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1、 Copyright 2014 Pearson Education,Inc.CHAPTER 10 SPECIAL PRICING PRACTICES QUESTIONS 1.False.This statement could be true if average cost were constant and completely variable with quantity.However,if unit cost changes as more or less is produced,then what is the cost on which the mark-up should be
2、calculated?If there are fixed costs,sales at a relatively high price(high mark-up)may not be sufficient to cover all fixed costs.2.An example of the equity argument is given by the medical profession,when certain(low income)patients are treated at lower fees,while high income patients pay higher fee
3、s.Similarly,attorneys can charge in this manner,sometimes taking on cases at low or hardly any charge.It is quite true that in such cases people who cannot afford regular fees are benefited,while those who are able to pay more can do so with relative ease.This can be a valid argument from an equity
4、viewpoint.However,if a firm is faced by two(or more)markets with different demand elasticities,and these markets are sealed off from one another(you cannot transfer the product or service from one market to another),charging different prices in the different markets will increase the suppliers profi
5、t.This is a case of third-degree discrimination.3.The higher is the demand elasticity the lower will generally be the mark-up.Thus,cigarettes and orange juice probably sell at higher mark-ups.4.Most probably,the price of coffee was the one which was raised,since presumably it has the lower elasticit
6、y of demand.5.Both types of price leadership will occur in an oligopolistic industry.The case of barometric leadership exists when no one firm is dominant in an industry and one firm(that may or may not be the largest)will change its price because of changed demand or supply conditions,and expects t
7、hat others will follow.This does not always happen.In the case of dominant price leadership,a firm,almost always the largest and most powerful,sets its price so that it maximizes its profits,and lets all the other firms sell as much as they wish at that price.6.Yes.In order to maximize the total pro
8、fits of the cartel,the cartel will charge a monopoly price.Output will be established at the point where the industry marginal revenue curve meets the combined marginal cost curve of the members of the cartel.Price is then charged on the demand curve.This is the same price as would be charged by a m
9、onopoly.7.Conditions favorable to formation of cartel:a.Small number of large firms.b.Geographic proximity.c.Homogeneous product.d.High entry barriers.e.Similar cost structures.98 Special Pricing Practices Copyright 2014 Pearson Education,Inc.8.Yes.Monopolies can be created through regulation and li
10、censing.For instance,licensing is required of various professions,such as electricians,plumbers,doctors,accountants and lawyers.The licensing boards are generally composed of members of the profession in whose interest it is to limit the number of entrants.(This statement does not mean,that there ar
11、e no benefits from licensing,e.g.,quality of participants.However,there is no question that the number of people in the profession will be limited.)In many cities,taxi cabs must have a permit(medallion)to operate.Only a limited number of these permits is available.Liquor stores must be licensed.Natu
12、ral monopoly conditions(large cost economies of scale over the entire range of output to meet the market demand for a product)lead to government creation of monopolies,such as public utilities in water,sewage treatment,gas,cable television,etc.In the past,several industries were regulated,e.g.,the a
13、irlines.Routes and fares were specified by a government agency.Price competition did not exist.It might also be said that other types of government regulations(however important they may be)bring about greater concentration,and thus possibly less competition within industries.The testing of drugs as
14、 regulated by the Federal Drug Administration and requirements for pollution control set by the Environmental Protection Administration are very expensive procedures,and thus may hit small firms more than large companies.Such expenditures could create a barrier to entry into industries and thus lead
15、 to greater concentration.9.The Baumol model states that companies(in oligopolistic industries)have for their objective the maximization of revenue subject to a minimum profit constraint.The price charged by such companies would be lower than that of a profit maximizer and quantities sold will be hi
16、gher.Also,changes in fixed costs could affect the quantity produced,unlike in the short-run profit maximization case.Revenue maximization may be important in some cases,particularly where a company tries to gain a foothold in an industry and increase its market share.This is a short-run situation.Ho
17、wever,in the final analysis,it appears that stockholders,in the long run,are more interested in a companys profitability and cash flows.Thus the profit maximization model is under most circumstances more applicable.10.Not in all instances,since these prices are charged at different times of the day
18、where the costs of providing these services may differ as well as reflecting differences in demand and price elasticities of demand among various users.Certainly,telephones are used more during the day,particularly by businesses.Telephone traffic is generally rather low at night or during weekends.H
19、owever,some textbook authors include this type of pricing as an example of price discrimination.11.If average variable costs are constant or nearly constant,then the methods will give same or similar answers.12.When two passengers sitting next to one another on an airplane have paid different prices
20、 for the same trip,it would appear that this is an obvious example of price discrimination,and in some cases it certainly is.If one passenger had bought his ticket long ago(and paid for it),while the other,Special Pricing Practices 99 Copyright 2014 Pearson Education,Inc.because of a sudden business
21、 necessity,had purchased it yesterday,it would appear that the two passengers have very different price elasticities.However,there may also be cost differences involved.An airline can do a more cost-effective job of planning its schedules when the demand is better known.Also,its cash flow from the f
22、irst passenger has already occurred,and the company has had the funds for some time.Further,there are significant swings in demand during different times in a week.Mondays,Thursdays and Fridays appear to have more(business)traffic than the other days.Thus,lower price fares may prevail during days wh
23、en an airline has excess capacity.Also the incremental costs of servicing additional passengers may be low in flights that are well below capacity,so that marginal cost pricing would call for lower fares for last-minute customers.13.No.Within a company,mark-ups can differ from product to product.Suc
24、h price differences are probably governed by differences in demand elasticity.Also,a company will change its prices and mark-ups,often in order to improve or protect its profits.This indicates that a company is moving the price along a demand curve to ascertain an optimum point.14.a.Transfer pricing
25、:a computer company which operates at different stages of production will often employ transfer pricing.Suppose the product advances through four stages:manufacture of components,assembly of components into a machine,the assembly of machines into a system,and marketing the final product.A price is e
26、stablished at each stage;this price becomes the unit cost for the next stage.b.Psychological pricing:a price which would appeal to the public is established.For instance,a product could be priced at$19.95 instead of$20,since the small difference creates an illusion of lower price.Gasoline is usually
27、 priced at,for instance,96.9 cents,rather than 97.Most people appear to think of this price as 96 cents.c.Price skimming:the producer of a new product(with no competition)will charge a higher price.The price charged ideally would be along the demand curve(skims the demand curve)so that early custome
28、rs would pay the high price they are willing to pay rather than obtain a benefit of a single price set at the equilibrium of demand and supply.As the company exhausts that part of the market willing to pay the high price,prices will be dropped,particularly as competition enters the market.Calculator
29、s,cameras and personal computers are just a few examples,where such pricing has prevailed.d.Penetration pricing:a company introducing a new product will charge a relatively low price,in order to gain a foothold in the market and attain a market share over time.This may occur when a new product enter
30、s a field where other similar products are already marketed.Most frequently,penetration pricing occurs at the retail level in such items as soap,toothpaste,etc.It is also used in the restaurant business,where a new restaurant or one which wants to expand its market share will give discounts,such as
31、two meals for the price of one.15.Under conditions of first-and second-degree discrimination,more may be produced than under non-discriminating monopoly.Prices will be charged along the demand curve.The demand curve thus becomes the marginal revenue curve.Thus,output could equal that which would hav
32、e been produced under competitive conditions.Of course,profits accruing to the monopolist would exceed those under competitive conditions.100 Special Pricing Practices Copyright 2014 Pearson Education,Inc.Under certain circumstances,production under third-degree discrimination could also be higher t
33、han under a non-discriminating monopoly.As a matter of fact,since profits are greater under conditions of discrimination,there is the possibility that a non-discriminating monopolist would find the product unprofitable and no production would take place.Thus,only under conditions of discrimination w
34、ould any product be produced.PROBLEMS 1.The total revenue function is:Q =30-2P P =15-0.5Q TR=Q x P=15Q-0.5Q2 The total cost function for the two companies combined is:TC=6+10Q Marginal revenue and marginal cost are the following:MR=dTR/dQ=15-Q MC=dTC/dQ=10 Total profit maximization occurs where MR=M
35、C,or 15-Q=10,or Q=5.When Q=5,P=12.5.The same result can be obtained as follows:Profit=15Q-0.5Q2-6-10Q =-0.5Q2+5Q-6 d/dQ =-Q+5=0 Q =5 Profit is maximized at Q=5 =-0.5(5)2+5(5)-6 -12.5+25-6=6.5 Price at this quantity:P=15-0.5(5)=12.5 This result can also be obtained with the following schedule:Price Q
36、uantity Total Revenue Total Cost Profit 15.0 0 14.0 2 28.0 26 2.0 13.0 4 52.0 46 6.0 12.5 5 62.5 56 6.5 12.0 6 72.0 66 6.0 11.0 8 88.0 86 2.0 10.0 10 100.0 106-6.0 Special Pricing Practices 101 Copyright 2014 Pearson Education,Inc.2.a.(1)ADULT MARKET Total Marginal Marginal Total Price Quantity Reve
37、nue Revenue Cost Cost MR-MC Profit 14.00 6 84 5.00 30.00 54.00 13.00 7 91 7.00 5.00 35.00 2.00 56.00 12.00 8 96 5.00 5.00 40.00 0.00 56.00 11.00 9 99 3.00 5.00 45.00-2.00 54.00 10.00 10 100 1.00 5.00 50.00-4.00 50.00 9.00 11 99-1.00 5.00 55.00-6.00 44.00 8.00 12 96-3.00 5.00 60.00-8.00 36.00 7.00 13
38、 91-5.00 5.00 65.00-10.00 26.00 6.00 14 84-7.00 5.00 70.00-12.00 14.00 5.00 15 75-9.00 5.00 75.00-14.00 0.00 (2)CHILDRENS MARKET Total Marginal Marginal Total Price Quantity Revenue Revenue Cost Cost MR-MC Profit 13.00 4 52 5.00 20.00 32.00 12.00 6 72 10.00 5.00 30.00 5.00 42.00 11.00 8 88 8.00 5.00
39、 40.00 3.00 48.00 10.00 10 100 6.00 5.00 50.00 1.00 50.00 9.00 12 108 4.00 5.00 60.00-1.00 48.00 8.00 14 112 2.00 5.00 70.00-3.00 42.00 7.00 16 112 0.00 5.00 80.00-5.00 32.00 6.00 18 108-2.00 5.00 90.00-7.00 18.00 5.00 20 100-4.00 5.00 100.00-9.00 0.00 4.00 22 88-6.00 5.00 110.00-11.00-22.00 The adu
40、lt market will achieve its highest profit between prices of$12 and$13,about$56.In the childrens market,the optimum price will be$10,and the profit will be$50.Thus,the total profit,when differential prices are charged,will be about$106.(2)COMBINED MARKET Total Marginal Marginal Total Price Quantity R
41、evenue Revenue Cost Cost MR-MC Profit 13.00 11 143 5.00 55.00 88.00 12.00 14 168 8.33 5.00 70.00 3.33 98.00 11.00 17 187 6.33 5.00 85.00 1.33 102.00 10.00 20 200 4.33 5.00 100.00-0.67 100.00 9.00 23 207 2.33 5.00 115.00-2.67 92.00 8.00 26 208 0.33 5.00 130.00-4.67 78.00 7.00 29 203-1.67 5.00 145.00-
42、6.67 58.00 6.00 32 192-3.67 5.00 160.00-8.67 32.00 5.00 35 175-5.67 5.00 175.00-10.67 0.00 4.00 38 152-7.67 5.00 190.00-12.67-38.00 102 Special Pricing Practices Copyright 2014 Pearson Education,Inc.If both adults and children are charged the same price,a price of$11 will maximize profit at$102.(3)T
43、his is a case of third-degree price discrimination.The elasticities of the two demand curves are different and there are no transfers between the two markets(either the admitted person is a child or it is not).Under these circumstances,by charging different prices in the two markets(i.e.exercising p
44、rice discrimination),the seller can increase its profits.In this case,if different prices are charged,the maximum profit will be$106($56+$50),while if one price is charged,the profit will be$102.b.First,each of the demand curves is converted,so that price is the independent variables:PA=20-1QA PC=15
45、-.5QC PT=16.667-.333QT Marginal revenue will be calculated for each:Adult market:TRA =20QA-1QA2 MRA=20-2QA Childrens market:TRC=15QC-.5QC2 MRC=15-1QC Combined market:TRT=16.667QT-.333QT2 MRT=16.667-.667QT Now,set marginal revenue equal to marginal cost($5),and solve for Q and P:Adult market:20-2QA=5
46、 PA =20-1(7.5)QA =7.5 =12.5 Childrens market:15-1QC =5 PC=15-.5(10)QC =10 =10 Combined market:16.667-.667QT=5 PT=16.667-.333(17.5)QT =17.5 =10.83 Total Profit:Market with differential pricing(price discrimination)Adult market:7.5(12.5-5)=56.25 Childrens market:10(10-5)=50.00 Total$106.25 Combined ma
47、rket:17.5(10.83-5)=$102.03 As can be seen,the results are almost exactly the same as in a.The results are mathematically more precise when equations are used.Special Pricing Practices 103 Copyright 2014 Pearson Education,Inc.3.a.Total Total Total Profit Quantity Price Revenue Cost Profit Margin 0 50
48、0 0 700-700 1 480 480 900-420-87.5%2 460 920 1100-180-19.6%3 440 1320 1300 20 1.5%4 420 1680 1500 180 10.7%5 400 2000 1700 300 15.0%6 380 2280 1900 380 16.7%7 360 2520 2100 420 16.7%8 340 2720 2300 420 15.4%9 320 2880 2500 380 13.2%10 300 3000 2700 300 10.0%11 280 3080 2900 180 5.8%12 260 3120 3100
49、20 0.6%13 240 3120 3300-180-5.8%14 220 3080 3500-420-13.6%(1)Quantity will be between 7 and 8,and price between$340 and$360.P=500-20Q TC=700+200Q TR=500Q-20Q2 MC=200 MR=500-40Q MR=MC 500-40Q=200 40Q=300 Q=7.5 P=500-20(7.5)=500-150=$350 (2)Quantity will be between 12 and 13,and price will be between$
50、240 and 260.MR=500-40Q=0 Q =12.5 P=500-20(12.5)=$250 (3)Quantity will be 10 and price will be$300.TR=TC+300 500Q-20Q2=700+200Q+300 =1000+200Q 0=1000-300Q+20Q2 Solving the above quadratic equation will give Q=10 and Q=5.At a quantity of 5,revenue will be$2000.At a quantity of 10,revenue will be$3000.