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BUSI620 Module 6 Module 6 Critical Thinking 6 (Liberty University)

Salvatore’s Chapter 12:

a) Discussion Questions: 7, 11, and 13.

b) Problems: 12 and spreadsheet problem 1 (p. 523).

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

Discussion Question 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

c) An imperfectly competitive external market for the intermediate product exists?

Discussion Question 13: What are:

a) The advantages of cost-plus pricing?

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?

Problem 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?

Spreadsheet Problem 1: Using a spreadsheet like the following, entering formulas for the total revenue and consumers surplus, and given the following demand curve of a consumer for a monopolist product Q=14-2p

a) Find the total revenue of the monopolist when it sells 6 units of the commodity without practicing any form of discrimination. What is the value of the consumer’s surplus?

b) What would be the total revenue of the monopolist if it practiced first-degree price discrimination? How much would the consumers’ surplus be in this case?

c) What if the monopolist charged P=$5.50 for the first 3 units of the commodity and P=$4 for the next 3 units – what type of price discrimination is this?

Froeb et al.’s Chapter 14:

a) Individual problems: 14–1 and 14–4.

Individual Problem 14-1: Why might Mattel set a much lower contribution margin on its Barbie dolls than on the accessories for the dolls?

Individual Problem 14-4: 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 value to the auto-defroster feature. There is little additional cost to incorporating 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 compromise the bulk of microwave shoppers?

Salvatore’s Chapter 13:

a) Discussion Questions: 8 and 10.

b) Problems: 12, 13, and 15.

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

Discussion 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

Problem 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

Problem 13: 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.

Problem 15: From the following figure referring to natural monopolist, indicate

a) The best level of output, price, and profit per unit and in total for the monopolist

b) The best level of output and price with a lump sub tax that would eliminate all monopolists 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?

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