Question 1

Figure 16-7
  
The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-Refer to Figure 16-7.The owners of the Lizard Lounge are considering the following four pricing options:
A.A single price scheme where the cocktail price equals the monopoly price.
B.A single price scheme where the cocktail price equals the competitive price.
C.A two-part tariff: a monopoly cocktail price and a cover charge that will generate total revenue equal to the area X.
D.A two-part tariff: a competitive cocktail price and whatever cover charge that will generate a total revenue equivalent to the area X + Y + Z.
Which pricing scheme(s)achieve the economically efficient outcome?

Accepted Answer

Scheme b is not efficient as it leads to lower total revenue and deadweight loss. Schemes a and c achieve economic efficiency by charging a higher monopoly price (as opposed to the competitive price in scheme b) and capturing some consumer surplus through a cover charge. Scheme d also achieves efficiency by setting a competitive price and using the cover charge to capture additional consumer surplus. However, scheme d is not the best choice as it may result in a higher incidence of deadweight loss than schemes a and c.

Question 2

If marginal costs differ quite substantially from average total costs, then using a cost-plus pricing schedule will not lead to the profit-maximizing price.

Accepted Answer

Cost-plus pricing involves adding a markup to the average total cost to determine the selling price. However, if the marginal costs differ significantly from the average total costs, the cost-plus pricing method may not lead to the profit-maximizing price because it does not take into account the additional costs incurred to produce each additional unit, which can significantly impact profitability. Thus, alternative pricing strategies that consider marginal costs and revenue may be more appropriate in such cases for determining the optimal price.

Question 3

Figure 16-7
  
The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-Refer to Figure 16-7.The owners of the Lizard Lounge are considering the following four pricing options:
A.A single price scheme where the cocktail price equals the monopoly price.
B.A single price scheme where the cocktail price equals the competitive price.
C.A two-part tariff: a monopoly price for cocktails and a cover charge that will generate total revenue equal to the area X.
D.A two-part tariff: a competitive price for cocktails and a cover charge that will generate total revenue equal to the area X + Y + Z.
Under which scheme are the Lounge customers best off?

Accepted Answer

The customers of the Lizard Lounge are best off under the single price scheme where the cocktail price equals the competitive price (option B). This is because under this scheme, the price charged for cocktails is more in line with the actual cost of production and there is no additional cover charge. Option A would charge a higher price than what is necessary for the monopoly power and result in a deadweight loss, while option C and D would impose additional cover charges on customers, making them worse off.

Question 4

Figure 16-6
  
Watanabe Sensei operates the only martial arts school in Hartfield. For simplicity, assume that consumers have identical demand curves and that Sensei knows what this demand curve is. Figure 16-6 shows this demand curve.
-Refer to Figure 16-6.With this pricing scheme-a competitive price for the classes and a one-time membership fee-what amount of producer surplus will Sensei earn?

Accepted Answer

The answer of Figure 16-6
  
Watanabe Sensei operates the...

Question 5

What is odd pricing? Why do some merchants use odd pricing?

Accepted Answer

The answer of What is odd pricing? Why do some...

Question 6

There is no evidence that odd pricing succeeds in convincing consumers that prices are lower than they really are.

Accepted Answer

Odd pricing, such as setting prices at $9.99 instead of $10.00, is a common retail strategy that has been shown to influence consumer perception, making prices appear lower than they actually are.

Question 7

Assume that a firm is able to use an optimal two-part tariff.
a.Is the outcome economically efficient? Why or why not?
b.What happens to consumer surplus?
c.Does this represent perfect price discrimination? Why or why not?

Accepted Answer

The answer of Assume that a firm is able to...

Question 8

Why might an amusement park switch from charging admission to the park and charging for the rides to charging for admission but not charging for the rides?

Accepted Answer

The answer of Why might an amusement park switch from...

Question 9

In an optimal two-part tariff pricing schedule, consumer surplus is zero.

Accepted Answer

In an optimal two-part tariff, the fixed fee is set equal to the consumer surplus, leaving the consumer with zero surplus after paying the fee.

Question 10

Firms engage in odd pricing when they charge prices that appear to be less than they really are; for example, charging a price of $4.95 instead of $5.00 and $.99 instead of $1.00.How have researchers tried to determine whether odd pricing is successful in convincing consumers that odd prices are less than they really are?

Accepted Answer

The answer of Firms engage in odd pricing when they...

Question 11

What is cost-plus pricing? Why do some firms use cost-plus pricing even when the firms' managers have the resources to devise a pricing strategy that would result in greater profits?

Accepted Answer

The answer of What is cost-plus pricing? Why do some...

Question 12

Economists believe that cost-plus pricing may be the best way for a firm to determine its optimal product price when the firm's marginal cost and average cost are about the same and when it is difficult to estimate the product's demand curve.

Accepted Answer

Cost-plus pricing involves adding a markup to the firm's cost to determine the product's price. This method may be appropriate when it is challenging to estimate the demand curve, and when the firm's marginal cost is similar to its average cost. In such cases, the firm can use cost-plus pricing to ensure that it covers its costs and earns a reasonable profit. However, when the demand curve is known, and marginal cost differs significantly from average cost, other pricing strategies may be more appropriate.

Question 13

A two-part tariff refers to a pricing schedule under which a buyer must pay a fixed fee for the right to purchase the product, in addition to a per-unit price.

Accepted Answer

A two-part tariff includes a fixed fee and a per-unit price.

Question 14

Movie theaters often charge different people different prices for admission.Why don't theaters charge different prices for popcorn and other food items?

Accepted Answer

The answer of Movie theaters often charge different people different...

Question 15

Figure 16-7
  
The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-Refer to Figure 16-7.The owners of the Lizard Lounge are considering the following four pricing options:
A.A single price scheme where the price of cocktails equals the monopoly price.
B.A single price scheme where the cocktail price equals the competitive price.
C.A two-part tariff: a monopoly price for cocktails and a cover charge that will generate total revenue equal to the area X.
D.A two-part tariff: a competitive price for cocktails and a cover charge that will generate total revenue equal to the area X + Y + Z.
Which scheme will earn the largest profit?

Accepted Answer

A two-part tariff with a competitive price for cocktails and a cover charge that captures the entire consumer surplus (areas X + Y + Z) will maximize profits by extracting the maximum willingness to pay from consumers.

Question 16

An optimal two-part tariff pricing schedule maximizes consumer surplus.

Accepted Answer

An optimal two-part tariff pricing schedule maximizes the profit of the firm, not the consumer surplus. The firm charges a fixed fee and a per-unit fee, which allows them to capture consumer surplus by charging a higher price to those who are willing to pay more.

Question 17

Many book publishers use cost-plus pricing to establish prices for some of their books.Would you expect a publishing company to use a strict cost-plus pricing system for all its books? How might you determine if a publishing company actually does use cost-plus pricing for all its books?

Accepted Answer

The answer of Many book publishers use cost-plus pricing to...

Question 18

The Walt Disney Company uses cost-plus pricing to determine the prices it charges for admission and rides at Disneyland and Walt Disney World.

Accepted Answer

The Walt Disney Company uses dynamic pricing strategies to determine the prices it charges for admission and rides at Disneyland and Walt Disney World, which means that prices fluctuate based on demand, time of day, and other factors. Cost-plus pricing is a simpler pricing strategy that adds a predetermined markup to the cost of producing a product or service.

Quiz 16: Pricing Strategy