- You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1's elasticity of demand is -2, while group 2's is -4. Your marginal cost of producing the product is $40.
a. Determine your optimal markups and prices under third-degree price discrimination.
b. Which of the following are necessary conditions for third-degree price discrimination to enhance profits.
Instructions: You may select more than one answer. Click the box with a check mark for the correct answers and click twice to empty the box for the wrong answers. You must click to select or deselect each option in order to receive full credit.
There are two different groups with different (and identifiable) elasticities of demand.
We are able to prevent resale between the groups.
At least one group has elasticity of demand greater than 1 in absolute value.
At least one group has elasticity of demand less than one in absolute value.
- A monopoly is considering selling several units of a homogeneous product as a single package. A typical consumer's demand for the product is Qd = 100 - 0.25P, and the marginal cost of production is $140. a. Determine the optimal number of units to put in a package. units b. How much should the firm charge for this package? $
Problem 1 : You are the owner of a local Honda dealership. Unlike other dealerships in the area, you take pride in your "No Haggle" sales policy. Last year, your dealership earned record profits of $1.2 million. In your market, you compete against two other dealers, and the market-level price elasticity of demand for midsized Honda automobiles is -1.4. In each of the last five years, your dealership has sold more midsized automobiles than any other Honda dealership in the nation. This entitled your dealership to an additional 25 percent off the manufacturer's suggested retail price (MSRP) in each year. Taking this into account, your marginal cost of a midsized automobile is $13,000.
What price should you charge for a midsized automobile if you expect to maintain your record sales?
Problem 2: Suppose the European Union (EU) is investigating a proposed merger between two of the largest distillers of premium Scotch liquor. Based on some economists' definition of the relevant market, the two firms proposing to merge enjoyed a combined market share of about two-thirds, while another firm essentially controlled the remaining share of the market. Additionally, suppose that the (wholesale) market elasticity of demand for Scotch liquor is -1.5 and that it costs $16.20 to produce and distribute each liter of Scotch.
Based only on these data, provide quantitative estimates of the likely pre- and postmerger prices in the wholesale market for premium Scotch liquor.
According to the Cahner's In-Stat Group, the number of worldwide wireless phone subscribers will soon reach the 1 billion mark. In the United States alone, the number of wireless subscribers is projected to grow by almost 17 million subscribers per year for the next five years. Contributing to the extensive growth are lower prices, larger geographic coverage, prepaid services, and Internet enabled phones. While the actual cost of a basic wireless phone is about $150, most wireless carriers offer their customers a "free" phone with a one-year wireless service agreement.
This pricing strategy is consistent with which of the following:
Instructions: You may select more than one answer. Click the box with a check mark for the correct answers and click twice to empty the box for the wrong answers. You must click to select or deselect each option in order to receive full credit.
Cross subsidization
Second-degree price discrimination
Two-part pricing
Bundling
Problem 3: You own a franchise of rental car agencies in Florida. You recently read a report indicating that about 80 percent of all tourists visit Florida during the winter months in any given year, and that 60 percent of all tourists traveling to Florida by air rent automobiles. Travelers not planning ahead often have great difficulty finding rental cars due to high demand. However, during nonwinter months tourism drops dramatically and travelers have no problem securing rental car reservations.
Determine the optimal pricing strategy for this situation.
Two-part pricing
Peak-load pricing
Block pricing
Randomized pricing
Problem 4: As a manager of a chain of movie theaters that are monopolies in their respective markets, you have noticed much higher demand on weekends than during the week. You therefore conducted a study that has revealed two different demand curves at your movie theaters. On weekends, the inverse demand function is P = 20 - 0.001Q; on weekdays, it is P = 15 - 0.002Q. You acquire legal rights from movie producers to show their films at a cost of $25,000 per movie, plus a $2.50 "royalty" for each moviegoer entering your theaters (the average moviegoer in your market watches a movie only once).
What type of pricing strategy should you consider in this case?
Block pricing
Second degree price discrimination
First degree price discrimination
Third degree price discrimination
What price should you charge on weekends?
What price should you charge on weekdays?
Problem 5 : BAA is a private company that operates some of the largest airports in the United Kingdom, including Heathrow and Gatwick. Suppose that BAA recently commissioned your consulting team to prepare a report on traffic congestion at Heathrow. Your report indicates that Heathrow is more likely to experience significant congestion between July and September than any other time of the year.
Based on your estimates, demand is Q1d = 600 - 0.25P, where Q1d is quantity demanded for runway time slots between July and September. Demand during the remaining nine months of the year is Q2d = 220 - 0.1P, where Q2d is quantity demanded for runway time slots.
The additional cost BAA incurs each time one of the 80 different airlines utilizes the runway is £1,100 provided 80 or fewer airplanes use the runway on a given day. When more than 80 airplanes use Heathrow's runways, the additional cost incurred by BAA is £6 billion (the cost of building an additional runway and terminal). BAA currently charges airlines a uniform fee of £1,712.50 each time the runway is utilized.
As a consultant to BAA, what pricing plan would clearly enhance Heathrow's profitability?
What price should BAA charge for runway slots between July and September?
What price should BAA charge for runway slots for the remaining nine months?
Problem 6: (Essay, Autogradable) Many home improvement retailers like Home Depot and Lowes have low-price guarantee policies. At a minimum, these guarantees promise to match a rival's price, and some promise to beat the lowest advertised price by a given percentage.
True or False: These types of pricing strategies result in cutthroat Bertrand competition and zero economic profits.