasticity of demand will be:

-3 = %ΔQ / %ΔP 
-3 = ((Q2 - 100) / 100) / (%ΔP / 100)
-3 = (Q2 - 100) / 100 x (100 / %ΔP)
%ΔP = %ΔQ / -3
%ΔP = (Q2 - 100) / 300
Q2 = 100 - 300 x %ΔP

For non-users of the coupon, the new price elasticity of demand will be:

-1.5 = %ΔQ / %ΔP 
-1.5 = ((Q2 - 100) / 100) / (%ΔP / 100)
-1.5 = (Q2 - 100) / 100 x (100 / %ΔP)
%ΔP = %ΔQ / -1.5
%ΔP = (Q2 - 100) / 150
Q2 = 100 - 150 x %ΔP

To maximize profit, we need to find the discount that will maximize total revenue. Total revenue is calculated as:

TR = P x Q

where P is the price per unit, and Q is the quantity demanded.

For coupon users:

TR = ($10(1 - x/100)) x (100 - 300 x %ΔP)
TR = $10(1 - x/100) x (100 - 300 x ((Q2 - 100) / 300))
TR = $10(1 - x/100) x (100 - Q2 + 100)
TR = $10(1 - x/100) x (200 - Q2)

For non-users of the coupon:

TR = ($10(1 - x/100)) x (Q2 - 100)
TR = $10(1 - x/100) x (100 - 150 x %ΔP - 100)
TR = $10(1 - x/100) x (-50 + 150 x %ΔP)
TR = $10(1 - x/100) x (-50 + 150 x ((Q2 - 100) / 150))
TR = $10(1 - x/100) x (-50 + Q2 - 100)
TR = $10(1 - x/100) x (Q2 - 150)

To find the optimal discount, we need to take the derivative of each equation with respect to x, set it equal to zero, and solve for x:

For coupon users:

dTR/dx = 10(200 - Q2)/100 - 10(1 - x/100)(-300/100) = 0
200 - Q2 + 3x = 0
Q2 = 200 - 3x

For non-users of the coupon:

dTR/dx = -10(Q2 - 150)/100 - 10(1 - x/100)(-150/100) = 0
Q2 - 150 + 1.5x = 0
Q2 = 150 - 1.5x

Now we can substitute Q2 from one equation into the other:

200 - 3x = 150 - 1.5x
50 = 1.5x
x = 33.33

Therefore, the optimal discount to provide for coupon users is 50% off, since this discount will yield the highest total revenue.

Question 11

Under perfect price discrimination, consumer surplus:

Accepted Answer

Under perfect price discrimination, a seller charges each buyer their maximum willingness to pay, thus capturing all the consumer surplus and leaving the consumer surplus equal to zero.

Question 12

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?

Accepted Answer

The correct ratio of price elasticities of demand in the two markets under third-degree price discrimination cannot be determined solely based on the prices charged in each market. The formula for determining the ratio of price elasticities involves not just the prices but also the marginal cost and quantities sold in each market, none of which are provided in the question.

Question 13

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:

Accepted Answer

The answer of The manager of a firm is attempting...

Question 14

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?

Accepted Answer

In third-degree price discrimination, the firm sets different prices for different groups of consumers based on their price elasticity of demand. To maximize profits, the firm should produce where marginal revenue equals marginal cost in each market (MR1U1B1AS1U1B0 = MC and MR1U1B1BS1U1B0 = MC) and charge a price that corresponds to the demand curve in each market (P1U1B1AS1U1B0, P1U1B1BS1U1B0). Therefore, the best choice is C, where the firm sets prices in each market based on the respective market's demand curve and produces where marginal revenue equals marginal cost in each market. This strategy ensures that the firm maximizes its profits in both markets.

Question 15

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?

Accepted Answer

When the price elasticity of demand is greater abroad, the firm can increase total revenue by lowering the price abroad, as consumers are more responsive to price changes.

Question 16

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?

Accepted Answer

The answer of American Tire and Rubber Company sells identical...

Question 17

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:

Accepted Answer

When a firm practices third-degree price discrimination, it charges different prices for the same product in different markets based on the willingness to pay of consumers in each market. To maximize profits, the firm sets the output where marginal revenue (MR) equals marginal cost (MC) in each market. Therefore, both in the foreign and domestic markets, the marginal revenue of the firm will equal the respective market's marginal cost. Hence, the correct answer is D - all of the above.

Question 18

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:

Accepted Answer

Charging a higher price in a market with a lower own price elasticity of demand (more inelastic demand) will result in a smaller decrease in quantity demanded in response to the higher price, leading to higher profits. If the market has a higher own price elasticity of demand (more elastic demand), a higher price will lead to a larger decrease in quantity demanded and may result in lower profits. The teenage population and consumer incomes are not directly related to the own price elasticity of demand, so they are not relevant to this decision.

Question 19

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.

Accepted Answer

The answer of A lower east-side cinema charges $3.00 per...

Question 20

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

Accepted Answer

Economies of scale is not a condition for third degree price discrimination. The other three conditions, monopoly power, different own price elasticities of demand, and separate markets, are necessary for third degree price discrimination to be effective.

Quiz 11: Pricing With Market Power

When a monopolist engages in perfect price discrimination,

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:

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

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

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:

Under perfect price discrimination, consumer surplus:

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 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?

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?

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:

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:

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