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ECON 2009 Chapter Notes - Chapter 10: Economic Surplus, Reservation Price, Transfer Pricing

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School
Carleton University
Department
Economics
Course
ECON 2009
Professor
Zhihao Yu

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Document Summary

Simple bundling when managers offer several products or services as one package so consumers do not have an option to purchase package components separately. Mixed bundling allows consumers to purchase package components either as a single unit or separately. Negatively correlation when some customers have higher reservation prices for one item in the bundle but lower reservation prices for another item in the bundle, whereas another group of customers has the reverse preferences. Managers commonly use bundling as it can increase the sellers s profit if customers have varied tastes. Credibility of the bundle when managers correctly anticipate which customers will purchase the bundle or the goods separately. Extraction when the manager extracts the entire consumer surplus form each customer. Exclusion when the manager does not sell a good to a customer who values the good at less than the cost of producing it.

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Related Questions

You are a produce grocer who sells two products: apples and bananas (you sell them in bushels, but we’ll just consider a bushel to be one unit of fruit). Each costs you $1 per bushel wholesale, which is your only cost. You can prevent resale among your customers, of which there are three, each with unit inelastic demand. Consumer 1 has a willingness to pay of $2 per apple (bushel) and $8 per banana (bushel). For Consumer 2, the willingness to pay is $4 for apples and $6 for bananas. Consumer 3 would pay up to $9 for apples but only $1 for bananas.

A. Suppose you price apples and bananas separately. What is the profit-maximizing price for each?

B. What is the profit-maximizing price if you sell the two fruit as a pure bundle?

C. What leads to higher profits – selling separately or offering a pure bundle? Explain how this answer relates to the correlation in consumers’ willingness to pay across apples and bananas.

D. Can you do better by mixed bundling? Explain why or why not?

E. Does your answer to part (d) change if your production cost is $3 per unit instead?

A monopolist with the constant marginal cost of 4 (MC ¡ 4) to just two consumer types, which are of equal size n. Members of group 1 have an individual inverse demand curve given by p1(q) = 16- 1 2 q while members of group 2 have individual inverse demand given by p2(q) = 20 - 1 2 q. (Because marginal cost is constant, you may assume each group has just one member.) Resale of the good among consumers is impossible. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(1) Suppose the monopolist offers just a single two-part tariff. Calculate the one that maximizes its profit. Calculate the associated profit.

(2) Suppose the monopolist can not tell whether a person is in group 1 or group 2. So it offers a pair of two-part tariffs and lets each consumer buy according to the one he or she prefers. Calculate the profit-maximizing pair of two-part tariffs for the monopolist to offer. Calculate the associated profit.

(3) Suppose the monopolist offers just a single package for sale, described as (q0, T E0). Accordingly, a consumer has the choice of buying nothing or buying exactly q0 units for an item of total expenditure (payment from that consumer) of T E0. Determine the profit-maximizing single package to offer. How does this profit compare with that in the two previous parts?

(4) Suppose the monopolist offers two packages for sale, described as (q1, T E1) and (q2, T E2). Accordingly, a consumer has the choice of buying nothing or buying exactly q1 units for a total expenditure of T E1 or buying exactly q2 units for a total expenditure of T E2. (The monopolist envisions that those in group 1 will choose (q1, T E1) and those in group 2 will choose (q2, T E2).) Determine the profit-maximizing pair of packages to offer. Calculate the associated profit.

Question 1

The amount of profit that can be achieved using uniform pricing is __________ the profit that can be achieved from price discrimination because of _______.

Select one:

a. greater than; the cost of trying to determine every single consumer's individual demand (willingness to pay) is prohibitively expensive.

b. less than; uniform pricing is more costly so the ATC and AVC curves are higher than they are under price discrimination.

c. equal to; the TR and TC curves are equivalent under either pricing scheme, so there is no profit advantage to either scheme.

d. less than; total demand includes people who would be willing to pay more than, as well as less than, the uniform market price.

Question 2

A firm selling in two markets is practicing price discrimination:

Select one:

a. when it refuses to sell the good to some group of consumers.

b. anytime it charges different consumers different prices.

c. when it charges the same price to different consumers as long as they differ in their demand for the good.

d. when it is charging different consumers, different prices, and the price difference is not based upon cost differences.

Question 3

To successfully practice price discrimination:

Select one:

a. consumers in two separate markets must have identical demand.

b. the firm must possess market power.

c. it must be easy for consumers in one market to sell to consumers in the other market.

d. the firm must be a pure monopoly.

Question 4

If it could practice first-degree price discrimination, a firm with market power could earn:

Select one:

a. its typical monopoly profit as well as the area which, under uniform pricing, would represent the deadweight loss associated with market power.

b. an area half the size of its monopoly power under uniform pricing.

c. its typical monopoly profit as well as the area which, under uniform pricing, would represent consumer surplus.

d. its typical monopoly profit as well as the area which, under uniform pricing, would represent consumer surplus and the deadweight loss associated with market power.