Quiz 12 Microeconomics Pricing, ch. 15

1. The best example of demand-based price discrimination among the following is:

a. Your bold professor’s haircut costing less than yours.

b. Cleaning men’s cotton shirts for a lower price than women’s silk blouses.

c. Charging higher prices to minorities than to whites.

d. Selling New York Times paper for $1 and Daily News for $1.50.

e. “Early-bird specials” at restaurants.

2. Give your own example of price discrimination.

Bill Barriers, the president of MightySoft (MS), is trying to decide how to price a new piece of software called DoorKnobs (DK). MS spent $100,000 to develop this software and is the only firm that can sell it. The marginal cost of producing and distributing a copy of DK is $10 per customer. Each demander will buy at most one copy of DK. There are three types of demanders in this market. Type A demanders are willing to pay up to $210 for a copy of DK, Type B demanders are willing to pay up to $110 for a copy of DK, and Type C demanders are willing to pay up to $60 for a copy of DK. In this market, there are 1,500 Type A demanders, 500 Type B demanders, and 1,000 Type C demanders.

3. If MS must charge the same price to all buyers, what price will maximize its profits?

a) $200 b) $210 c) $110 d) $100 e) $60

4. At this price, how much profit will MS make from DK?

a) $300,000 b) $200,000 c) $150,000 d) $100,000 e) $50,000

5. Now suppose that MS’s market research team discovers that all Type B and Type C demanders own copies of a competing software product, and none of the Type A demanders own this competing product. MS can reliably determine who owns a copy of the competing product, but this is the only information it has regarding the type of each demander. Therefore, MS can charge different prices for DK to those who do and do not own copies of the competing product. In addition, MS is able to prevent resale of DK from one seller to another. Under these circumstances, what should MS do to maximize its profits?

a) Set a price of $210 for DK, but offer a $50 discount to anyone who owns a copy of the competing product.

b) Set a price of $210 for DK, but offer a $150 discount to anyone who owns a copy of the competing product.

c) Set a price of $160 for DK and offer no discounts.

d) Set a price of $210 for DK and offer no discounts.

e) Set a price of $160 for DK, but offer a $100 discount to anyone who owns a copy of the competing product.

6.  Choose one specific product and research its prices on the internet. Describe your results briefly. Do all internet stores charge the same price? If not, what is the price range? How can you explain why prices vary?

7. Give your own example of a two-part tariff price.

8. Answer one of the following questions.

a) What is necessary for a firm to be able to price discriminate?

b) Draw a graph that shows producer surplus, consumer surplus and deadweight loss in a market where the seller charges one monopoly price, and a market where the seller is able to perfectly price discriminate.

c) What is cost-plus pricing? Is it consistent with profit maximization?

9. Products produced for mass consumption are often criticized as being of poor quality. We know, however, that markets create many assurance mechanisms to help consumers monitor product quality. “Piece of Crap” by Canadian rocker Neil Young discusses several of these mechanisms, for example:

Tried to save the trees
Bought a platsic bag
The bottom fell out
It was a piece of crap
Saw it on the tube
Bought it on the phone
Now you're home alone
It's a piece of crap
I tried to plug in it
I tried to turn it on
When I got it home
It was a piece of crap / Got it from a friend
On him you can depend
I found out in the end
It was a piece of crap
I'm trying to save the trees
I saw it on TV
They cut the forest down
To build a piece of crap
I went back to the store
They gave me four more
The guy told me at the door
It's a piece of crap

In reference to the song, what market mechanisms help to alleviate problems arising from the lack of information about the quality of goods? Does Neil Young think these mechanisms work well?