ECON 300 Ch. 11 Quiz

question

They're a means of capturing consumer surplus and transferring it to the producer

answer

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

answer

How do firms maximize profit if they sell all of their output at a single price?

question

Price Discrimination

answer

The practice of charging different prices to different consumers for similar goods

question

First-Degree Price Discrimination

answer

The practice of charging each customer their reservation price

question

Reservation price

answer

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

answer

How does first-degree price discrimination affect the firm's profit?

question

Incremental Profit = MR/unit-MC/unit

answer

Incremental Profit formula

question

Variable profit

answer

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

answer

How do we find total profit when given the variable profit?

question

Perfect Price Discrimination

answer

...

question

each customer is being charged exactly what they want to pay

answer

When firms can perfectly price discriminate, the MR curve will no longer be relevant to the output decision because ______________________________________________________

question

Incremental revenue

answer

The price paid for one unit

question

the demand curve

answer

Incremental revenue is given by ___________________________________

question

Profit = AR - MC

answer

Incremental Profit formula

question

as long as demand exceeds marginal cost → will do so until it produces a total output of Q**

answer

Firms can increase their profit by expanding production _____________________________________________

question

Q**

answer

The point at which demand is equal to marginal cost and producing any more will reduce profit

question

Variable profit

answer

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

answer

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

answer

Who uses imperfect price discrimination?

question

A doctor charging lower-income patients fairly low rates but charging higher-income patients more

answer

What is an example of imperfect price discrimination?

question

Second-Degree Price Discrimination

answer

The practice of charging different prices per unit for different quantities of the same good/service

question

Block pricing

answer

The practice of charging different prices for different quantities or "blocks" of a good

question

Third-Degree Price Discrimination

answer

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

answer

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)

answer

How should firms decide what price to charge each group of consumers?

question

the incremental profit from the last unit sold is zero

answer

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)

answer

Marginal revenue in terms of elasticity of demand can be written as:

question

P1P2=(1+1/E2)(1+1/E1)

answer

To equate MR1 and MR2, we use the equation:

question

Inter-temporal price discrimination

answer

The practice of separating consumers w/different demand functions into different groups by charging different prices at different points in time

question

answer

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

answer

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

answer

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

answer

What is the goal when performing inter-temporal price discrimination?

question

Peak-Load Pricing

answer

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

answer

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.

answer

How is peak-load pricing different from third-degree price discrimination? A

question

Two-Part Tariff

answer

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)

answer

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

answer

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)

answer

Two-Part Tariff Profit formula

question

the firm would no longer set usage fee equal to marginal cost

answer

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

answer

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

answer

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)

answer

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

answer

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

answer

What is the goal when choosing the entry fee?

question

Bundling

answer

The practice of selling two or more products as a package

question

consumers have heterogeneous demands; when the firm cannot price discriminate

answer

Bundling makes sense when ___________________________________________________ and ________________________________________

question

Bundling is often more profitable when the two products' relative valuations are reversed and demands are negatively correlated

answer

Why is bundling often more profitable than selling products separately?

question

the reservation price of a consumer for good 1

answer

When determining the potential benefits of bundling, the horizontal axis shows ____________________________________________________________

question

the reservation price of a consumer for good 2

answer

When determining the potential benefits of bundling, the vertical axis shows _____________________________________________________________

question

Consumers

answer

...

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?

answer

...

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

answer

When will consumers buy the bundle?

question

r2 = PB - r1

answer

What's the dividing line when determining whether a consumer will buy the bundle?

question

r1+r2 is greater than/equal to PB

answer

Consumers will buy the bundle only if

question

the extent to which demands are negatively correlated

answer

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)

answer

Bundling will work best when ___________________________________________________________________________________

question

Mixed Bundling

answer

Strategy of selling two or more goods as a package or individually

question

Pure Bundling

answer

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

answer

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

answer

When marginal product cost > reservation price, ___________________________________________________________________________________

question

consumers' demands aren't perfectly negatively correlated

answer

If marginal costs are zero, mixed bundling will be more profitable as long as _____________________________________________________________

question

Dots

answer

estimates of reservation prices/representative sample of consumers

question

a diagonal line connecting these prices passes midway through the dots in the figure

answer

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)

answer

What are the four regions when determining whether bundling will be effective?

question

Tying

answer

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

answer

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

answer

By advertising:

question

Firm should choose price P and advertising expenditure A to maximize profit

answer

How much advertising should a firm do?

question

Profit = PQ(P,A) - C(Q) - A

answer

...

question

MRAds 1 + MC(change in Q/A) = full marginal cost of advertising

answer

The firm should advertise up to the point where ___________________________________________________________________________

question

A/PQ= -EA/EP

answer

Advertising Profit formula

1 of 73

question

They're a means of capturing consumer surplus and transferring it to the producer

answer

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

answer

How do firms maximize profit if they sell all of their output at a single price?

question

Price Discrimination

answer

The practice of charging different prices to different consumers for similar goods

question

First-Degree Price Discrimination

answer

The practice of charging each customer their reservation price

question

Reservation price

answer

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

answer

How does first-degree price discrimination affect the firm's profit?

question

Incremental Profit = MR/unit-MC/unit

answer

Incremental Profit formula

question

Variable profit

answer

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

answer

How do we find total profit when given the variable profit?

question

Perfect Price Discrimination

answer

...

question

each customer is being charged exactly what they want to pay

answer

When firms can perfectly price discriminate, the MR curve will no longer be relevant to the output decision because ______________________________________________________

question

Incremental revenue

answer

The price paid for one unit

question

the demand curve

answer

Incremental revenue is given by ___________________________________

question

Profit = AR - MC

answer

Incremental Profit formula

question

as long as demand exceeds marginal cost → will do so until it produces a total output of Q**

answer

Firms can increase their profit by expanding production _____________________________________________

question

Q**

answer

The point at which demand is equal to marginal cost and producing any more will reduce profit

question

Variable profit

answer

The area between demand and MC curves and the point at which all consumer surplus has been captured by the firm

question

answer

Why is perfect first-degree price discrimination almost impossible to achieve?

question

answer

Who uses imperfect price discrimination?

question

A doctor charging lower-income patients fairly low rates but charging higher-income patients more

answer

What is an example of imperfect price discrimination?

question

Second-Degree Price Discrimination

answer

The practice of charging different prices per unit for different quantities of the same good/service

question

Block pricing

answer

The practice of charging different prices for different quantities or "blocks" of a good

question

Third-Degree Price Discrimination

answer

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

answer

How do firms create consumer groups?

question

answer

How should firms decide what price to charge each group of consumers?

question

the incremental profit from the last unit sold is zero

answer

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)

answer

Marginal revenue in terms of elasticity of demand can be written as:

question

P1P2=(1+1/E2)(1+1/E1)

answer

To equate MR1 and MR2, we use the equation:

question

Inter-temporal price discrimination

answer

The practice of separating consumers w/different demand functions into different groups by charging different prices at different points in time

question

answer

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

answer

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

answer

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

answer

What is the goal when performing inter-temporal price discrimination?

question

Peak-Load Pricing

answer

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

answer

The objective when doing peak-load pricing is to ________________________________________________________________

question

answer

How is peak-load pricing different from third-degree price discrimination? A

question

Two-Part Tariff

answer

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)

answer

What is the problem for firms engaging in two-part tariff pricing?

question

answer

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)

answer

Two-Part Tariff Profit formula

question

the firm would no longer set usage fee equal to marginal cost

answer

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

answer

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

answer

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)

answer

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

answer

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

answer

What is the goal when choosing the entry fee?

question

Bundling

answer

The practice of selling two or more products as a package

question

consumers have heterogeneous demands; when the firm cannot price discriminate

answer

Bundling makes sense when ___________________________________________________ and ________________________________________

question

Bundling is often more profitable when the two products' relative valuations are reversed and demands are negatively correlated

answer

Why is bundling often more profitable than selling products separately?

question

the reservation price of a consumer for good 1

answer

When determining the potential benefits of bundling, the horizontal axis shows ____________________________________________________________

question

the reservation price of a consumer for good 2

answer

When determining the potential benefits of bundling, the vertical axis shows _____________________________________________________________

question

Consumers

answer

...

question

answer

...

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

answer

When will consumers buy the bundle?

question

r2 = PB - r1

answer

What's the dividing line when determining whether a consumer will buy the bundle?

question

r1+r2 is greater than/equal to PB

answer

Consumers will buy the bundle only if

question

the extent to which demands are negatively correlated

answer

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)

answer

Bundling will work best when ___________________________________________________________________________________

question

Mixed Bundling

answer

Strategy of selling two or more goods as a package or individually

question

Pure Bundling

answer

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

answer

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

answer

When marginal product cost > reservation price, ___________________________________________________________________________________

question

consumers' demands aren't perfectly negatively correlated

answer

If marginal costs are zero, mixed bundling will be more profitable as long as _____________________________________________________________

question

Dots

answer

estimates of reservation prices/representative sample of consumers

question

a diagonal line connecting these prices passes midway through the dots in the figure

answer

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)

answer

What are the four regions when determining whether bundling will be effective?

question

Tying

answer

The practice of requiring a customer to purchase only one good

question

answer

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

answer

By advertising:

question

Firm should choose price P and advertising expenditure A to maximize profit

answer

How much advertising should a firm do?

question

Profit = PQ(P,A) - C(Q) - A

answer

...

question

MRAds 1 + MC(change in Q/A) = full marginal cost of advertising

answer

The firm should advertise up to the point where ___________________________________________________________________________

question

A/PQ= -EA/EP

answer

Advertising Profit formula

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ECON 300 Ch. 11 Quiz

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