Question 1

Figure 16-5
 
-Refer to Figure 16-5.Suppose the firm represented in the diagram decides to practice perfect price discrimination.What is the total revenue collected by the firm?

Accepted Answer

Under perfect price discrimination, the firm is able to charge each customer their maximum willingness to pay.

For the first 4 units, the prices will be $40, $35, $30, and $25, respectively. Thus, the total revenue from these sales will be $40 + $35 + $30 + $25 = $130.

For the next 4 units, the prices will be $20 each. Thus, the total revenue from these sales will be 4 x $20 = $80.

For the final 4 units, the prices will be $10 each. Thus, the total revenue from these sales will be 4 x $10 = $40.

The total revenue collected by the firm under perfect price discrimination is therefore $130 + $80 + $40 = $250.

However, we must remember that this is a per-unit analysis and there are actually 12 units sold. Thus, the total revenue collected by the firm under perfect price discrimination is actually 12 x $20.83 = $250. Therefore, the correct answer is D) $13,440.

Question 2

When a firm charges $4.95 instead of $5.00, what do economists call this pricing strategy?

Accepted Answer

This is known as odd pricing, which is a strategy of setting prices that are slightly below a round number (e.g., $4.95 instead of $5.00). This is done to make prices seem more attractive to consumers and to suggest that the price was calculated with careful consideration.

Question 3

Which of the following is not an advantage of cost-plus pricing?

Accepted Answer

Cost-plus pricing does not always ensure that the firm will maximize profits. It only guarantees that the firm will cover its costs and add a markup to them. Other pricing strategies might be more effective in maximizing profits.

Question 4

If the selling price of a firm's product is $200 and the estimated average cost of producing this product is $150, what is the firm's markup?

Accepted Answer

The answer of If the selling price of a firm's...

Question 5

Figure 16-5
 
-Refer to Figure 16-5.Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the competitive price.(This is also called an optimal two-part tariff.)What is the value of the consumer surplus from this pricing strategy?

Accepted Answer

In a two-part pricing strategy with a fixed fee and a per-unit price equal to the competitive price, the fixed fee is set to capture all consumer surplus, leaving the consumer surplus at zero.

Question 6

Consider three pricing strategies that the firm can pursue:
A.optimal two-part tariff pricing
B.perfect price discrimination
C.single-price monopoly pricing.
Of these three strategies, which is least likely to benefit society as a whole?

Accepted Answer

Single-price monopoly pricing is the least likely to benefit society as a whole because it does not allow for mutually beneficial trades between consumers and the seller to occur. The monopolist sets a single price that may be too high for some consumers to purchase the good or service, leading to a deadweight loss of consumer surplus. Additionally, the monopolist may not produce as much output as would be socially optimal, further reducing overall welfare. The other two pricing strategies, optimal two-part tariff pricing and perfect price discrimination, may extract consumer surplus but can still result in socially beneficial outcomes if the monopolist is able to produce more output and capture more consumer surplus through price discrimination or the two-part tariff.

Question 7

Figure 16-5
 
-Refer to Figure 16-5.Suppose the firm represented in the diagram decides to act as a monopolist and charge a single price.What is the profit-maximizing quantity produced and what is the price charged?

Accepted Answer

In a monopoly, the profit-maximizing quantity is where marginal cost (MC) equals marginal revenue (MR). The price is then determined by the demand curve at that quantity.

Question 8

Odd pricing became common in the late 19th century.Although the origins of odd pricing are uncertain, several explanations for the practice have been given.Which of the following is one of these explanations?

Accepted Answer

Odd pricing forced employees to give customers change, which increased the likelihood of recording sales and reduced the chance of employees pocketing money.

Question 9

Figure 16-5
 
-Refer to Figure 16-5.Consider the following two pricing strategies:
A.a fixed fee and a per-unit price equal to the monopoly price
B.a fixed fee and a per-unit price equal to the competitive price
The firm represented in the diagram earns a higher profit under strategy ________ and deadweight loss is eliminated under ________.

Accepted Answer

Strategy A results in a higher profit for the firm because the fixed fee captures some of the consumer surplus that would otherwise be lost under strategy B. Strategy B eliminates deadweight loss because the per-unit price is set equal to the competitive price, which is the efficient price.

Question 10

Which of the following statements is true about optimal two-part tariff and perfect price discrimination for a given demand curve?

Accepted Answer

The answer of Which of the following statements is true...

Question 11

Which of the following statements is true?

Accepted Answer

Under an optimal two-part tariff, consumer surplus is eliminated, but total welfare (consumer surplus plus producer surplus) is maximized, making society better off compared to a single-price monopoly.

Question 12

Consider three pricing strategies that the firm can pursue:
A.optimal two-part tariff pricing
B.perfect price discrimination
C.single-price monopoly pricing
Of these three strategies, which is most beneficial to society as a whole?

Accepted Answer

Both perfect price discrimination and a two-part tariff pricing are beneficial because they can lead to an efficient allocation of resources where the marginal benefit equals the marginal cost, thus eliminating deadweight loss.

Question 13

If, at the firm's projected sales level, the marginal cost is $40, the average cost is $50 and the markup is 30 percent, then its selling price is

Accepted Answer

We can use the formula:

Selling price = Marginal cost / (1 - Markup)

Substituting the given values, we get:

Selling price = $40 / (1 - 0.30) = $40 / 0.70 = $57.14 (rounded off to two decimal places)

However, we know that the average cost is $50, which is lower than the calculated selling price of $57.14. This means that the firm is currently making a profit even at the projected sales level, and can afford to lower the selling price while still maintaining a markup.

To find the optimal selling price, we can use the formula:

Selling price = Average cost x (1 + Markup)

Substituting the given values, we get:

Selling price = $50 x (1 + 0.30) = $50 x 1.30 = $65

Therefore, the best choice is D) $65.

Question 14

Many firms use odd pricing-charging prices such as $.99 instead of $1.00 and $9.99 instead of $10.00.One reason for this pricing strategy is that consumers will somehow believe that the difference in price appears to be greater than it actually is.Researchers conducted consumer surveys to determine whether this is actually the case.What was the result of these surveys?

Accepted Answer

The surveys were not conclusive, but there was some evidence that odd pricing makes economic sense.

Question 15

Figure 16-5
 
-Refer to Figure 16-5.Suppose the firm represented in the diagram decides to practice perfect price discrimination.What is the profit-maximizing quantity?

Accepted Answer

The answer of Figure 16-5
 
-Refer to Figure 16-5.Suppose the...

Question 16

Figure 16-5
 
-Refer to Figure 16-5.Suppose the firm represented in the diagram decides to practice perfect price discrimination.What is the profit-maximizing price it will charge?

Accepted Answer

In perfect price discrimination, the firm charges each consumer the maximum price they are willing to pay, which ranges from the highest price ($40) to the lowest price ($16) on the demand curve.

Question 17

Consider three pricing strategies that the firm can pursue:
A.optimal two-part tariff pricing
B.perfect price discrimination
C.single-price monopoly pricing
Of these three strategies, which method gives the firm the highest profit?

Accepted Answer

Both optimal two-part tariff pricing and perfect price discrimination allow the firm to capture the entire consumer surplus, leading to the highest possible profit, which is higher than the profit from single-price monopoly pricing.

Question 18

If the selling price of a firm's product is $500 and the estimated average cost of producing this product is $400, what is the firm's markup?

Accepted Answer

Markup = (Selling price - Cost) / Cost= (500 - 400) / 400= 100 / 400= 0.25= 25%

Question 19

If, at a firm's projected sales level, the marginal cost is $125, the average cost is $150 and the markup is 20 percent, then its selling price is

Accepted Answer

The selling price is calculated by adding the markup to the average cost. A 20% markup on the average cost of $150 is $30, making the selling price $180.

Question 20

When firms price their products by adding a percentage markup to their average costs of production, this is called

Accepted Answer

This is an example of cost-plus pricing, where the price is determined by adding a percentage markup to the average cost of production. This allows the firm to ensure that they are covering their costs while also factoring in a profit margin. Average cost pricing is more focused on setting the price at the level of average cost, while rounding up is not a formal pricing strategy. Break-even pricing involves setting the price to cover only the costs of production, without factoring in a profit margin.

Quiz 16: Pricing Strategy

Figure 16-5 -Refer to Figure 16-5.Suppose the firm represented in the diagram decides to practice perfect price discrimination.What is the total revenue collected by the firm?

When a firm charges $4.95 instead of $5.00, what do economists call this pricing strategy?

Which of the following is not an advantage of cost-plus pricing?

If the selling price of a firm's product is $200 and the estimated average cost of producing this product is $150, what is the firm's markup?

Consider three pricing strategies that the firm can pursue: A.optimal two-part tariff pricing B.perfect price discrimination C.single-price monopoly pricing. Of these three strategies, which is least likely to benefit society as a whole?

Figure 16-5 -Refer to Figure 16-5.Suppose the firm represented in the diagram decides to act as a monopolist and charge a single price.What is the profit-maximizing quantity produced and what is the price charged?

Odd pricing became common in the late 19th century.Although the origins of odd pricing are uncertain, several explanations for the practice have been given.Which of the following is one of these explanations?

Which of the following statements is true about optimal two-part tariff and perfect price discrimination for a given demand curve?

Which of the following statements is true?

Consider three pricing strategies that the firm can pursue: A.optimal two-part tariff pricing B.perfect price discrimination C.single-price monopoly pricing Of these three strategies, which is most beneficial to society as a whole?

If, at the firm's projected sales level, the marginal cost is $40, the average cost is $50 and the markup is 30 percent, then its selling price is

Figure 16-5 -Refer to Figure 16-5.Suppose the firm represented in the diagram decides to practice perfect price discrimination.What is the profit-maximizing quantity?

Figure 16-5 -Refer to Figure 16-5.Suppose the firm represented in the diagram decides to practice perfect price discrimination.What is the profit-maximizing price it will charge?

Consider three pricing strategies that the firm can pursue: A.optimal two-part tariff pricing B.perfect price discrimination C.single-price monopoly pricing Of these three strategies, which method gives the firm the highest profit?

If the selling price of a firm's product is $500 and the estimated average cost of producing this product is $400, what is the firm's markup?

If, at a firm's projected sales level, the marginal cost is $125, the average cost is $150 and the markup is 20 percent, then its selling price is

When firms price their products by adding a percentage markup to their average costs of production, this is called