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1. Mapleville Tennis & Golf Club offers golf and tennis memberships to the residents of Mapleville. Market research has found there are two types of families living in the city: 120 golf-oriented families and 100 tennis-oriented families. Information on the demand prices for golf and tennis memberships by family type is given below. It is not possible to identify family types for pricing purposes, and all costs are fixed so that maximizing total revenue is equivalent to maximizing profit.
Type of family
Tennis membership only
Golf membership only
Tennis-oriented
$150
$50
Golf-oriented
$75
$200
If Mapleville Tennis & Golf Club plans to offer golf and tennis memberships separately, what prices should be charged for each kind of membership it wishes to maximize profit?
Charge $75 for tennis memberships and $200 for golf memberships.
Charge $75 for tennis memberships and $50 for golf memberships.
Charge $150 for tennis memberships and $200 for golf memberships.
Charge $150 for tennis memberships and $50 for golf memberships.
2. Second-degree price discrimination
is also known as block rate setting.
captures all consumer surplus.
sets a different price for each customer.
can only be used when customers can be segmented into groups.
3. If the price elasticity of demand for bananas is -1.5 and the price elasticity of demand for grapefruit is -2.5, and the marginal cost of producing each of the items is $0.50 each, what is the profit-maximizing price for each?
Bananas: $1.50; Grapefruit: $0.83
Bananas: $0.75; Grapefruit: $1.25
Bananas: $0.34; Grapefruit: $0.20
Bananas: $0.75; Grapefruit: $1.25
4. In ____ price discrimination, it is possible for the entire consumer surplus to be captured by the seller.
first-degree
second-degree
third-degree
a and b
5. The segmenting of customers into several small groups such as household, institutional, commercial, and industrial users, and establishing a different rate schedule for each group is known as
first-degree price discrimination.
market penetration.
third-degree price discrimination.
second-degree price discrimination.
6. ______ is the price at which an intermediate good or service is transferred from the selling to the buying division within the same firm.
Incremental price
Marginal price
Full-cost price
Transfer price
7. _______ is a pricing strategy for newly introduced products that results in a high initial product price. This price is reduced over time as demand at the higher price is satisfied.
Prestige pricing
Price lining
Skimming
Incremental pricing
8. Which of the following is NOT a shortcoming of cost-plus pricing?
Most often the actual profit margin will be less than profit maximizing margin.
Cost-plus pricing allows firms to set prices equal to a predetermined markup above average costs.
It is unlikely that arbitrary rules or historical precedent to choose a markup will product the maximum profit.
Because cost-plus pricing involves average rather than marginal cost, it does not use the MR=MC rule to find the profit maximizing rate of production.
9. Which of the following is considered a necessary condition for successful price discrimination?
A firm’s customers must all have the same price elasticity of demand.
Firms must be able to determine each customer’s maximum willingness to pay for the product in question.
Firms are able to prevent resale among different groups of customers.
Firms must operate in a perfectly competitive market.
10. Other things being equal, a firm’s profits will be greatest when it practices
first-degree price discrimination.
second-degree price discrimination.
third-degree price discrimination.
no price discrimination.
11. Which of the following is NOT considered to be a form of price discrimination?
Declining block pricing
Group pricing
Bundling multiple products
Personalized pricing
12. Which of the following is an example of bundling?
Charging an admission to a nightclub as well as requiring patrons to pay for their drinks.
Charging students and seniors a lower price for movie tickets than adults.
Purchasing a cell phone plan that includes texting and internet access.
Charging $5 per pair of socks and also offering a bag of 5 pairs for $15.
13. Many years ago, the Wall Street Journal published an article about a dating service. The article noted that men were charged $300, above the $250 charged for women. The dating service’s owner said that the difference in price compensated for inequities in pay scales between men and women. Which of the following statements below is an alternative explanation that an economist would look for?
Men have a higher (or more elastic) price elasticity of demand for dating services than do women.
More women than men use dating services.
More men than women use dating services.
Men have a lower (or less elastic) price elasticity of demand for dating services than do women.
14. Which of the statements about price discrimination is FALSE?
It must be possible to segment the market.
It must be difficult to transfer the seller’s product from one market segment to another.
Public utilities practice first-degree price discrimination.
There must be differences in the elasticity of demand from one customer segment to another.
15. In ____ price discrimination, the monopolist charges each consumer the highest price that purchaser is willing to pay for each unit purchased (provided that this price exceeds the marginal cost of production).
first-degree
second-degree
third-degree
a and b
ECO 500: Module Nine Homework Problem Sets
1. Customers to Live Theaters, Inc. can be divided into two groups: seniors and everyone else. The inverse demand curves for each of the two groups are given below. The marginal cost (which equals the average variable cost) of serving an additional patron, either senior or everyone else, is equal to $4. Fixed costs are equal to $1000.
Ps = 80 – Qs
Pe = 100 – 2Qe
Where Ps and Pe denote, respectively, the prices charged to seniors and everyone else and Qs and Qe denote the number of seniors and the number of all other customers served.
1. What is Live Theaters’ total revenue function? What is its total cost function? Its total profits function? For the total revenue use Total Revenue=Ps*Qs + Pe*Qe
1. What are the profit maximizing levels of price and output if Live Theaters, Inc. engages in third degree price discrimination? Show that MRe = MRs = MC. Use MRe = d/dQ(Pe*Qe), MRs = d/dQ(Ps*Qs), and MC = d/dQ (TC)
1. What are profits associated with this option?
1. If Live Theaters charges one price to all patrons, what would it be? How many customers would it serve? What would be its profits?
1. Computer Products Corp. sells peripheral equipment used by both private businesses and the government. Due to a recession, Computer Product’s sales have declined by 100,000 units and it now has 200,000 units of excess capacity. All of its current sales are to private sector customers and each pays $12.00 per unit for the equipment. The sales price is equal to 150% of average variable costs. A government agency has offered to purchase 300,000 units at $10.00 each. If Computer Products accepts the offer, it will not be able to fill 100,000 units of its expected orders from private sector customers over the next few months, although the inability to meet customer demand is not expected to affect future sales.
1. Should Computer Products accept the offer to supply 300,000 units at $10 each to the government agency? What happens to its profits if it accepts the offer?
1. Would your answer change if the inability to meet private sector customer demand reduces sales of 50,000 during this (ignore any effects beyond this period)?
1. Online Tutors offers monthly access to students for either or both math or science tutors. A market study found that the served by Online Tutors can be divided into two types of students: students needing help with math, who are primarily interested in math tutoring but may be interested in some science tutoring, and students who are primarily interested in science tutoring but may need some math tutoring. The study further estimates that there are 300 students who fit the category of “students needing help with math” and 200 students who fit the category of “students needing help with science.” Online Tutors estimated demand for each type of tutoring service by type of student is given below. All costs are fixed so that maximizing total revenue is equivalent to maximizing profit. Use a payoff matrix or find combinations of pricing to result in the best profit.
The demand prices for monthly math and science tutoring services are given below
Type of Student………………………….Math Tutoring Only……………………Science Tutoring Only
In Need of Math Tutoring……………………….$100……………………………………………….$25
In Need of Science Tutoring……………………..$50……………………………………………….$150
a. If the Online Tutoring decides to sell its tutoring services individually, what should it charge for math tutoring? What should it charge for science tutoring?
b. If Online Tutoring offers bundled services, what pricing would you recommend? What happens to its revenues if it uses bundling?
