Managerial Economics Chapter 11

question

standard pricing for firms with market power

answer

MR=MC

question

simple markup rule

answer

P=[E/(1+E)]*MC
the more elastic the demand, the lower the markup
the higher elastic the demand, the higher markup

question

first degree or perfect price discrimination

answer

practice of charging each consumer the maximum amount he or she will pay for each incremental unit
-permits a firm to extract all surplus from consumers
-price won't work if consumers can resell the good
(ex. car salesman)

question

oligopoly markup rule

answer

P=[EN/(1+EN)]*MC

question

second degree price discrimination

answer

the practice of posting a discrete schedule of declining prices for different quantities.
(ex. electricity)

question

third degree price discrimination

answer

-the practice of charging different groups of consumers different prices for the same product
-group must have observable characteristics for third-degree price discrimination to work
(ex. student discounts, senior citizen's discounts, regional & international pricing)

question

two-part pricing

answer

fixed fee & a per unit cost
1. set price at marginal cost
2. compute consumer surplus
3. charge a fixed fee equal to consumer surplus

question

block pricing

answer

the practice of packaging multiple units of an identical product together and selling them as one product

question

commodity bundling

answer

the practice of bundling two or more products together and charging one price for the bundle
(ex. vacation practices)

question

peak load pricing

answer

when demand during peak times is higher than capacity of the firm, the firms should utilize peak-load pricing
-charge higher prices during the peak times
-charge lower prices during the off peak time
(uber - surcharge)

question

cross-subsidies

answer

prices charged for one product and subsidized by the sale of another product
-my be profitable when there are significant demand complementaries effects ex. drinks and meals at restaurants

question

double marginalization

answer

large firm with upstream and downstream (vertical integration)
both divisions mark up their price over MC which results in a double mark up
*PRINCIPLE NOT COMPUTATION*

question

transfer pricing

answer

NMRd=MRd-MCd=MCu

question

pricing in markets with intense price competition

answer

price matching - no firm has an incentive to lower prices
randomized pricing - constantly changing prices, reduces ability of rival firms to undercut a firms prices

question

the pricing strategy in which a firm optimally sets the internal price to an upstream division to maximize overall firm profits is referred to as

answer

transfer pricing

1 of 15

question

standard pricing for firms with market power

answer

MR=MC

question

simple markup rule

answer

P=[E/(1+E)]*MC
the more elastic the demand, the lower the markup
the higher elastic the demand, the higher markup

question

first degree or perfect price discrimination

answer

question

oligopoly markup rule

answer

P=[EN/(1+EN)]*MC

question

second degree price discrimination

answer

the practice of posting a discrete schedule of declining prices for different quantities.
(ex. electricity)

question

third degree price discrimination

answer

question

two-part pricing

answer

fixed fee & a per unit cost
1. set price at marginal cost
2. compute consumer surplus
3. charge a fixed fee equal to consumer surplus

question

block pricing

answer

the practice of packaging multiple units of an identical product together and selling them as one product

question

commodity bundling

answer

the practice of bundling two or more products together and charging one price for the bundle
(ex. vacation practices)

question

peak load pricing

answer

question

cross-subsidies

answer

prices charged for one product and subsidized by the sale of another product
-my be profitable when there are significant demand complementaries effects ex. drinks and meals at restaurants

question

double marginalization

answer

large firm with upstream and downstream (vertical integration)
both divisions mark up their price over MC which results in a double mark up
*PRINCIPLE NOT COMPUTATION*

question

transfer pricing

answer

NMRd=MRd-MCd=MCu

question

pricing in markets with intense price competition

answer

price matching - no firm has an incentive to lower prices
randomized pricing - constantly changing prices, reduces ability of rival firms to undercut a firms prices

question

the pricing strategy in which a firm optimally sets the internal price to an upstream division to maximize overall firm profits is referred to as

answer

transfer pricing

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Managerial Economics Chapter 11

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