ECON 300 Ch. 11 Quiz - Custom Scholars
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# ECON 300 Ch. 11 Quiz

question
They're a means of capturing consumer surplus and transferring it to the producer
What do all pricing strategies have in common?
question
Firm pick price P and corresponding output Q at the intersection of the MR and MC curves
How do firms maximize profit if they sell all of their output at a single price?
question
Price Discrimination
The practice of charging different prices to different consumers for similar goods
question
First-Degree Price Discrimination
The practice of charging each customer their reservation price
question
Reservation price
The maximum price that a consumer is willing to pay for a good
question
Find the profit that the firm earns when it charges only a single price P and add the profit of each incremental unit produced and sold up until we reach the total quantity Q
How does first-degree price discrimination affect the firm's profit?
question
Incremental Profit = MR/unit-MC/unit
Incremental Profit formula
question
Variable profit
The sum of profits on each incremental unit produced by a firm (profit ignoring fixed costs) - the area between the MR and MC curves
question
Total Profit = Variable Profit - Fixed Costs
How do we find total profit when given the variable profit?
question
Perfect Price Discrimination
...
question
each customer is being charged exactly what they want to pay
When firms can perfectly price discriminate, the MR curve will no longer be relevant to the output decision because ______________________________________________________
question
Incremental revenue
The price paid for one unit
question
the demand curve
Incremental revenue is given by ___________________________________
question
Profit = AR - MC
Incremental Profit formula
question
as long as demand exceeds marginal cost → will do so until it produces a total output of Q**
Firms can increase their profit by expanding production _____________________________________________
question
Q**
The point at which demand is equal to marginal cost and producing any more will reduce profit
question
Variable profit
The area between demand and MC curves and the point at which all consumer surplus has been captured by the firm
question
It's usually impractical to charge every customer a different price unless there's only a few customers; Firms usually don't know the reservation price of each customer and would probably not receive honest answers if they did ask; Firms can charge a few different prices based on estimates of customers' reservation prices
Why is perfect first-degree price discrimination almost impossible to achieve?
question
Imperfect price discrimination is often used by professionals - doctors, lawyers, accountants, architects - who know their clients relatively well and their willingness to pay can be assessed and fees are set accordingly
Who uses imperfect price discrimination?
question
A doctor charging lower-income patients fairly low rates but charging higher-income patients more
What is an example of imperfect price discrimination?
question
Second-Degree Price Discrimination
The practice of charging different prices per unit for different quantities of the same good/service
question
Block pricing
The practice of charging different prices for different quantities or "blocks" of a good
question
Third-Degree Price Discrimination
The practice of dividing consumers into 2+ groups w/seperate demand curves and charging different prices to each group
question
When utilizing third-degree price discrimination, some characteristic is used to divide consumers into distinct groups
How do firms create consumer groups?
question
Firms should find the total profit for both consumer groups using the formula Profit = (price charged to the first group of consumers quantity sold to the first group) + (price charged to the second group of consumers quantity sold to the second group) - (total cost of producing the total output)
How should firms decide what price to charge each group of consumers?
question
the incremental profit from the last unit sold is zero
When firms sell to different groups of consumers, the firm should increase sales to each group of consumers (Q1 and Q2) until ___________________________________________________________
question
MR = P(1+1Ed)
Marginal revenue in terms of elasticity of demand can be written as:
question
P1P2=(1+1/E2)(1+1/E1)
To equate MR1 and MR2, we use the equation:
question
Inter-temporal price discrimination
The practice of separating consumers w/different demand functions into different groups by charging different prices at different points in time
question
D1
When engaging in inter-temporal price discrimination, _______ is the inelastic demand curve for a small group of consumers who value the product highly and don't want to wait to buy it
question
D2
When engaging in inter-temporal price discrimination, _______ is the demand curve for broader group of consumers who are willing to forgo the product if the price is too high
question
Initially offer the price at the higher price P to sell to the smaller group and then lower the price to P2 to sell to the larger group
What strategy should firms use when engaging in inter-temporal price discrimination?
question
The goal is to divide consumers into high-demand and low-demand groups by charging a price that's high at first but falls later
What is the goal when performing inter-temporal price discrimination?
question
The practice of charging higher prices during peak period when capacity constraints cause marginal costs to be high
question
increase economic efficiency by charging consumers prices closer to marginal cost
The objective when doing peak-load pricing is to ________________________________________________________________
question
In third-degree price discrimination, marginal revenue must be equal for each group of consumers, equal to marginal cost, and the costs of serving different groups aren't independent. In peak-load pricing, price and sales in each period can be determined independently by setting MC = MR for each period.
How is peak-load pricing different from third-degree price discrimination? A
question
Two-Part Tariff
A form of pricing where consumers are charged both an entry and a usage fee
question
The problem for the firm is how to set the entry fee (T) versus the usage fee (P)
What is the problem for firms engaging in two-part tariff pricing?
question
If there's only one consumer in the market/many consumers w/identical demand curves, firms must set the usage fee (P) equal to MC and entry fee (T) equal to total consumer surplus for each consumer - the consumer pays T (or a little less) to use the product and pays P = MC per unit consumed
What happens if there's a single consumer when a firm decides to do two-part tariff pricing?
question
Profit = 2T+(P-MC)(Q1+Q2)
Two-Part Tariff Profit formula
question
the firm would no longer set usage fee equal to marginal cost
If there's two different consumers/two groups of identical consumers, _____________________________________________________
question
above MC; equal to remaining consumer surplus of the consumer w/the smaller demand
If there's two different consumers/two groups of identical consumers, the firm should set the usage fee __________________ and the entry fee ___________________________________________
question
There is no simple formula to calculate optimal two-part tariff → some trial and error experiments may be needed
Is there a formula that we can use to calculate the optimal two-part tariff when there are many consumers?
question
A lower entry fee (the more entrant there are, the more profit from sales of the item the firm will earn)
What is the trade-off in a two-part tariff when there's many consumers?
question
the profit derived from the entry fee will fall
As entry fee becomes smaller and number of entrants becomes larger, __________________________________________________________________
question
The goal is to prick entry fee resulting in the optimum number of entrants → the fee that allows for max profit
What is the goal when choosing the entry fee?
question
Bundling
The practice of selling two or more products as a package
question
consumers have heterogeneous demands; when the firm cannot price discriminate
Bundling makes sense when ___________________________________________________ and ________________________________________
question
Bundling is often more profitable when the two products' relative valuations are reversed and demands are negatively correlated
Why is bundling often more profitable than selling products separately?
question
the reservation price of a consumer for good 1
When determining the potential benefits of bundling, the horizontal axis shows ____________________________________________________________
question
the reservation price of a consumer for good 2
When determining the potential benefits of bundling, the vertical axis shows _____________________________________________________________
question
Consumers
...
question
I (upper right hand corner) - consumer will buy both goods; II (upper left hand corner) - consumers will only buy the second good; III (lower left hand corner) - consumers won't buy either of the goods; IV (lower right hand corner) - consumers will only buy the first good What are the four regions when determining bundling benefits?
...
question
Consumers will buy the bundle only if the price is less than/equal to the sum of the consumer's reservation prices for the two goods
When will consumers buy the bundle?
question
r2 = PB - r1
What's the dividing line when determining whether a consumer will buy the bundle?
question
r1+r2 is greater than/equal to PB
Consumers will buy the bundle only if
question
the extent to which demands are negatively correlated
The effectiveness of bundling depends on __________________________________________________________________
question
consumers have a high reservation price for good 1 and a low reservation price for good 2 (and vice versa)
Bundling will work best when ___________________________________________________________________________________
question
Mixed Bundling
Strategy of selling two or more goods as a package or individually
question
Pure Bundling
Strategy of selling products only as a package
question
Selling the goods separately at different prices, Selling the goods only as a bundle, Mixed bundling
What are the three potential strategies firms can use when determining whether to engage in mixed or pure bundling?
question
mixed bundling will be the most profitable
When marginal product cost > reservation price, ___________________________________________________________________________________
question
consumers' demands aren't perfectly negatively correlated
If marginal costs are zero, mixed bundling will be more profitable as long as _____________________________________________________________
question
Dots
estimates of reservation prices/representative sample of consumers
question
a diagonal line connecting these prices passes midway through the dots in the figure
Company might first try pricing the bundle at PB so that ________________________________________________________________
question
I - consumers buy nothing (r1<P1, r2<P2, r1+r2<PB); II - consumers buy the bundle (r1+r2>PB); III - consumers only buy good 2 (r1<PB-P2, r2>P2); IV - consumers only buy good 1 (r2<PB-P1, r1>P1)
What are the four regions when determining whether bundling will be effective?
question
Tying
The practice of requiring a customer to purchase only one good
question
It allows a firm to meter demand and practice price discrimination more effectively, can be used to extend a firm's market power, can be used to protect customer goodwill protected w/a brand name -- the reason why franchise are required to purchase input from the franchiser
What are the benefits of tying?
question
the firm shifts the AR and MR curves to the right, AC rises to AC9 but MC remains the same, the firm now produces Q1 where MR'=MC and receives price P1 => Total profit (1) is larger
question
Firm should choose price P and advertising expenditure A to maximize profit
How much advertising should a firm do?
question
Profit = PQ(P,A) - C(Q) - A
...
question
MRAds 1 + MC(change in Q/A) = full marginal cost of advertising
The firm should advertise up to the point where ___________________________________________________________________________
question
A/PQ= -EA/EP
1 of 73
question
They're a means of capturing consumer surplus and transferring it to the producer
What do all pricing strategies have in common?
question
Firm pick price P and corresponding output Q at the intersection of the MR and MC curves
How do firms maximize profit if they sell all of their output at a single price?
question
Price Discrimination
The practice of charging different prices to different consumers for similar goods
question
First-Degree Price Discrimination
The practice of charging each customer their reservation price
question
Reservation price
The maximum price that a consumer is willing to pay for a good
question
Find the profit that the firm earns when it charges only a single price P and add the profit of each incremental unit produced and sold up until we reach the total quantity Q
How does first-degree price discrimination affect the firm's profit?
question
Incremental Profit = MR/unit-MC/unit
Incremental Profit formula
question
Variable profit
The sum of profits on each incremental unit produced by a firm (profit ignoring fixed costs) - the area between the MR and MC curves
question
Total Profit = Variable Profit - Fixed Costs
How do we find total profit when given the variable profit?
question
Perfect Price Discrimination
...
question
each customer is being charged exactly what they want to pay
When firms can perfectly price discriminate, the MR curve will no longer be relevant to the output decision because ______________________________________________________
question
Incremental revenue
The price paid for one unit
question
the demand curve
Incremental revenue is given by ___________________________________
question
Profit = AR - MC
Incremental Profit formula
question
as long as demand exceeds marginal cost → will do so until it produces a total output of Q**
Firms can increase their profit by expanding production _____________________________________________
question
Q**
The point at which demand is equal to marginal cost and producing any more will reduce profit
question
Variable profit
The area between demand and MC curves and the point at which all consumer surplus has been captured by the firm
question
It's usually impractical to charge every customer a different price unless there's only a few customers; Firms usually don't know the reservation price of each customer and would probably not receive honest answers if they did ask; Firms can charge a few different prices based on estimates of customers' reservation prices
Why is perfect first-degree price discrimination almost impossible to achieve?
question
Imperfect price discrimination is often used by professionals - doctors, lawyers, accountants, architects - who know their clients relatively well and their willingness to pay can be assessed and fees are set accordingly
Who uses imperfect price discrimination?
question
A doctor charging lower-income patients fairly low rates but charging higher-income patients more
What is an example of imperfect price discrimination?
question
Second-Degree Price Discrimination
The practice of charging different prices per unit for different quantities of the same good/service
question
Block pricing
The practice of charging different prices for different quantities or "blocks" of a good
question
Third-Degree Price Discrimination
The practice of dividing consumers into 2+ groups w/seperate demand curves and charging different prices to each group
question
When utilizing third-degree price discrimination, some characteristic is used to divide consumers into distinct groups
How do firms create consumer groups?
question
Firms should find the total profit for both consumer groups using the formula Profit = (price charged to the first group of consumers quantity sold to the first group) + (price charged to the second group of consumers quantity sold to the second group) - (total cost of producing the total output)
How should firms decide what price to charge each group of consumers?
question
the incremental profit from the last unit sold is zero
When firms sell to different groups of consumers, the firm should increase sales to each group of consumers (Q1 and Q2) until ___________________________________________________________
question
MR = P(1+1Ed)
Marginal revenue in terms of elasticity of demand can be written as:
question
P1P2=(1+1/E2)(1+1/E1)
To equate MR1 and MR2, we use the equation:
question
Inter-temporal price discrimination
The practice of separating consumers w/different demand functions into different groups by charging different prices at different points in time
question
D1
When engaging in inter-temporal price discrimination, _______ is the inelastic demand curve for a small group of consumers who value the product highly and don't want to wait to buy it
question
D2
When engaging in inter-temporal price discrimination, _______ is the demand curve for broader group of consumers who are willing to forgo the product if the price is too high
question
Initially offer the price at the higher price P to sell to the smaller group and then lower the price to P2 to sell to the larger group
What strategy should firms use when engaging in inter-temporal price discrimination?
question
The goal is to divide consumers into high-demand and low-demand groups by charging a price that's high at first but falls later
What is the goal when performing inter-temporal price discrimination?
question
The practice of charging higher prices during peak period when capacity constraints cause marginal costs to be high
question
increase economic efficiency by charging consumers prices closer to marginal cost
The objective when doing peak-load pricing is to ________________________________________________________________
question
In third-degree price discrimination, marginal revenue must be equal for each group of consumers, equal to marginal cost, and the costs of serving different groups aren't independent. In peak-load pricing, price and sales in each period can be determined independently by setting MC = MR for each period.
How is peak-load pricing different from third-degree price discrimination? A
question
Two-Part Tariff
A form of pricing where consumers are charged both an entry and a usage fee
question
The problem for the firm is how to set the entry fee (T) versus the usage fee (P)
What is the problem for firms engaging in two-part tariff pricing?
question
If there's only one consumer in the market/many consumers w/identical demand curves, firms must set the usage fee (P) equal to MC and entry fee (T) equal to total consumer surplus for each consumer - the consumer pays T (or a little less) to use the product and pays P = MC per unit consumed
What happens if there's a single consumer when a firm decides to do two-part tariff pricing?
question
Profit = 2T+(P-MC)(Q1+Q2)
Two-Part Tariff Profit formula
question
the firm would no longer set usage fee equal to marginal cost
If there's two different consumers/two groups of identical consumers, _____________________________________________________
question
above MC; equal to remaining consumer surplus of the consumer w/the smaller demand
If there's two different consumers/two groups of identical consumers, the firm should set the usage fee __________________ and the entry fee ___________________________________________
question
There is no simple formula to calculate optimal two-part tariff → some trial and error experiments may be needed
Is there a formula that we can use to calculate the optimal two-part tariff when there are many consumers?
question
A lower entry fee (the more entrant there are, the more profit from sales of the item the firm will earn)
What is the trade-off in a two-part tariff when there's many consumers?
question
the profit derived from the entry fee will fall
As entry fee becomes smaller and number of entrants becomes larger, __________________________________________________________________
question
The goal is to prick entry fee resulting in the optimum number of entrants → the fee that allows for max profit
What is the goal when choosing the entry fee?
question
Bundling
The practice of selling two or more products as a package
question
consumers have heterogeneous demands; when the firm cannot price discriminate
Bundling makes sense when ___________________________________________________ and ________________________________________
question
Bundling is often more profitable when the two products' relative valuations are reversed and demands are negatively correlated
Why is bundling often more profitable than selling products separately?
question
the reservation price of a consumer for good 1
When determining the potential benefits of bundling, the horizontal axis shows ____________________________________________________________
question
the reservation price of a consumer for good 2
When determining the potential benefits of bundling, the vertical axis shows _____________________________________________________________
question
Consumers
...
question
I (upper right hand corner) - consumer will buy both goods; II (upper left hand corner) - consumers will only buy the second good; III (lower left hand corner) - consumers won't buy either of the goods; IV (lower right hand corner) - consumers will only buy the first good What are the four regions when determining bundling benefits?
...
question
Consumers will buy the bundle only if the price is less than/equal to the sum of the consumer's reservation prices for the two goods
When will consumers buy the bundle?
question
r2 = PB - r1
What's the dividing line when determining whether a consumer will buy the bundle?
question
r1+r2 is greater than/equal to PB
Consumers will buy the bundle only if
question
the extent to which demands are negatively correlated
The effectiveness of bundling depends on __________________________________________________________________
question
consumers have a high reservation price for good 1 and a low reservation price for good 2 (and vice versa)
Bundling will work best when ___________________________________________________________________________________
question
Mixed Bundling
Strategy of selling two or more goods as a package or individually
question
Pure Bundling
Strategy of selling products only as a package
question
Selling the goods separately at different prices, Selling the goods only as a bundle, Mixed bundling
What are the three potential strategies firms can use when determining whether to engage in mixed or pure bundling?
question
mixed bundling will be the most profitable
When marginal product cost > reservation price, ___________________________________________________________________________________
question
consumers' demands aren't perfectly negatively correlated
If marginal costs are zero, mixed bundling will be more profitable as long as _____________________________________________________________
question
Dots
estimates of reservation prices/representative sample of consumers
question
a diagonal line connecting these prices passes midway through the dots in the figure
Company might first try pricing the bundle at PB so that ________________________________________________________________
question
I - consumers buy nothing (r1<P1, r2<P2, r1+r2<PB); II - consumers buy the bundle (r1+r2>PB); III - consumers only buy good 2 (r1<PB-P2, r2>P2); IV - consumers only buy good 1 (r2<PB-P1, r1>P1)
What are the four regions when determining whether bundling will be effective?
question
Tying
The practice of requiring a customer to purchase only one good
question
It allows a firm to meter demand and practice price discrimination more effectively, can be used to extend a firm's market power, can be used to protect customer goodwill protected w/a brand name -- the reason why franchise are required to purchase input from the franchiser
What are the benefits of tying?
question
the firm shifts the AR and MR curves to the right, AC rises to AC9 but MC remains the same, the firm now produces Q1 where MR'=MC and receives price P1 => Total profit (1) is larger
question
Firm should choose price P and advertising expenditure A to maximize profit
How much advertising should a firm do?
question
Profit = PQ(P,A) - C(Q) - A
...
question
MRAds 1 + MC(change in Q/A) = full marginal cost of advertising
The firm should advertise up to the point where ___________________________________________________________________________
question
A/PQ= -EA/EP

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