Chapter 11

Question 1

Profit-Maximizing Markup for Monopoly and Monopolistic Competition

Answer 1

The price that maximizes profit is given by
where EF is the own-price elasticity of demand for the firm’s product and MC is the firm’s
marginal cost. The term in brackets is the optimal markup factor.

Question 2

Profit-Maximizing Markup for Cournot Oligopoly

Answer 2

If there are N identical firms in a Cournot oligopoly, the profit-maximizing price for a firm
in this market is
where N is the number of firms in the industry, EM is the market elasticity of demand, and
MC is marginal cost.

Question 3

price

discrimination

Answer 3

The practice of
charging different
prices to consumers
for the
same good or
service.

Question 4

two-part pricing

Answer 4

Pricing strategy in
which consumers
are charged a fixed
fee for the right to
purchase a product,
plus a per-unit
charge for each
unit purchased.

Question 5

first-degree price discrimination

Answer 5

that is,
charge each consumer the maximum price he or she would be willing to pay for each
unit of the good purchased. By adopting this strategy, a firm extracts all surplus from
consumers and thus earns the highest possible profits. Unfortunately for managers, firstdegree
price discrimination (also called perfect price discrimination) is extremely difficult
to implement because it requires the firm to know precisely the maximum price
each consumer is willing and able to pay for alternative quantities of the firm’s product

Question 6

Second-degree price discrimination

Answer 6

is the practice of posting a discrete schedule of declining prices for different
ranges of quantities. This practice is very common in the electric utility industry, where
firms typically charge a higher rate on the first hundred kilowatt hours of electricity
used than on subsequent units. The primary advantage of this strategy is that the firm
can extract some consumer surplus from consumers without needing to know beforehand
the identity of the consumers who will choose to purchase small amounts (

Question 7

3rd degree PD

Answer 7

is commonly practiced by firms that recognize
that the demand for their product differs systematically across consumers in different
demographic groups. In these instances firms can profit by charging different groups
of consumers different prices for the same product,

Question 8

3rd degree PD conditions

Answer 8

• market segmentation

- minimize re-sale

Question 9

Two-Part Pricing Examples

Answer 9

-original cell phone plans