Running head: QUESTIONS FOR CRITICAL THINKING 6
Questions for Critical Thinking 6
BUSI 620
Heather Welch
Liberty University
December 2, 2016
1
CRITICAL THINKING 62
Salvatore Chapter 12:
a.Discussion Questions:
7. It is true that quantity discounts are not a form of price discrimination. Price discrimination is
the process by which companies unjustly set differing prices for the same product within
different markets or groups of customers. Quantity discounts are not discriminatory in nature. To
the contrary, price discounts are a way for companies to reward large customers and to guarantee
the sales will continue. Additionally, producing in bulk is cheaper and therefore can be sold at a
lower price and still bring a profit.
8.
(a) First-degree price discrimination is the act of selling each product individually, while setting
the price as high as possible to continue to make sales. This sales method allows the companies
to extract any surplus, thus maximizing its profit for the particular item. To practice this method,
the company would be required to obtain specific consumer information and target each
individual, which would be quite cost prohibitive.
Second-degree price discrimination is setting a specific price per unit for a certain amount of the
product, and then lowering the price per unit with each additional batch sold. This type of price
discrimination requires a great amount of metering, which means it is commonly found in places
such as utilities providers. The metering requirement makes this type of discrimination less
likely.
Third-degree price discrimination is simply setting a different price for the same product
depending on the location. This is very common. Utility providers are again a good example of
this type of discrimination, as they tend to charge commercial users less than private consumers.
Since this type of discrimination is usually conducted by a company with at least a partial
monopoly, consumers typically are unable to avoid it, thus making this the most common type.
(b) Lower fares in the middle of the week are simply a result of supply and demand resulting in
changes in prices, but are not an example of third-degree price discrimination.
(c) When the elasticity of demand is equal across multiple markets, it would not be useful to
charge different prices. This is because with a lower demand, there will be fewer buyers no
matter the price.
13. What are
(a) the advantages
This is a short-cut method for pricing based on estimates of the average variable costs as opposed
to accurate measures of marginal revenue and marginal costs within a company. This method is
much less time consuming and complicated, thus time saving as well.
(b) Since cost-plus pricing is based on the average variable costs, it is not as accurate as pricing
based on marginal revenue or marginal cost of production. This method tends to disregard the
law of supply and demand.
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(c) Since incremental pricing first requires an incremental analysis to determine the best steps to
take for optimal revenue, this pricing method is the best way to ensure successful changes within
a company will occur. When companies are operating at their optimal production levels, full-cost
pricing is equal to incremental cost pricing.
b.Problems:
5.
TC=$70 TC=$90 TC=$140
Product AProduct BProduct AProduct BProduct AProduct B
80 0 100 0 130 0
70 40 90 60 110 70
50 70 70 90 80 120
20 90 30 120 40 150
0 95 0 130 0 160
TC=$70 RevenueProfit
80
0 80 10
70
40 110 40
50
70 120 50
20
90 110 40
0
95 95 25
TC=$90Revenue Profit
1000
100 10
9060
150 60
7090
160 70
30 120
150 60
1000
130 40
TC=$140 Revenue Profit
130
0 130 -10
110
70 180 40
80
120 200 60
40
150190 50
0
160 160 20
Maximum total profit=
TC Profit
7050
9070
CRITICAL THINKING 64
12. (a) A monopolist’s total revenue would be larger when applying the second-degree
discrimination method when the batched on which it charges a uniform price are smaller. There
is a smaller price per unit for large batches and a greater price per unit on small batches.
(b) A two-part tariff is the practice of companies collecting fees for the right to purchase a
product or service and charging a fee for or pricing each unit separately. A two-part tariff is
commonly used among oligopolistic and monopolistic companies. Bundling on the other hand, is
a type of tying in which monopolistic companies force consumers to purchase products whether
they choose them or not. This is possible due to the lack of competition and demand for at least
one of the products. The result is higher profits for the monopolies.
Froeb et al. Chapter 14:
a.Individual problems:
14-1: Barbie Dolls and Accessories
The cost of production on the dolls is higher than the cost of production on the accessories. This
means that Mattel can raise the contribution margin on the accessories and make a much larger
profit than if it were to raise the contribution margin on the dolls. Further, raising the price of the
dolls could lead to significant loss in sales, whereas raising the price of the low-cost accessories
would result in far fewer loss of sales. Another way in which the contribution margin may have
lowered is if the dollar had depreciated in foreign markets.
14–4: Microwave Ovens
(A). Using prospect theory, it can be assumed that by lowering the price of the microwave with
the auto-defrost feature below the valued price of $150, there will be a greater number of sales.
Since there is very little additional cost of adding the auto-defrost feature, the sales margin on
these microwaves marketed to women will be greater. This would allow the manufacturer to set
the price of the microwave without the auto-defrost feature to below the $70 value that male
consumers placed on it, which would increase sales and thus profits. This way both men and
women would perceive themselves to be receiving positive gains from the microwave purchases.
(B.) Since women value the microwaves with the auto-defrost feature at $150, by pricing the
units slightly lower, the company will be able to drive sales, while the consumers perceive
themselves to be getting a good deal. With fewer male consumers, the manufacturer can still
make a large profit without offering the lower priced unit.
Salvatore Chapter 13:
a.Discussion Questions:
8. Subsidies given to companies which produce pollution, would aid in decreasing the amount of
pollution by aiding in the cost associated with installation of antipollution equipment. In other
words, subsidies result in less pollution. On the other hand, taxing companies which produce
pollution would not necessarily change the way in which the company controls its pollution.
Since changing machinery can be prohibitively expensive for many companies, it is likely that
many companies would simply continue to pay the taxes as it could be difficult or even
CRITICAL THINKING 65
impossible to pay both the taxes and upgrades. Additionally, where subsidies would be paid for
by citizen tax revenue, pollution taxes on the companies would result in revenue for the citizenry.
10. It would not be better to nationalize utility companies in the way that European countries
have done. Since utility companies are naturally monopolistic, removing the competition among
utility companies leaves consumers vulnerable to overcharging. Nationalization would force out
smaller utility companies, instead favoring the federally funded conglomerates and thus
financially injuring the consumer.
b.Problems:
12. Before the merger, the Herfindahl index would =1,000.
(10)^2 +(10)^2 +(10)^2 +(10)^2 +(10)^2 +(10)^2 +(10)^2 +(10)^2 +(10)^2 +(10)^2 = 1,000
After the merger, the Herfindahl index would = 1,200.
(10)^2 +(10)^2 +(10)^2 +(10)^2 +(10)^2 +(10)^2 +(10)^2 +(10)^2+(20)^=1,200
13. (Library research)
(a) The economic theory of regulation or the capture theory states that “regulation is the result of
pressure group action and results in laws and policies to support business and protect consumers,
workers, and the environment” (p.555). Licensing and patents are two ways in which the
government regulation was used for these purposes. Specifically, the National Highway Traffic
Safety Administration (NHTSA), which “imposed safety standards on highway traffic,” has had
a great effect on the U.S. trucking industry (p. 559). The capture theory hypothesis as applied to
the U.S. trucking industry is intended to protected consumers from injury, including drivers,
passengers and other parties to a vehicular accident. The regulations are also applied to emissions
and gas usage in order to better protect the environment. Workers are protected through unions
and other governmental agencies, which regulate hourly wages and employee safety.
(b) Signed by President Jimmy Carter in 1980, the Motor Carrier Act put an end to the
controversy surrounding collaborative efforts to reform the “economic regulation of the interstate
for-hire motor trucking industry” (Harper, 1980, p.5). Prior to this act, no major changes had
been made to the motor trucking industry since 1935, when the first Motor Carrier Act was
signed into law.
Though repudiated by proponents of the act, there were many criticisms including, “that entry
control, operating restrictions on carriers, and rate regulation (including the use of rate bureaus)
resulted in inadequate incentive to the carriers to exercise managerial initiative and strive for
efficiency” (Harper, 1980, p.6). Additionally, the act led to inadequate or bad service, energy
wastefulness, and excessive transportation costs.
In the end, there is a greater amount of oversight with less governmental interference within the
trucking industry. The number of new trucking businesses has greatly increased, many of which
are non-union and budget carriers.
Reference
Harper, D. (1980). The Federal Motor Carrier Act of 1980: Review and Analysis. Transportation
CRITICAL THINKING 66
Journal, 20(2), 5-33. Retrieved from http://www.jstor.org/stable/20712611
15. Based on the MC/MR intersect in figure 13-5, the best level of output is 6,000,000 at $12 for
each unit with a profit of $24,000,000.
6,000,000*$12=$72,000,000
$72,000,000-$48,000,000=24,000,000
(b) The lump sum tax is $4 per unit. This reduces the profit to $0.
(c) The maximum number of units will be 5,000,000 and the average cost will be $13 per unit.
This means the profit will be $0.
(d) If the government sets the price of the product at $10, the best level of output would be
8,000,000 with a cost of $8 per unit. The profit would be $16,000,000.
$10-$8=$2
$2*8,000,000=$16,000,000
(e) Answer (d) is the best method of controlling monopoly power. When the price is equal to the
marginal cost, a company will have its optimal output.
