Chapter 14: ADVANCED PRICING TECHNIQUES
Chapter 14: ADVANCED PRICING TECHNIQUES
Multiple Choice
14-1 A firm faces the demand for its product,
P=100 –0.5Q
, as shown in the figure below. It
produces under conditions of constant costs in the long run, and LMC = LAC = $12 per unit.
If the firm must set a uniform price for the good, what price will it set to maximize its profit in the
long run?
a. $12
b. $24
c. $25
d. $30
e. none of the above
14-2 A firm faces the demand for its product,
P=100 –0.5Q
, as shown in the figure below. It
produces under conditions of constant costs in the long run, and LMC = LAC = $12 per unit.
Chapter 14: ADVANCED PRICING TECHNIQUES
At the profit-maximizing uniform price, the firm earns economic profit of __________ when it
engages in uniform pricing.
a. $3,872
b. $4,728
c. $4,874
d. $5,428
e. none of the above
14-3 A firm faces the demand for its product,
P=100 –0.5Q
, as shown in the figure below. It
produces under conditions of constant costs in the long run, and LMC = LAC = $12 per unit.
Under uniform pricing, consumers enjoy $______ of consumer surplus.
a. $1,872
b. $1,936
c. $2,474
d. $2,500
14-4 A firm faces the demand for its product,
P=100 –0.5Q
, as shown in the figure below. It
produces under conditions of constant costs in the long run, and LMC = LAC = $12 per unit.
Chapter 14: ADVANCED PRICING TECHNIQUES
Under uniform pricing, the firm loses sales on _______ units that could be profitably sold if
buyers paid their demand prices instead of facing the uniform price.
a. 44
b. 50
c. 88
d. 112
14-5 A firm faces the demand for its product,
P=100 –0.5Q
, as shown in the figure below. It
produces under conditions of constant costs in the long run, and LMC = LAC = $12 per unit.
If the firm can practice first-degree price discrimination, it will be able to collect $________ in
total revenue under perfect price discrimination.
a. $1,872
b. $1,936
c. $7,744
d. $9,856
e. none of the above
Chapter 14: ADVANCED PRICING TECHNIQUES
14-6 A firm faces the demand for its product,
P=100 –0.5Q
, as shown in the figure below. It
produces under conditions of constant costs in the long run, and LMC = LAC = $12 per unit.
If the firm can practice first-degree price discrimination, it can make a maximum profit of
a. $1,872.
b. $1,936.
c. $7,744.
d. $9,856.
14-7. A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There
are 50 nighttime buyers, all of whom have identical demands given by DN in the figure below.
The firm’s variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000.
The marketing director must devise a two-part pricing plan that will maximize the firm’s profit.
Chapter 14: ADVANCED PRICING TECHNIQUES
Suppose the marketing director ignores the nighttime market and wishes to extract all consumer
surplus from the daytime buyers. The optimal access charge is $_________ and the optimal usage
fee is $______ per unit.
a. A* = $1,000 and f * = $12
b. A* = $2,400 and f * = $12
c. A* = $7,744 and f * = $12
d. A* = $9,856 and f * = $12
14-8. A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There
are 50 nighttime buyers, all of whom have identical demands given by DN in the figure below.
The firm’s variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000.
The marketing director must devise a two-part pricing plan that will maximize the firm’s profit.
Suppose the marketing director ignores the nighttime market and wishes to extract all consumer
surplus from the daytime buyers. By setting the optimal access charge and user fee, the firm will
earn $_________ of profit on each one of the 50 daytime buyers.
a. $1,872.
b. $1,936.
c. $7,744.
d. $9,856.
14-9. A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There
are 50 nighttime buyers, all of whom have identical demands given by DN in the figure below.
The firm’s variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000.
The marketing director must devise a two-part pricing plan that will maximize the firm’s profit.
Now suppose the marketing director wishes to serve both daytime and nighttime buyers, what is
the MRf function?
a. MRf = 5,000 – 200f
b. MRf = 7,500 – 250f
c. MRf = 8,000 – 250f
d. MRf = 7,500 – 200f
Chapter 14: ADVANCED PRICING TECHNIQUES
14-10. A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There are 50
nighttime buyers, all of whom have identical demands given by DN in the figure below. The firm’s
variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000. The marketing
director must devise a two-part pricing plan that will maximize the firm’s profit.
Assuming the firm will serve both daytime and nighttime buyers, what is the MCf function?
a. MCf = –1,800
b. MCf = –2,000
c. MCf = 8,000 – 250f
d. MCf = 7,500 + 200f
e. none of the above
14-11. A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There
are 50 nighttime buyers, all of whom have identical demands given by DN in the figure below.
The firm’s variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000.
The marketing director must devise a two-part pricing plan that will maximize the firm’s profit.
Chapter 14: ADVANCED PRICING TECHNIQUES
Assuming both daytime and nighttime markets are served, the optimal per unit usage fee (f*) is
a. f * = $24
b. f * = $34
c. f * = $44
d. f * = $54
e. f * = $64
14-12. A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There
are 50 nighttime buyers, all of whom have identical demands given by DN in the figure below.
The firm’s variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000.
The marketing director must devise a two-part pricing plan that will maximize the firm’s profit.
Chapter 14: ADVANCED PRICING TECHNIQUES
Assuming both daytime and nighttime markets are served, the optimal fixed access charge (A*) is
a. A* = $1,472
b. A* = $2,178
c. A* = $3,872
d. A* = $4,356
e. A* = $7,744
14-13. A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There are 50
nighttime buyers, all of whom have identical demands given by DN in the figure below. The firm’s
variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000. The marketing
director must devise a two-part pricing plan that will maximize the firm’s profit.
Chapter 14: ADVANCED PRICING TECHNIQUES
How much profit will the firm earn by charging the optimal access charge and optimal access fee
(remember that there are 50 daytime and 50 nighttime buyers)?
a. $80,600
b. $90,600
c. $124,600
d. $185,600
e. $215,600
14-14. A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There
are 50 nighttime buyers, all of whom have identical demands given by DN in the figure below.
The firm’s variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000.
The marketing director must devise a two-part pricing plan that will maximize the firm’s profit.
Should the firm bother to sell output to the nighttime market?
a. Yes, because only $77,200 of profit is earned by serving only the daytime buyers.
b. Yes, because only $137,200 of profit is earned by serving only the daytime buyers.
c. No, because $240,000 of profit is earned by serving only the daytime buyers.
d. No, because $300,000 of profit is earned by serving only the daytime buyers.
14-15 A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There
are 50 nighttime buyers, all of whom have identical demands given by DN in the figure below.
The firm’s variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000.
Chapter 14: ADVANCED PRICING TECHNIQUES
The marketing director must devise a two-part pricing plan that will maximize the firm’s profit.
A firm selling in two markets is practicing price discrimination
a. anytime it charges different consumers different prices.
b. when it is charging different consumers different prices and the price difference is not
based upon cost differences.
c. when it refuses to sell the good to some group of consumers.
d. all of the above
e. none of the above
14-16 A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There
are 50 nighttime buyers, all of whom have identical demands given by DN in the figure below.
The firm’s variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000.
The marketing director must devise a two-part pricing plan that will maximize the firm’s profit.
Chapter 14: ADVANCED PRICING TECHNIQUES
To maximize profit a price discriminating firm should
a. produce the output at which total marginal revenue equals marginal cost.
b. allocate the optimal output so the elasticity is the same in each market.
c. allocate the output so that marginal revenue is the same in each market.
d. both a and c
e. all of the above
14-17 A firm sells its product to two groups of buyers: daytime buyers and nighttime buyers. There are
50 daytime buyers, all of whom have identical demands given by DD in the figure below. There
are 50 nighttime buyers, all of whom have identical demands given by DN in the figure below.
The firm’s variable costs are constant (SMC = AVC = $12) and its total fixed cost is $250,000.
The marketing director must devise a two-part pricing plan that will maximize the firm’s profit.
If a firm is selling a product in two markets, A and B, and the marginal revenue in A is $25 and
the marginal revenue in B is $20, the firm should
a. charge a higher price in A where MR is higher
b. charge a lower price in B where MR is lower
Chapter 14: ADVANCED PRICING TECHNIQUES
c. sell more in B and less in A
d. sell more in A and less in B
e. both a and c
14-18 To successfully practice price discrimination
a. the firm must be a pure monopoly
b. the firm must possess market power
c. it must be difficult for consumers in one market to sell to consumers in the other market
d. both a and c
e. both b and c
14-19 In order to maximize profit, a firm that sells its output in two markets will allocate total output
between the two markets so that:
a. marginal revenue is equal in the two markets
b. marginal revenue for the firm is equal to the sum of the marginal revenues
c. marginal revenue for the firm is equal to the sum of the marginal costs
d. both a and b
e. none of the above
14-20 A news magazine offers students a discount on the regular subscription rate. The total number of
subscriptions is optimal, and, at the current prices, the marginal revenue from the last subscription
sold to a student is $6, while the marginal revenue from the last subscription sold to a regular
customer is $10. In order to maximize profit, the magazine should
a. stop offering students a discount on the regular subscription rate.
b. offer students a higher discount (lower the price to students).
c. offer students a lower discount (raise the price to students).
d. offer all customers the same discount received by the students.
Chapter 14: ADVANCED PRICING TECHNIQUES
14-21 A news magazine offers students a discount on the regular subscription rate. The total number of
subscriptions is optimal, and, at the current prices, the marginal revenue from the last subscription
sold to a student is $6, while the marginal revenue from the last subscription sold to a regular
customer is $10. If the magazine sells one more subscription to a regular customer and one less
subscription to a student:
a. profit will increase $4
b. profit will increase $16
c. profit will decrease $6
d. profit will decrease $10
e. none of the above
14-22 The following graph shows the demands and marginal revenue in two markets, 1 and 2, for a price
discriminating firm along with total marginal revenue, MRT, and marginal cost.
What total output should the firm produce?
a. 275 units
b. 225 units
c. 175 units
d. 350 units
e. 100 units
Chapter 14: ADVANCED PRICING TECHNIQUES
14-23 The following graph shows the demands and marginal revenue in two markets, 1 and 2, for a price
discriminating firm along with total marginal revenue, MRT, and marginal cost.
How should the firm allocate sales between the two markets?
a. 150 in each market
b. 100 in market 1, 175 in 2
c. 150 in market 1, 300 in 2
d. 112.5 in each market
e. 75 in market 1, 150 in 2
14-24 The following graph shows the demands and marginal revenue in two markets, 1 and 2, for a price
discriminating firm along with total marginal revenue, MRT, and marginal cost.
Chapter 14: ADVANCED PRICING TECHNIQUES
What price should the firm charge in each market?
a. P1 = $20, P2 = $32.50
b. P1 = $35, P2 = $22.50
c. P1 = $20, P2 = $20
d. P1 = $27.50, P2 = $35
e. Impossible to say because market demand is not given
14-25 The following graph shows the demands and marginal revenue in two markets, 1 and 2, for a price
discriminating firm along with total marginal revenue, MRT, and marginal cost.
At the optimal price and quantity, what is demand elasticity in each market?
a. E1 = −3.67, E2 = −2.33
b. E1 = −3, E2 = −4
c. E1 = −2.5, E2 = −3.5
d. E1 = −3, E2 = −3
e. E1 = −1.67, E2 = −2.33
14-26 The following graph shows the demands and marginal revenue in two markets, 1 and 2, for a price
discriminating firm along with total marginal revenue, MRT, and marginal cost.