Running head: Questions for Critical Thinking 6
Questions for Critical Thinking 6
Robert Rivers
BUSI 620
Liberty University
1 Dec 2013
Salvatore’s chapter 12:
Discussion Questions:
7. The fact that quantity discounts can be considered second degree price discrimination makes
this statement false. As quality discounts occur the price per unit is dependent upon how many
units are sold. Fewer units call for higher prices as larger units can allow lower prices.
11.
a. Without an external market for intermediate product, it is transferred from production to
marketing department in the form of a sell. The final product is in a one to one ratio with the
intermediate product which makes the outputs from both equal.
b. When a market exists for an intermediate product to be sold in a perfectly competitive, the
transfer price for internal sales is given by the external competitive price of the product. In
theory this could be represented by MRp = MRm – MCp + MRe where MRp equals marginal
revenue of production, MRm equals marginal revenue of marketing, MCp equals marginal cost of
production, and MRe equals marginal revenue of external division.
c. When imperfectly competitive external markets exist, the price for products differs at the
market and external level. At this point the external and internal prices are determined by the
third degree price discrimination.
13.
a. The advantages of cost-plus pricing includes requiring less information than the
MR = MC rule, being relatively simple and easy to use, resulting in relatively stable prices, and
providing a clear indication for price increases when costs rise.
b. The disadvantages of cost-plus pricing include using historical and accounting cost rather than
replacement and opportunity costs, being based on average cost rather than marginal costs, the
simplicity in the method can drive misleading results, and the method ignores the condition of
demand.
c. Incremental analysis must be used to optimally affect pricing and output decisions.
Incremental cost pricing considers direct and indirect fluctuations in costs and revenues as they
relate to actions performed by the company. When a company lowers the price of their products
in an attempt to increase sales while at full production, it can lead to an ultimate expansion of
cost from operations. For this situation, full cost and incremental costs are equal.
Problems:
12.
a. The monopolist's total revenue will be larger with second-degree price discrimination when
the uniform price is smaller. With this relationship, smaller batches correspond to more
monopolist approaches as the results of first degree price discrimination. The text point out
however, that this is very expensive.
b. A two-part tariff is the pricing practice where a monopolist maximizes its total profits by
charging a usage fee or a price equal to its marginal cost and an initial or membership fee equal
to the entire consumer surplus. Adversely, bundling is a common form of tying in which the
monopolist requires customers buying or leasing one of its products or services to also buy or
lease another product or service when customers have different tastes but the monopolist cannot
price discriminate.
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Spreadsheet problem 1
TRConsumer's Surplus
Q 6.0 24 9
P$4.00
1st
Degree TRConsumer's Surplus
330
2 Prices TRConsumer's Surplus
P1 $5.50 $16.50 2.25
P2 $4.00 $12.00 2.25
Total $28.504.5
In this case, the monopolist would be practicing second-degree price discrimination
Froeb and McCann’s chapter 14:
Individual problems:
14-1
The accessories are like ink for printers as they complete the sale. You will only buy a
few dolls like you will only buy a few printers. The repeat costs associated with accessories
generate more revenue and ultimately produce the greatest return for the company.
14-4
The reasonably price for a product will be determined by the consumer. If they are
willing to pay more for a product the elasticity of demand is low and vice versa. The optimal
pricing strategy for an equal gender market would be $70 and $150 for simple and auto defrost
microwaves respectively. If women are the primary buyers, the pricing strategy would move to
have the simple microwave increase to $80 and the auto defrost microwave stay the same.
8.
Salvatore’s chapter 13:
Discussion Questions:
Levying subsidy on producers could enable the misuse of money given for installing
antipollution equipment. Without this equipment the reduction of pollution from production will
not be possible and could ultimately produce more pollution. With the use of taxes, the fear of
substantial fines could persuade producers to utilize antipollution equipment in their plants.
10.
Experience would say that economic efficiency is best illustrated by competition. With
utilities you must compete for natural resources as well as with the competitive natural that exist
in business. In naturalization, this competition is removed from the push to a more unified
organization responsible for the natural resources. Without the motivation of profit, the
management of utilities is likely to not function as optimally or efficiently as possible.
Problems:
12.
There is an analytical process that the agency will complete to determine if they should
challenge a merger. One of the first things that will be done is the calculation of whether the
merger will increase concentration, resulting in a concentration market, which would be defined
and measured. Next the agency would determine if the merger raises any worry concerning
adverse competitive effects. After that market entry is measured to see if it is likely, timely, and
adequate to prevent or offset the competitive effect of concern. Furthermore, a competence gain
15.
is assessed to see if it cannot be achieved any other way. Lastly, the likelihood that the merger
would fail and have assets exits the market. All of these are done to determine if the merger
could make or improve market power or to help its exercise.
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.
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.
a. The best level of output of the monopolist is 6 million units of the product or service and is
given by point E, at which the MC curve intersects the MR curve. The monopolist sets P = $12
(point A on the D curve), faces AC = $8 (point B on the AC curve), and thus earns a profit of $4
(AB) per unit and $24 million in total (the area of rectangle ABCF).
d. If the government sets the price of the product or service that the monopolist sells at
P = $10, the market demand curve that the monopolist faces is given by GE″D and his or her
marginal revenue curve is given by GE″HNR. The monopolist would then behave as a perfect
competitor and produce 8 million units of the product or service, as indicated by point E', at
which P = MR = MC. At Q = 8 million units, AC = $7.5 (point H on the AC curve), so that the
firm would earn a profit of $2.5 (E″H) per unit and $20 million (the area of rectangle E″HTG) in
total.
c. A per-unit tax of $3 is like a variable cost. As such, it shifts the monopolist's AC and
MC curves up by $3. Thus, the best level of output of the monopolist is 5 million units and is
given by point E', at which the MC' curve intersects the MR curve. At Q = 5 million, P = $13
(point A' on the D curve) and AC' = $13 (point A' on the AC' curve), so that the monopolist earns
a profit of $0 per unit and in total.
b. A lump-sum tax is like a fixed cost. As such, it shifts only the monopolist's AC curve up. A
lump-sum tax of $24 million would shift the AC curve up to AC', so that P = AC = $12 at the best
level of output of 6 million units (given by point E, at which MR = MC) and the monopolist
breaks even.
