Q&A Hero

Q: Some firms require consumers to pay an initial fee for the right to buy their product and an additional fee for each unit of the product they purchase. This practice is referred to as A) odd pricing. B) dual pricing. C) a two-part tariff. D) intertemporal pricing.

Q: Which of the following statements about two-part tariffs is false? A) Because each individual has a different individual demand curve, if there is just one entrance fee some consumers will be able to reap some consumer surplus. B) The producer cannot capture the entire consumer surplus because the entrance fee might discourage some potential consumers even though they would have been willing to pay a lesser entrance fee. C) Two-part tariff pricing allows a producer to capture the entire consumer surplus. D) For two-part tariff pricing to be successful, the producer must be able to identify two distinct customer groups.

Q: Though large firms have the knowledge and resources to utilize a better pricing strategy, many choose to use cost-plus pricing. One reason for this is that A) large firms do not have to maximize their profits because they face little competition from other firms. B) there is less risk of violating antitrust laws if a cost-plus pricing strategy is used rather than a profit-maximizing pricing strategy. C) the additional revenue that would result from a profit-maximizing pricing strategy is an insignificant fraction of the firms' revenues. D) firms often adjust the markup they charge to reflect current demand.

Q: Even though it often does not result in profit maximization, some small firms use a cost-plus pricing strategy anyway because A) it is easy to use. B) they do not understand what marginal revenue and marginal cost mean. C) it is expensive to hire an economist who can determine what the profit-maximizing price is. D) they sell several products, each of which sells for a different price. The time and expense involved in finding the profit-maximizing price for each product are not worth the effort.

Q: Cost-price pricing typically does not result in profit-maximization. As a result, economists have two views of cost-plus pricing. One of these views is A) cost-plus pricing is more likely to lead to profit-maximization for large firms than for small firms. B) cost-plus pricing is a good way to approximate the profit-maximizing price when marginal revenue or marginal cost is difficult to determine. C) cost-plus pricing is more likely to lead to profit-maximization for monopolistically competitive firms than for oligopoly firms. D) cost-plus pricing is more likely to result in profit-maximization the more elastic the firm's demand curve is.

Q: Book publishers often use a cost-plus pricing strategy. One reason for this is A) most publishers do not hire economists who can determine the number of books they must sell to equate marginal cost and marginal revenue. B) publishers do not want to incur the expense of determining the profit-maximizing strategy. They prefer cost-plus pricing because of its lower cost. C) much of the cost of publishing textbooks is difficult to assign to any particular book. D) bookstores, not publishers, ultimately determine how many books will be produced.

Q: Cost-plus pricing may be a reasonable way to determine price when A) marginal cost and average fixed cost are roughly equal. B) marginal cost and average cost are about the same. C) marginal cost differs significantly from average cost. D) marginal cost is very low.

Q: Cost-plus pricing would be consistent with selecting the profit-maximizing price when A) it results in a price that causes quantity sold to be where marginal revenue equals marginal cost. B) a firm has no difficulty estimating its demand curve. C) consumers value the product beyond its marginal cost. D) the demand for the firm's product is unit-elastic.

Q: Which of the following firms is most likely to use cost-plus pricing? A) A firm that makes one product. B) A firm that sells one product and has a sizable research and development budget. C) A firm that makes several products and has a sizable research and development budget, the cost of which cannot be easily assigned to each product. D) A firm that makes many products but has a small research and development budget, the cost of which can be easily assigned to the different product lines.

Q: Which of the following is not an advantage of cost-plus pricing? A) It is easy to calculate. B) It requires little information. C) If a firm is selling multiple products, it ensures that the firm's prices will cover costs that are difficult to assign to one product. D) It ensures that the firm will maximize its profits.

Q: 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? A) 15 percent B) 20 percent C) 25 percent D) 40 percent

Q: 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 A) $125. B) $150. C) $165. D) $180.

Q: When firms price their products by adding a percentage markup to their average costs of production, this is called A) average cost pricing. B) rounding up. C) break-even pricing. D) cost-plus pricing.

Q: 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? A) The surveys found that small differences in price cause small differences in quantity demanded. There is no evidence that odd pricing makes economic sense. B) Although the results were not conclusive, there is some evidence that odd pricing makes economic sense. C) The surveys found indifference regarding this strategy among most consumers, but hostility among other consumers. The latter group resented what they viewed as an attempt to fool them into buying products with odd prices. Researchers concluded that odd pricing is counterproductive. D) The survey results were inconclusive because most consumers gave unreliable responses to the survey questions.

Q: 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? A) Odd pricing forced employees to give customers change. This made it more likely that employees would record sales rather than pocketing their customers' money. B) Odd pricing began in an era when it was difficult for owners and managers of firms to determine the marginal cost of the goods and services they sold. Odd prices were rough estimates designed to cover costs plus earn firms a profit. C) Odd pricing was begun in England in the 1700s when America was part of the British Empire. Members of the British Royal Court were given the task of pricing products. After independence, merchants in the United States carried on the practice of odd pricing. D) After the passage of the Sherman Act in 1890, merchants used odd pricing as a means of avoiding prosecution for antitrust violations.

Q: When a firm charges $4.95 instead of $5.00, what do economists call this pricing strategy? A) cost-plus pricing B) indirect pricing C) odd pricing D) unusual pricing

Q: 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? A) 75 percent B) 33.33 percent C) 25 percent D) impossible to determine with the information given

Q: 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 A) $40. B) $50. C) $52. D) $65.

Q: 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? A) optimal two-part tariff pricing B) perfect price discrimination C) single-price monopoly pricing D) The profit is the same under optimal two-part tariff pricing and perfect price discrimination and the profit is higher than under single-price monopoly pricing.

Q: Which of the following statements is true about optimal two-part tariff and perfect price discrimination for a given demand curve? A) The total revenue received under the two pricing schedules is the same. B) The total revenue received under an optimal two-part tariff exceeds that received under perfect price discrimination. C) The total revenue received under an optimal two-part tariff is less than that received under perfect price discrimination. D) The total revenue received under an optimal two-part tariff could be greater than, less than or equal to that received under perfect price discrimination, depending on the fixed-fee portion of the two-part tariff.

Q: 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? A) Both perfect price discrimination and a two-part tariff pricing are equally beneficial in that the marginal benefit of the last unit sold equals the marginal cost of producing that unit. B) only perfect price discrimination because this pricing method eliminates deadweight loss C) single-price monopoly pricing because consumers enjoy at least some consumer surplus D) only two-part tariff pricing because the per-unit portion of the price is set equal to marginal cost

Q: 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? A) a two-part tariff pricing because consumers have to pay a fixed fee in addition to a per-unit price B) perfect price discrimination because those willing to pay higher prices are forced to subsidize those who are not C) Both perfect price discrimination and two-part tariff pricing do not benefit society because the entire consumer surplus is extracted by the producer. D) single-price monopoly pricing because there are mutually beneficial trades (between consumers and seller) that are not exploited

Q: Which of the following statements is true? A) Consumer surplus under perfect price discrimination is greater than under single-price monopoly pricing. B) Consumer surplus under an optimal two-part tariff is greater than that under single-price monopoly pricing. C) Although consumers reap some consumer surplus under a single-price monopoly, society is better off with optimal two-part tariff pricing. D) Of the three pricing schedules, single-price monopoly, an optimal two-part tariff and perfect price discrimination, profit is highest under single-price monopoly pricing.

Q: 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? A) Q = 240 units; P = $28 B) Q = 320 units; P = $24 C) Q = 480 units; P = $16 D) Q = 560 units; P = $12

Q: 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? A) $6,720 B) $7,680 C) $10,240 D) $13,440

Q: 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? A) It should charge a range of prices from $40 to $16. B) It should charge a range of prices from $40 to $12. C) $2 D) $8

Q: 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? A) 320 units B) 480 units C) 560 units D) 640 units

Q: 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 ________. A) b; b B) a; b C) a; neither strategy D) b; neither strategy

Q: 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? A) $2,560 B) $5,760 C) $7,870 D) 0

Q: 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 total revenue it can expect to collect from the fixed fee portion of the price? A) $2,560 B) $5,760 C) $7,870 D) $10,240

Q: 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 per-unit price it should charge, if any? A) It should not charge a price per unit; just a flat fee to consume as much of the product as desired. B) It should charge a range of prices from $40 to $12. C) $12 D) $16

Q: 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 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 quantity it should produce? A) 240 units B) 320 units C) 480 units D) 560 units

Q: 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 monopoly price. What is the profitearned under this pricing scheme? A) $5,760 B) $6,400 C) $7,680 D) $7,870

Q: 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 monopoly price. What is the revenue collected from the fixed fee portion of the price? A) $10,240 B) $7,870 C) $2,560 D) $1,440

Q: 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 monopoly price. What is the per-unit price? A) $28 B) $24 C) $12 D) $8

Q: 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 monopoly price. What is the quantity it should produce? A) 240 units B) 320 units C) 480 units D) 560 units

Q: If marginal cost is zero, with an optimal two-part tariff A) total revenue is maximized. B) consumers maximize their surplus C) the firm does not have to charge a fixed-fee portion. D) firms may not maximize profit.

Q: With an optimal two-part tariff A) consumer surplus equals producer surplus. B) all consumer surplus is transformed into profit. C) consumers maximize consumer surplus. D) the firm earns zero profit.

Q: A firm using a two-part tariff can produce the economically efficient outcome by A) making the fixed-fee portion of the price as low as possible. B) setting the per-unit portion of the price equal to the marginal cost of production. C) setting the per-unit portion of the price equal to the average cost of production. D) setting the fixed-fee portion of the price at some proportion to the fixed cost of production.

Q: A firm using a two-part tariff faces a tradeoff because A) the only way to increase the fixed-fee portion of the price is to lower the per-unit portion of the price. B) the only way to increase total revenue is to lower per-unit profit. C) any increase in consumer surplus must be offset by a decrease in producer surplus. D) the smaller the variation between the parts of the price, the greater the deadweight loss generated by the pricing scheme.

Q: Compared to monopoly pricing, an optimal two-part tariff A) reduces economic efficiency. B) eliminates the deadweight loss. C) equates marginal revenue and average revenue. D) increases consumer surplus.

Q: Which of the following describes two-part tariff pricing? A) A firm charges two different prices for the same good. B) An importer has to pay a tax at the nation's borders, and a sales tax when the good is sold. C) A buyer pays an initial price for entrance to the market and an additional fee for each unit of the product purchased. D) A buyer must pay a down payment and monthly payments to buy big-ticket items such as a car, a plasma television or a suite of furniture.

Q: Until the early 1980s, The Walt Disney Company used a pricing strategy in which visitors to its theme parks paid a low admission fee and also paid for rides. This pricing strategy is an example of A) perfect price discrimination. B) cost-plus pricing. C) a two-part tariff. D) monopoly pricing.

Q: Most supermarkets charge the same price for the majority of goods sold. This suggest that A) the government regulates prices of most products sold in supermarkets. B) supermarkets have colluded to fix prices on most of the goods sold. C) mark-ups reflect the degree of competition in the supermarket industry. D) the large supermarket chains are price leaders and smaller grocers take these prices as given.

Q: If demand is taken into account, firms that use cost-plus pricing can adjust price by A) letting sales fall, but hold the markup constant if demand falls. B) lowering markups on price-elastic goods and raising markups on price-inelastic goods. C) raising markups on price-elastic goods and lowering markups on price-inelastic goods. D) letting sales rise, but hold the markup constant if demand rises.

Q: Cost-plus pricing is a reasonable way to determine the optimal price when A) marginal cost and average cost are roughly equal. B) fixed cost and variable costs are roughly equal. C) fixed costs vary. D) fixed costs are high.

Q: All of the following are disadvantages of cost-plus pricing except A) It ignores the price elasticity of demand: for example, it may be possible to increase profits by raising or lowering price. B) If the industry comprises identical firms (with identical costs), markups could be consistent among firms leading to no one firm having a competitive edge in terms of price. C) Allocating and apportioning business overheads to individual products could be somewhat arbitrary. D) The business has less incentive to cut or control costs: if costs increase, then selling prices increase. Consequently, this might further erode a firm's competitiveness.

Q: Which of the following is not an advantage cost-plus pricing? A) It leads to profit maximization. B) It is an easy method to implement if a firm produces multiple products and has overhead costs that are difficult to allocate to a particular good. C) It could lead to price stability if the industry is made up of identical firms all using the same method of pricing. D) It is easy to justify price increases when total costs of production increase.

Q: One method of setting price using the cost-plus method is to add A) a given percentage of marginal cost to marginal cost of production. B) a given percentage of fixed cost to total fixed cost. C) a given percentage of average total cost to average total cost. D) a given percentage of average variable cost to average total cost.

Q: Suppose the per-unit production cost of a book is $4.00 and the retail price is $32. If the book publisher sells books to a bookstore at a 40 percent discount, what is the amount of the publisher's markup per book? Assume that bookstores sell books at the retail price. A) $12.80 B) $15.20 C) $19.20 D) $21.60

Q: Some firms practice odd pricing because A) they believe that customers will buy a larger quantity with an odd price. B) it is a way to price discriminate. C) it is too difficult for sellers to reeducate buyers into accepting even prices. D) it lowers transactions costs.

Q: Arnold's Airport Transport provides passenger transportation to and from the local airport. Arnold charges a flat rate of $30 per person for round-trip service, and he gives a $5 discount to senior citizens. Assume Arnold's marginal cost is $3.00 per person. Draw two graphs, one showing demand and marginal cost for his $30 customers, of which he has 300 per month, and the other graph showing demand and marginal cost for his senior citizen customers, of which he has 100 per month. If Arnold charged all of his customers $30, he would have 325 customers per month.

Q: Book publishers often use price discrimination across time to increase profits. Toni Morrison's book, A Mercy, was published as a hardcover edition in November 2008 at a price of $23.95. In August 2009, the paperback version was published at a price of $15.00. Assume that 100,000 hardcover books were sold to hard-core Toni Morrison fans in November 2008, and 400,000 paperback books were sold to casual readers in August 2009. Illustrate each of these situations graphically. Assume that the marginal cost of the hardcover version is $2.00 and the marginal cost of the paperback version is $0.75.

Q: Figure 16-4 Refer to Figure 16-4. Graph (a) represents a monopolist who cannot price discriminate and graph (b) represents a monopolist practicing perfect price discrimination. On each graph, identify the monopoly price, the monopoly output, the efficient output, and the areas representing profit, consumer surplus, and deadweight loss.

Q: Draw a graph that shows producer surplus, consumer surplus, and deadweight loss in a market where the seller practices perfect price discrimination. Be sure to identify the demand curve, the marginal revenue curve, the marginal cost curve, and the profit maximizing quantity on the graph.

Q: Suppose a restaurant is trying to determine how much to charge for a bowl of chili, and decides to run an experiment to see how much its customers are willing to pay by allowing them to set their own price for this menu item. a. Is charging a customer the price he or she is willing to pay for the bowl of chili an example of price discrimination? Briefly explain. b. What is it called when a firm knows every consumer's willingness to pay, and can charge every consumer a different price? What happens to consumer surplus in this situation?

Q: Your text refers to airlines as "The Kings of Price Discrimination." Why is price discrimination common in the airline industry?

Q: Book publishers use price discrimination routinely, but the form of price discrimination they use is different from the form used by airlines and other industries. Explain.

Q: Racial discrimination and other forms of discrimination based on irrelevant factors are illegal. Can price discrimination be illegal as well?

Q: Delaware and North Dakota have identical state gasoline taxes of 23.0 cents per gallon. When added to the federal gasoline tax of 18.4 cents per gallon, the total tax on one gallon of gasoline in these two states is 41.4 cents. On October 8, 2013, the average price of one gallon of regular gasoline was $3.309 in Delaware and $3.394 in North Dakota. Briefly explain whether this is an example of price discrimination. Assume that the gasoline being sold is identical in both states. Sources: gaspricewatch.com and gasbuddy.com.

Q: Are restaurant coupons a form of price discrimination? Why or why not?

Q: What is yield management? How is yield management being used in the airline industry?

Q: What is perfect price discrimination and why do economists believe that no firm is able to practice perfect price discrimination?

Q: What three conditions must hold for a firm to successfully price discriminate?

Q: Why is it necessary for a firm that practices price discrimination be a price maker rather than a price taker?

Q: What is the difference between price discrimination and other forms of discrimination?

Q: The Clayton Act of 1936 outlawed price discrimination that reduced competition.

Q: Perfect price discrimination will lead a firm to produce up to the point where price equals marginal cost, the efficient level of output.

Q: A firm that engages in price discrimination must be able to identify the preferences of every customer it serves.

Q: The airline industry routinely engages in price discrimination across time.

Q: A successful strategy of price discrimination requires that a firm be a price-taker.

Q: Early adopters are consumers who will pay a high price to be among the first to own new products.

Q: Both first-degree price discrimination and optimal two-part tariff pricing maximize economic surplus.

Q: One reason why McDonald's charges a single price for its products is that it is difficult and costly for the company to determine each individual consumer's willingness to pay.

Q: Because each customer pays according to her willingness to pay, a consumer maximizes her consumer surplus under first-degree price discrimination.

Q: If a monopolist engages in first-degree price discrimination, it will produce the same output level as a perfectly competitive industry.

Q: To successfully price discriminate, a firm must ensure that there are no opportunities for arbitrage.

Q: Figure 15-11 In 2011, Verizon was granted permission to enter the market for cable TV in Upstate New York, ending the virtual monopoly that Time Warner Cable had in most local communities in the region. Figure 15-11 shows the cable television market in Upstate New York. Refer to Figure 15-11. Following the entry of Verizon, the subscription price falls from PM to PC. What is the increase in consumer surplus as a result of this change? A) the areaA + B + C B) the areaB + C C) the areaD + F D) the areaB + C + D

Q: Figure 15-11 In 2011, Verizon was granted permission to enter the market for cable TV in Upstate New York, ending the virtual monopoly that Time Warner Cable had in most local communities in the region. Figure 15-11 shows the cable television market in Upstate New York. Refer to Figure 15-11. Suppose the local government imposes a $2.50 per month tax on cable companies. What happens to the price charged by the cable company following the imposition of this tax? A) The price rises from PMto (PM+ $2.50). B) The price rises from PM but it increases by an amount less than $2.50. C) The price rises from PM but it increases by an amount greater than $2.50 to reflect the monopoly's markup. D) The price remains at PM.

Q: Firms do not have market power in which of the following market structures? A) perfect competition only B) perfect competition and monopolistic competition C) oligopoly D) monopoly