Exam 16: Pricing Strategy

Movie theaters often charge different people different prices for admission. Why don't theaters charge different prices for popcorn and other food items?

Which of the following statements is true?

When you buy at a low price in one market then sell at a higher price in another market you are engaging in

Dell Computers allows potential consumers to customize personal computers to their desires. Dell's strategy is successful because offering bundles that more exactly meet a consumer's preference allows Dell to extract more consumer surplus.

Figure 16-5 -Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the competitive price. (This is also called an optimal two-part tariff.) What is the value of the consumer surplus from this pricing strategy?

Figure 16-5 -Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the competitive price. (This is also called an optimal two-part tariff.) What is the per-unit price it should charge, if any?

Joss is a marketing consultant. Iris and Daphne are potential customers interested in commissioning Joss to undertake a market survey and compile the findings in a report. Iris is willing to pay $500 for the service while Daphne is willing to pay $800. Suppose that the opportunity cost of Joss's time is $1,200. Assume that Iris and Daphne do not know each other. Which of the following statements is true?

The law of one price states that identical products should sell for the same price everywhere as long as transactions costs are zero.

Figure 16-1 -Refer to Figure 16-1. What is the economically efficient output level?

If marginal costs differ quite substantially from average total costs, then using a cost-plus pricing schedule will not lead to the profit maximizing price.

Which of the following describes two-part tariff pricing?

Figure 16-6 Watanabe Sensei operates the only martial arts school in Hartfield. For simplicity, assume that consumers have identical demand curves and that Sensei knows what this demand curve is. Figure 16-6 shows this demand curve. -Refer to Figure 16-6. If Sensei acts as a single-price monopolist and charges the profit-maximizing price, what is his producer surplus?

Figure 16-6 Watanabe Sensei operates the only martial arts school in Hartfield. For simplicity, assume that consumers have identical demand curves and that Sensei knows what this demand curve is. Figure 16-6 shows this demand curve. -Refer to Figure 16-6. Suppose instead of charging the monopoly price for his classes, Sensei charges the competitive price. What is the competitive price and what is the quantity demanded at this price?

Compared to monopoly pricing, an optimal two-part tariff

Article Summary Brandeis University economist Benjamin Shiller has written a paper which explains how Netflix could combine demographic data with customers' Web browsing habits to more accurately predict how much a customer would be willing to pay for a Netflix subscription, and how using this method of first-degree price discrimination would generate higher profits. Shiller explains that the more information a company has about its customers, the better it is at being able to set prices to increase profits. As he stated in his paper, "Using all variables to tailor prices, one can yield variable profits 1.39 percent higher than variable profits obtained using non-tailored 2nd degree price-discrimination. Using demographics alone to tailor prices raises profits by much less, yielding variable profits only 0.14% higher than variable profits attainable under 2nd degree [price discrimination]." -Refer to the Article Summary. If Netflix chose to use Shiller's pricing method

Consider three pricing strategies that the firm can pursue: a. optimal two-part tariff pricing b. perfect price discrimination c. single-price monopoly pricing. Of these three strategies, which is least likely to benefit society as a whole?

The Walt Disney Company is in a position to use a two-part tariff policy in setting prices for admission and rides at Disney World. If this strategy resulted in maximum profit, Disney would convert all consumer surplus into profit. Which of the following explains why Disney does not maximize its profits from admission and rides?

Cost-plus pricing may be a reasonable way to determine price when

Even though it often does not result in profit maximization, some small firms use a cost-plus pricing strategy anyway because

According to a New York Times article, shoppers from New York City have played a game of "retail arbitrage" by shopping at malls in Northern New Jersey, a state where there is no tax on clothing and shoes. Even after accounting for transactions costs, shoppers could still save money on their clothing and footwear purchases. Source: Ken Belson and Nate Schweber, "Sales Tax Cut in City May Dim Allure of Stores Across Hudson," New York Times, January 18, 2007. Is the term "arbitrage" correctly used here?