Felicia Jacobs 1
Chapter 12
-Discussion Question 7
I believe quantity discounts are not a form of price discrimination. Large orders are considered a
benefit to the buyer and seller. Large orders also save both parties. Orders that are large can be
shipped at a cheaper cost, compared to orders that are smaller, which ultimately saves shipping
costs for the consumer/purchaser. Larger orders actually cost less than smaller orders in relation
to production. For example, it would cost more to make just 50 products as opposed to 350+
products.
-Discussion Question 8
(a) First degree requires precise knowledge on each individual consumer’s demand and price
accordingly. This is rare in the real world. While second degree is more common, since it
involves selling to different consumers’ different “blocks of units” it requires measuring each
consumer’s quantity purchased, and this requires goods for which one can easily measure
consumption per person. So things like electricity would allow for second degree price
discrimination. On the other hand, third degree is the most common form of price discrimination.
This involves selling at different prices in different markets. Hence, once the markets are
identified, it is relatively easy to practice third degree price discrimination (assuming resale can
be prevented).
(b) Lower airline fares at midweek would be third degree price discrimination only if those
travelling at mid-week tend to have higher elasticity of demand. Since people travelling at mid-
week would seem to be business travelers, and they would have lower elasticity of demand, it is
probably not price discrimination (e.g. it could be due to the low marginal cost of a return
flight….i.e. filling up an empty plane). However, if one could argue the mid-week market
comprises a group of consumers with lower elasticity, then it could be price discrimination.
(c) If the different markets do not have different demand elasticities there is no benefit to price
discrimination.
-Discussion Question 13
(a)The advantage so of cost plus pricing include - It is relatively easy to use. - It is a relatively
inexpensive method of determining prices - If costs are constant it results in stable prices - It
provides a justification to increase prices when costs rise
(b) There are historical and accounting costs that are considered while replacement and
opportunity costs are ignored. It is not based off of marginal cost but on average cost of
production. The method is very simple for this and may lead to misleading results. This method
ignores the condition and nature of demand.
(c) Incremental cost pricing is the best/correct pricing method because it requires that direct
and indirect changes in revenues and costs resulting from a particular course of action be taken
into consideration and because it also provides firms with elasticity when they take into
consideration both the short-run and long-run implications of their pricing policies. Why is full-
cost pricing equal to it? Full-cost pricing is equal to incremental cost-pricing because they both
produce the same results when a firm is manufacturing at their fullest capacity causing product’s
cost to decrease and sales to rise according to the writer’s comprehension
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-Problem 5
TC=70 Product A = $50 and Product B = $70: P = $50,
TC=90 Product A = $70 and Product B = $90: P = $70,
TC=140 Product A = $80 and Product B = $120: P = $60
-Problem 12
(A) Smaller bundles is greater with second degree price discrimination as long as they uniform in
price and quantity. By smaller bundles they are receiving a greater sum by covering more area in
the rectangle of P and Q. (b) two part tariff is a practice in which consumers pay an initial fee for
the right to purchase a product or service as well as a usage fee or price for each unit of product
they produce. Bundling is a common form of trying in which the firm requires customers buying
or leasing products or services to also buy or lease other products or services when customers
have different taste but the firm cannot price discriminate
Chapter 14
-Problem 14-1
Mattel might set a lower contribution margin on dolls in comparison to the accessories because if
the company sells the dolls at a lower price it gives them the opportunity to sell the accessories at
a higher margin because typically high value doll users purchase more Barbie outfits
-Problem 14-4
The best method to yield the most revenue would be to sell a simple microwave at $70 and a
model with an auto-defrost feature at $139. This will give male shoppers the best value for a
simple microwave at $70 and will give women a surplus of $10 since they value a simple
microwave at $80. In addition, women will have a surplus of $11 on the model with the auto-
defrost feature since it costs $139 and they value it at $150. If women are the bulk of microwave
shoppers, then the company should sell the model with defrost for the full value of $150
Chapter 13
-Discussion Question 8
The basic difference between using a subsidy to induce producers to install antipollution
equipment and a tax on producers who pollute, is that using a subsidy is a proactive measure to
put a check on pollution that is influence and caused by producers, while imposing a tax on
producers can only be done after some sort of negative impact or harm has been compromised to
the environment. In providing a subsidy to the producers, the government can then encourage
producers to select preventive measures that will benefit the business and help them conduct the
business in an ethical and beneficial manner. By doing so, it will also impact the industrial
manufacturers by preventing them from negatively affecting the environment and causing harm
to animals and humans. Additionally, it is very difficult to put a true measure on the damage or
negative impact that pollution may impose on animals and humans, therefore imposing tax on
producers, the government will have way of imposing an ethical and beneficial option for
producers to conduct their business.
-Discussion Question 10
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Given the difficulties that the regulation of public utilities faces, some European countries have
nationalized the companies that supply water, local telephone lines, gas, electricity, local
transportation services, and other popular and used public utilities. In doing so, it has removed
any benefit or incentive for economic efficiency in supplying its consumers with basic public
utilities and services. Therefore, nationalization of public utilities forces the competitive
companies out of the market completely and in turn causes the efficiency of a company to
weaken and provides no benefit or incentive for its managers to provide better services for
consumers. In conclusion, no, it would not be better to nationalize public utilities to solve
efficiency issues.
-Problem 12
According to Salvatore if the post-merger index was between 1,000 and 1,800 and the merger
lead to an increase in the index of more than 100, the Justice Department was likely to challenge
the merger. According to its 1984 guidelines, the Justice Department did not usually challenge a
horizontal merger during the 1980s and early 1990s if the post-merger Herfindahl index was less
than 1,000. I believe the Justice Department would challenge this merger.
If ten equally sized firms make up an industry, the Herfindahl-index would illustrate it like this:
HII= (10 2) x 10= 1,000 If two if these firms merged together, then it would be illustrated like
this: HII= [(10 2) x 8] + 20 2 = 800+400=1,200
-Problem 13
(a) Before the Motor Carrier Act of 1980, interstate trucking commerce was regulated by the
Interstate Commerce Commission (ICC). The ICC originally existed to regulate railroads. The
emergence of the trucking industry in the early twentieth century was monitored by the ICC as it
concerned the railroad industry. As the trucking industry grew and matured, the ICC introduced a
maze of regulations to protect larger trucking companies from the competition the smaller ones.
These regulations restricted entry into the industry and severely stifled competition. Because
regulation in the trucking industry resulted from pressure from large trucking firms and restricted
competition, it can be regarded as a good example of the capture theory of regulation.
(b) The Motor Carrier Act of 1980 led to the removal of most restrictions to entry into the
trucking industry. As a result, competition sharply increased in the industry, which lowered
shipping rates, improved service, and lower profits. Even though 1980 through 1982 was a
recession, with high inflation and interest rates, it is very difficult to determine how much of the
pressure on trucking firms was the result of deregulation and how much was due to the poor
economic climate
-Problem 15
The profit maximizing output for the monopolist is 6 million units (where MR=MC), resulting in
a price of $12 and an average cost of $8. Hence profits per unit is (P-AC) = $12-$8=$4.
(b) Because a lump sum tax is a fixed cost, it affects average cost but not marginal cost. For this
reason the profit maximizing decision of the firm is unaffected. It produces 6 million where MR
= MC. The lump sum tax of $4 per unit reduces profits to zero though.
(c) A $3 per unit tax increases both MC and AC by $3. If you look carefully at the graph, you can
tell that if you shift up both the MC and AC by $3 then MC will intersect MR at 5 million units,
the price will be $13, and average cost will be $13. Hence profits per unit will be 0.
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(d) If the government sets the price at $10, then the firm chooses quantity by setting P = MC,
choosing the quantity of 8 million. AC would be $8, and thus profits per unit would be $10 - $8
= $2.
(e) To see which is the best consider the following: (a) we have the standard inefficiency of a
monopoly. The last unit produced has a value greater to consumers (given by price) that exceeds
the marginal cost of production, and hence too little is produced. The question is what the
optimal quantity is. This occurs where P = MC, which is where the MC curve intersects Demand.
At this point the price is $10 and the quantity is 8 million. This corresponds to option (d).
