FEIZHEN MAE B.

RODELAS BSACC 1-Y2-1 MECO211

Chapter 14
Multiple-Choice Questions
1. A software firm can offer a high-feature version of its software or a stripped down low-
feature version, each with similar production costs. Which of the following cannot be an
optimal segmentation strategy? ANSWER: B
a. Offer only the high-feature version aimed only at a high-value market segment.
b. Offer only the low-value version aimed at all market segments.
c. Offer both versions targeted to different value segments.
d. Offer only the high-feature version aimed at all market segments.

2. Which of the following conditions must be satisfied for price discrimination to be

successful? ANSWER: D
a. The seller must have a different product for each group of customers.
b. The seller must be able to identify each customer as having a high or low value.
c. The seller must be able to prevent arbitrage between the two groups.
d. None of the above

3. Perfect price discrimination is when a firm can charge each customer exactly what they are
willing to pay. In this case, ANSWER: B

a. The demand curve is very inelastic.

b. The marginal revenue is the demand curve.
c. The demand curve is very elastic.
d. The marginal cost curve is the average cost curve.

4. Suppose the monopolist only sold the goods separately. What price will the monopolist
charge for Good 1 to maximize revenues for good 1? ANSWER: A
a. $2,300
b. $2,800
c. $1,200
d. $1,700
5. What is the total profit to the monopolist from selling the goods separately? ANSWER: C

a. $4,500
b. $6,300
c. $7,000
d. $6,200

6. What’s a better pricing strategy for the monopolist? What’s the resulting profit? ANSWER:
B

a. Bundle the goods at $2,800; Profits=$5,600

b. Bundle the goods at $4,000; Profits=$8,000
c. Charge $2,800 for good 1 and charge $1,700 for good 2; Profits=$4,500
d. Charge $2,300 for good 1 and charge $1,200 for good 2; Profits=$7,000

7. Assume that the price elasticity of demand for movie theatres is -.85 during all evening
shows but for all afternoon shows the price elasticity of demand is -2.28. For the theatre to
maximize total revenue, it should ANSWER: C

a. Charge the same price for both shows, holding other things constant.
b. Charge a higher price for the afternoon shows and lower price for the evening shows, holding
other things constant.
c. Charge a lower price for the afternoon shows and higher price for the evening shows,
holding other things constant.
d. Need more information.

8. Arbitrage ANSWER: D

a. Is the act of to buying low in one market and selling high in another market
b. Can force a seller to go back to uniform pricing
c. Can defeat direct price discrimination
d. All of the above

9. Airlines charge a ____________ price to business travelers compared to leisure travelers

because business travelers have a ____________ demand than leisure travelers. ANSWER: B
a. Higher; more elastic
b. Higher; less elastic
c. Lower; more elastic
d. Lower; less elastic

10. Metering is ANSWER: A

a. A type of indirect price discrimination

b. A type of direct price discrimination
c. An evaluation of a product
d. An example of bundling

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?
ANSWER: Since Barbie dolls and the accessories for the dolls are compliments, a lower margin
that is set on Barbie dolls will increase the demand for the dolls. An increase in the sale of
Barbie dolls will also increase the demand for the accessories of the dolls A higher margin for
the accessories allows Mattel to gain more surplus from the high types.

14-2 German Brothels

ANSWER: The decision to offer a monthly subscription service for multiple purchasers by the
German brothels would increase the patronage of prostitutes. Therefore, a person who wishes
to reduce the incidence of prostitution would not consider this pricing plan desirable.

14-3 Selling Salsa

Your family business produces a secret recipe salsa and distributes it through both smaller
specialty stores and chain supermarkets. The chains have been demanding sizable discounts
but you do not want to drop your prices to the specialty stores. How can you legally
accommodate the chains without losing profits from the specialty stores?
ANSWER: When the seller cannot prevent arbitrage between two groups, it can indirectly
distinguish, by designing products or services that appeal to groups with different price
elasticity of demand, based on their purchasing behavior. Through this concept, they can legally
accommodate chains without losing profits from specialty stores by offering volume discounts,
using two-part pricing, or offering a package containing a number of units for large
supermarkets only without small shops, where large stores can buy quantities Great product.
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
compromise the bulk of microwave shoppers?
ANSWER: There are three possibilities. First, we can market a single microwave (with auto-
defrost) to both men and women at $80. Second, we can market a single microwave (with auto-
defrost) only to women at $150. Third, we can version by selling a simple microwave targeted
to men for $70 and an auto-defrost version targeted to women for $140 ($70 + $150 - $80). The
existence of a simple microwave constrains our pricing on the auto-defrost one. Women value
the auto-defrost feature at $70 ($150-$80), and therefore its price cannot exceed that of the
simple one by more than $70.

If there is an equal number of men and women (say 1 of each), the revenue from each of our
three strategies, respectively, is $80x2=$160, $150x1=$150, and $70x1+$140x1=$210.
Therefore, offering the two versions is best.
On the other hand, if almost all shoppers are women, the best strategy will be to sell only
microwaves with auto-defrost feature at $150.

14-5 Music Pricing

The pricing model for iTunes has been to price songs individually. Instead, Spotify opted to
offer unlimited song playing for a monthly fee. Would Spotify’s pricing model likely yield
more profit than pricing songs individually?
ANSWER: I think that pricing songs individually would bring in a larger profit for companies, but
then it may not be as likely for consumers to purchase as many songs as they would like. On the
other hand, Spotify allows for a wide variety of old and new music in all genres for a set price a
month. I think that this attracts more consumers and will result in a higher profit for Spotify
than for buying songs individually would.
14-6 Bundling
At a student café, there are equal numbers of two types of customers with the following
values. The café owner cannot distinguish between the two types of students because many
students without early classes arrive early anyway (i.e., she cannot price discriminate).
Students with Early Classes Students without Early classes
Coffee 70 60
Banana 50 100

The Marginal Cost of coffee is 10. The Marginal Cost of a banana is 40. Is bundling more
profitable than selling separately? If so, what price should be charged for the bundle?

ANSWER:
Mixed bundling is more profitable than only selling separately:

Mixed bundle: Price bundle at 160, earn 160-50=110; price coffee at 70, earn 70-10=60. Total
Profit is 170.
Price separately only: price coffee at 60, earn a 120-20=100; price bananas at 100, earn 100-
40=60 Total profit is 160.

Bundle only: coffee + banana at 120, earn 240 - 100 = 140; Total profit is 140.