Exam 11: Pricing Strategies for Firms With Market Power

You are a truck farmer and bring produce to a farmer's market every Wednesday.You have found that on a typical day,five other farmers bring their produce to market.Years of experience have taught you that you make the most money by pricing your produce at 1.15 times your marginal cost.What is your elasticity of demand in this Cournot oligopoly? What is the market elasticity of demand?

Brand loyalty can be enhanced through:

Which of the following pricing strategies does NOT usually enhance the profits of firms with market power?

To circumvent the problem of double marginalization:

Before the breakup of AT&T,the firm charged a price for local telephone services that was roughly one-half of its cost of providing the services.In contrast,it charged almost two times it cost for long-distance services.Why do you think AT&T adopted this pricing strategy?

During spring break,students have an elasticity of demand for a trip to Las Vegas of −5.How much should an airline charge students for a ticket if the price it charges the general public is $660? Assume the general public has an elasticity of −3.

Suppose that JVC is trying to decide how to price a new stereo system composed of a receiver,CD player,and speakers.The company's economists have estimated that two different groups will purchase these products: students and club owners.The economists' analysis suggests that the total market for its brand of stereos consists of 10,000 students and 50,000 club owners.In addition,it is estimated that the maximum amount each group will pay for each stereo component is as follows: Group Receiver CD Player Speaters Studerits \ 250 \ 150 \ 100 Club owners \ 200 \ 75 \ 250 JVC's objective is to maximize revenues,and it is considering three strategies to price its stereo components: (1)a standard strategy whereby it prices each stereo component separately; (2)perfect price discrimination; or (3)bundling the three components together and selling only bundles containing the receiver,CD player,and speakers. a.If JVC uses a standard pricing strategy,what price should it charge for the receiver,for the CD player,and for the speakers to maximize revenues? What are the revenues they will earn through this strategy? b.Suppose JVC adopts a first-degree price discrimination policy.What prices should it charge to maximize revenues? What are JVC's revenues using this strategy? c.Suppose that JVC markets the receiver,CD player,and speakers together.That is,it uses a commodity-bundle strategy such that the products are sold as one item.What price should JVC charge to maximize revenues? How much will it earn?

During the 1990s,several airlines were on the brink of bankruptcy.These same airlines were giving away millions of dollars in free airline travel through their frequent-flyer programs.Do you think it would have been a good idea for these airlines to eliminate their frequent-flyer programs in order to earn higher profits?

Consider a Cournot oligopoly consisting of four identical firms producing good X.If the firms produce good X at a marginal cost of $7 per unit and the market elasticity of demand is −2,determine the profit-maximizing price.

A monopoly produces widgets at a marginal cost of $20 per unit and zero fixed costs.It faces an inverse demand function given by P = -100 − 4Q.Suppose fixed costs rise to $401.What happens in the market?

During spring break,students have an elasticity of demand for a trip to Cancun,Mexico,of −4.How much should an airline charge students for a ticket if the price it charges the general public is $420? Assume the general public has an elasticity of −2.

In a Cournot oligopoly with N firms and identical marginal costs,the relationship between the price elasticity of market demand and that of the firm is:

A campus auditorium sells tickets at half price to students during the last 30 minutes before a concert starts.This is an example of:

The idea of charging two different groups of consumers two different prices is practiced in:

You are the owner of a Mom and Pop store that buys milk from a supplier at a cost of $1 per gallon.If you estimate the elasticity of demand for milk sold at your store to be -3.5,what are your profit-maximizing markup and price?

You are the manager of a gas station and your goal is to maximize profits.Based on your past experience,the elasticity of demand by Ohioans for a car wash is −3,while the elasticity of demand by non-Ohioans for a car wash is −1.5.If you charge Ohioans $9 for a car wash,how much should you charge a man with a Kentucky license plate for a car wash?

Suppose that the inverse demand for a downstream firm is P = 150 − Q.Its upstream division produces a critical input with costs of C_U(Q_d)= 5(Q_d )².The downstream firm's cost is C_d(Q)= 10Q.When there is no external market for the downstream firm's critical input,the net marginal revenue for the downstream firm is:

You are the manager of a Mom and Pop store that can buy milk from a supplier at $2.00 per gallon.If you believe the elasticity of demand for milk by customers at your store is −3,then your profit-maximizing price is:

Suppose that the inverse demand for a downstream firm is P = 150 − Q.Its upstream division produces a critical input with costs of C_U(Q_d)= 5(Q_d )².The downstream firm's cost is C_d(Q)= 10Q.When there is no external market for the downstream firm's critical input,the marginal revenue for the downstream firm is:

You have just been hired as manager of a new health spa in Retirement Village,Florida.The owner has commissioned a market study that estimates the average customer's monthly demand curve for visiting the health spa to be Q^d = 50 - 0.25P.The cost of operating is C(Q)= 3Q,where Q is the number of visits.The owner has been charging a $20 per month membership fee and a $5 per visit fee.Part of your salary is 10 percent of the monthly profits.Suggest a pricing strategy that will increase your salary.