Pricing Practices and Government Regulation

Pricing Practices and Government Regulation

Salvatore’s Chapter 12

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Discussion Questions

7. Quantity discounts are not a form of price discrimination because the firm saves on handling large orders. True or false? Explain.

11. How is the transfer price of an intermediate product determined when (a) there is no external market for the intermediate product, (b) a perfectly competitive external market for the intermediate product exists, and (c) an imperfectly competitive external market for the intermediate product exists?

13. What are (a) the advantages and (b) the disadvantages of cost- plus pricing? (c) Why is incremental cost pricing the correct pricing method? Why is full- cost pricing equal to it?


12. (a) Will a monopolist’s total revenue be larger with second- degree price discrimination when the batches on which it charges a uniform price are larger or smaller? Why? (b) How does a two- part tariff differ from bundling?

            **Note: P12: You could use figure 12-4 as a reference (p. 492).

Spreadsheet Problem

Froeb et al’s Chapter 14

Individual Problems

14- 1 Barbie Dolls and Accessories

Why might Mattel set a much lower contribution margin on its Barbie dolls than on the accessories for the dolls?

14- 4 Microwave Ovens

A manufacturer of microwaves has discovered that male shoppers have little value for microwaves and attribute almost no extra value to an auto- defrost feature. Female shoppers generally value microwaves more than men and attribute greater value to the auto- defrost feature. There is little additional cost to incorporating an auto-defrost feature. Since men and women cannot be charged different prices for the same product, the manufacturer is considering introducing two different models. The manufacturer has determined that men value a simple microwave at $ 70 and one with auto- defrost at $ 80 while women value a simple microwave at $ 80 and one with auto-defrost at $ 150. If there is an equal number of men and women, what pricing strategy will yield the greatest revenue? What if women comprised the bulk of microwave shoppers?

Salvatore’s Chapter 13

Discussion Questions

8. What is the basic difference between using a subsidy to induce producers to install antipollution equipment and a tax on producers who pollute?

10. Given the difficulties that the regulation of public utilities faces, would it not be better to nationalize public utilities, as some European countries have done? Explain your answer.


12. Determine whether the Justice Department would challenge a merger between two firms in an industry with 10 equal- sized firms, based on its 1984 Herfindahl- index guidelines only.

            **Note: P12: Need to calculate Herfindahl index.

13. (Library research) Explain (a) in what way the U. S. trucking industry exemplified the capture theory hypothesis of government regulation prior to the passage of the Motor Carrier Act of 1980 and (b) the result of the passage of the Motor Carrier Act in 1980.

            **Note: P13: Use the internet search or other sources to answer this problem.

15. Integrating Problem

From the following figure referring to a natural monopolist, indicate (a) the best level of output, price, and profits per unit and in total for the monopolist, (b) the best level of output and price with a lump sum tax that would eliminate all the monopolist’s profits, (c) the best level of output, price, and profits per unit and in total with a $ 3 per unit tax collected from the monopolist, and (d) the best level of output and profit per unit and in total if the government sets the price of the product or service at $ 10. (e) Which is the best method of controlling monopoly power? Why? (See Figure 13-5.)

            **Note: P15: (b) A lump sum tax is a fixed cost, (c) a $3 per unit tax is a variable cost which will cause AC and MC to increase by $3.




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