Chapter 7 Pricing with Market Power Verified Test Bank

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1) The simple case of pricing with market power assumes that (a) all consumers are charged the same price, (b) the firm sells one product, and (c) demand exists in one time period. Discuss what happens when each assumption is relaxed.

2) The simple case of pricing with market power assumes that (a) all consumers are charged the same price, (b) the firm sells one product, (c) demand exists in one time period, and (d) competitors do not pursue pricing games. Economists insist on reviewing what happens as each assumption is relaxed one at a time. But it is clear that in the real world all four are relaxed simultaneously. Why does economic analysis insist on such an unrealistic analysis?

3) A small fitness center that offers only personal training services has the following demand and cost parameters:
Demand: The fitness center has found that it has some discretion in pricing­­—that is, it can raise price marginally without drastic reductions in volume. Based on statistical estimates of demand and assuming that external factors stay constant (e.g., price of competitors' services, income levels, etc.), the following relationship exists between the hourly rate for a personal training session (P) and the number of sessions demanded per day (Q):
P = 140 – Q.
Costs: The fitness center finds that its variable costs (e.g., labor) increase at a constant rate of $40 with each additional training session provided per day. Fixed costs such as rent are equal to $200 per day. This yields the following total variable cost (TVC) and total fixed cost (TFC) equations:
TVC = 40Q.
TFC = 200.
(a) Find the price and quantity demanded (P and Q) that maximize total profit.
(b) What is the maximum possible profit?

4) A typical university football program requires alumni to join one of several booster clubs (each club gets seats in different parts of the stadium) before the person can buy season tickets. What has this got to do with consumer surplus?

5) Great Nuggets finds that there is a clear gender difference in the demand for their chocolates. Men have very little price sensitivity and tend to buy whatever the sales clerk recommends. Women, on the other hand, tend to ask many questions about product quality and attempt to maximize the quantity available for the price. Great Nuggets would like to implement a two-tier pricing system based on gender. What (nonlegal) problems would it encounter?

6) Wet-n-Wild Indoor Water Park offers family fun year-round in the Northstar state to locals and out-of-state visitors. The demand for day passes to the water park for each market segment is independent of the other market segment. The marginal cost of providing service to each visitor is $5 per day. Suppose the daily demand curves for the two market segments are
Locals:or
Out-of-town:or
(a) If Wet-n-Wild Indoor Water Park charges one price to all visitors, what is the profit maximizing price? How many day passes will be sold per day?
(b) If Wet-n-Wild Indoor Water Park charges one price to locals, what is the profit maximizing price for locals? How many day passes will be sold per day to locals?
(c) If Wet-n-Wild Indoor Water Park charges one price to out-of-towners, what is the profit maximizing price for out-of-town guests? How many day passes will be sold per day to out-of-town guests? (d) Compare the prices from uniform pricing to the prices from price discrimination.

7) Two consumers, 1 and 2, of the same product have the following demand curves:
Q ₁ = 500 - 10P and Q ₂ = 500 - 20P. MC for the firm is $10. Calculate the prices when the firm discriminates between the two consumers. Is this a good strategy, or should the firm charge the same price to both of them?

8) P = 50 – 1/500Q is the demand curve for tickets. MC = $10 per ticket. What is the optimal price? Calculate the consumer surplus at this price.

9) Tax Fighters, Inc., develops, markets, and sells software for tax preparation. Tax Fighters, Inc. sells IRS Tax Fighter, a software for completing federal income tax forms and Gopher Basher, a software for completing Minnesota state income tax forms. For simplicity, assume that all of the costs in this industry are the fixed costs of developing the software packages themselves. The marginal cost of producing another disk is approximately zero.
Consider the following information about the demand for tax software. There are an equal number of consumers in each group. The table shows the maximum that each type of consumer is willing to pay for each product. As vice president for pricing, explain your optimal bundling and pricing strategy to maximize Tax Fighter profits from the sale of tax software. Be sure to clearly explain why your strategy is optimal.

10) Give examples of block pricing, bundling, price discrimination and two-part tariffs.

11) A firm with market power in pricing faces a

A) flat demand curve.
B) supply curve parallel to the horizontal axis.
C) downward-sloping supply curve.
D) downward-sloping demand curve.

12) If a firm charges a price equal to the marginal cost—the competitive solution—then the gains from trade are

A) all in the form of producer surplus.
B) split between producer and consumer surplus.
C) all in the form of consumer surplus.
D) split between shareholders and producers.

13) The difference between what a consumer is willing to pay for a product and what she actually pays when buying it is known as

A) consumer surplus.
B) the exchange rate.
C) the inflation rate.
D) price discrimination.

14) If Tiger Toys faces a demand curve of P = 85 − 0.25Q and a MC = ATC = 20, then the market price would be

A) $85.00.
B) $52.50.
C) $130.00.
D) $32.50.

15) If Tiger Toys faces a demand curve of P = 85 − 0.25Q and a MC = ATC = 20, then the output would be

A) 65.0 units.
B) 85.0 units.
C) 130.0 units.
D) 32.5 units.

16) If Tiger Toys faces a demand curve of P = 85 − 0.25Q and a MC = ATC = 20, then the economic profits would be

A) $130.
B) $6,825.
C) $2,600.
D) $4,225.

17) If Tiger Toys faces a demand curve of P = 85 − 0.25Q and a MC = ATC = 20, then the markup would be

A) $52.50.
B) $20.00.
C) $32.50.
D) $65.00.

18) For decision-making purposes, fixed costs incurred by a firm with market power are

A) the same as variable costs.
B) not taken into consideration.
C) the same as marginal costs.
D) the same as opportunity costs of production.

19) A firm’s market power decreases if the price elasticity of demand for its product

A) stays the same over time.
B) decreases.
C) equals the income elasticity of demand.
D) increases.

20) Using the linear approximation system to estimate the profit maximizing price requires that managers have information on the cost of production

A) and the nature of the production function.
B) the total population and the percentage of people in labor force.
C) the current price, the current quantity sold, and changes in price and quantity.
D) and the decision-making process of the marketplace.

21) Using cost plus pricing, what is the price if ATC = $14.50 and the target rate of return is 4 percent?

A) $15.10
B) $49.34
C) $14.5
D) $22.10

22) Using cost plus pricing, what is the price if ATC = $23.50 and the target rate of return is 17 percent?

A) $28.31
B) $138.24
C) $29.38
D) $46.74

23) The cost plus pricing formula tends to ignore

A) incremental costs.
B) customer quantity sensitivity.
C) fixed costs.
D) quotas.

24) Calculate the markup price if MC = $10.00 and price elasticity equals 1.7.

A) $5.88
B) $17.24
C) $24.27
D) $32.42

25) The higher the price elasticity, the

A) more sensitive price changes are to quantity demanded.
B) less sensitive price changes are to quantity demanded.
C) more sensitive quantity demanded is to price changes.
D) less sensitive quantity demanded is to price changes.

26) Many college basketball programs require alumni to join a booster club before they can buy season tickets. This is an example of

A) a two-part tariff.
B) first-degree price discrimination.
C) block pricing.
D) cost-plus pricing

27) A company might charge a customer different prices per unit, depending upon the number of units purchased. This is called

A) bundling.
B) two-part tariff.
C) price discrimination.
D) block pricing.

28) Under block pricing, a company might

A) charge a customer different prices per unit, depending on the customer's loyalty.
B) charge a customer different prices per unit, depending on the number of units purchased.
C) provide a customer different units, depending on the price the consumer bids.
D) charge a customer different prices per unit, depending on the price the consumer bids.

29) A customer pays an admission fee to get into the local YMCA and also a monthly membership fee. This is called

A) bundling.
B) two-part tariff.
C) price discrimination.
D) block pricing.

30) Price discrimination requires that different customers have different levels of price sensitivity and that

A) the cost of production is different for every customer.
B) customers cannot resell the product amongst themselves.
C) demand is homogeneous amongst customers.
D) marginal costs are falling.

31) Price discrimination is usually defined as selling a product to different customers at

A) the same price even though costs of service are different.
B) different prices as costs of service are different.
C) the same price as costs of service are the same.
D) different prices even though costs of service are the same.

32) ________ extracts the maximum amount each customer is willing to pay for a product.

A) Personalized pricing
B) Group pricing
C) Two-part tariff
D) Bundling

33) Third-degree price discrimination results when a firm sells

A) its product to every customer at a different price.
B) its product by volume at a different price.
C) every unit at the same price.
D) its product to different groups at different prices.

34) Many firms offer substantial rebates by mail or coupons for discounts at the point of sale. The people who use the rebates or coupons have ________ than the people who don't use them.

A) greater price sensitivity
B) the same price sensitivity
C) lesser price sensitivity
D) inverted price sensitivity

35) Disney sold The Little Mermaid for $20 with a $5 mail in rebate. The rebate should have

A) reduced overall customer demand.
B) stabilized overall customer demand.
C) increased overall customer demand.
D) inverted overall customer demand.

36) Refer to the diagram. If Happy Times Theater charges one price to all customers, then that price will be

A) $6.25.
B) $7.50.
C) $10.00.
D) Not enough information available.

37) Refer to the diagram. If Happy Times Theater charges one price to all customers, then the profit will be:

A) $374.25.
B) $62.50.
C) $562.50.
D) $150.00.

38) Refer to the diagram. If Happy Times Theater charges one price to day customers and a different price to night customers, then the profit will be

A) $374.25.
B) $62.50.
C) $562.50.
D) $150.00.

39) Refer to the diagram. If Happy Times Theater charges one price to day customers and another price to night customers, then the day price will be

A) $7.50.
B) $5.50.
C) $6.25.
D) $10.00.

40) Refer to the diagram. If Happy Times Theater charges one price to day customers and another price to night customers, then the night price will be

A) $7.50.
B) $5.50.
C) $6.25.
D) $10.00.

41) Refer to the diagram. If Happy Times Theater charges one price to day customers and another price to night customers, then its total profit on the sale of tickets will

A) increase.
B) stay the same.
C) decrease.
D) vary according to the slope of marginal revenue curve.

42) Season tickets for sporting events are an example of

A) bundling.
B) two-part tariff.
C) price discrimination.
D) block pricing.

43) Which of the following is a reason for firms to bundle products?

A) to extract additional profit from a customer base with heterogeneous product demand
B) to extract additional profit by charging higher prices for the goods in a bundle
C) to clear the old stock of the product
D) to increase customer welfare and satisfaction

44) Electric generator companies did not raise their prices when there was a huge demand for their products, due to a power shortage. The companies decided against a price rise because they were

A) concerned about being sued by consumer activists.
B) concerned about political backlash.
C) concerned about peoples' welfare.
D) concerned about reputation and future demand.

45) Bio seeds offers free genetically modified seeds (GMS) to farmers in developing countries the first season. The land accepts only GMS in any other cropping season. So providing free seeds in the first season is a strategic way to

A) bundle goods.
B) administer a two-part tariff.
C) enforce price discrimination.
D) regulate future demand.

46) Offering a product at a price below marginal cost is a more effective pricing strategy if

A) information costs are higher.
B) opportunity costs are higher.
C) sunk costs are higher.
D) information costs are lower.

47) The Robinson-Patman Act limits the ability of the firms to

A) charge different prices to retailers.
B) produce certain products.
C) discriminate in terms of prices.
D) use capital-intensive means of production.

48) Implementation of a pricing strategy is complicated. Which of the following is a possible reason?

A) Optimal pricing policies can change over time.
B) Firms change the technique of production over time.
C) Companies follow the recommendations of the Robinson-Patman Act.
D) Firms often do not differentiate their products.