can someone help me graph the points for figure 9-12 on the last page.
Answers for QCT 6
Salvatore?s chapter 12:
a. Discussion Questions:
7. Quantity discounts do lead to savings on handling costs on the part of the firm. That is,
the firm may incur lower paperwork costs per unit sold for large than for small orders,
may be charged lower transportation costs per unit, and so on. To the extent that
quantity discounts reflect only these costs savings on the part of the firm in handling large
orders, they do not represent price discrimination. If the amount of the quantity
discounts exceeds the cost savings that result to the firm from handling large orders, then
the difference does represent price discrimination.
11. (a) In the absence of an external market for the intermediate product, the transfer
price for the intermediate product is given by the marginal cost of the production division
at the best level of output for the intermediate product. If 1 unit of the
intermediate product is required to produce each unit of the final product, the best
level of output of the intermediate product is equal to the best level of output of
the final product.
(b) When a perfectly competitive external market for the intermediate product exists,
the transfer price for intracompany sales of the intermediate product is given by the
external competitive price of the product.
(c) When the transfer product can be sold in an imperfectly competitive external market,
the (internal) transfer price of the intermediate product is given at the point at which
the net marginal revenue of the marketing division of the firm is equal to the marginal
cost of the production division at the best level of output of the intermediate product,
and the price on the external market is given on the external demand curve.
13. (a) The advantages of cost-plus pricing are (1) it requires less information than the
MR = MC rule, (2) it is relatively simple and easy to use, (3) it usually results in
relatively stable prices, and (4) it provides a clear indication for price increases
when costs rise.
(b) The disadvantages of cost-plus pricing are (1) it is often based on accounting and
historical costs rather than on replacement or opportunity costs (cost-plus pricing,
however, could be based on the appropriate cost concepts), (2) it is based on
average rather than on marginal costs (to the extent, however, that AC = MC over
the normal or standard level of output, this does not create much of a problem), and (3)
it ignores conditions of demand (since firms usually apply higher markups to
products with a less elastic demand than to products with a more elastic demand,
however, cost-plus pricing leads to approximately the profit-maximizing price).
(c) The correct pricing and output decisions by a firm involve incremental analysis. That
is, a firm should lower the price of the product, introduce a new product, accept a new
order, etc., if the incremental revenue from the action exceeds the incremental cost. When excess capacity exists in the short run, overhead or fixed costs are irrelevant.
Correct incremental analysis, however, involves taking into consideration the shortrun
as well as the long-run implications of the managerial decision, and all the
important demand and production interrelationships. Only when the firm operates
with no idle capacity will incremental cost and full-cost pricing lead to the same results.
12. (a) The monopolist's total revenue will be larger with second-degree price
discrimination when the batches on which the monopolist charges a uniform price are
smaller. In fact, the smaller the batches are, the more the monopolist approaches the
results of first degree price discrimination (under which the monopolist extracts all of the
consumers' surplus and maximizes total revenue and profits). As pointed out in the text,
however, this is very difficult or prohibitively expensive to do.
(b) A two-part tariff is the pricing practice whereby a monopolist maximizes its total
profits by charging a usage fee or a price equal to its marginal cost and an initial or
membership fee equal to the entire consumer surplus. Bundling, on the other hand, is a
common form of tying in which the monopolist requires customers buying or leasing one
of its products or services to also buy or lease another product or service when customers
have different tastes but the monopolist cannot price discriminate.
Spreadsheet problem 1 (p. 523)
1. (a) TR = $24. Since the consumer would be willing to pay $33 for 6 units of the
commodity, the consumer?s surplus is $9.
(b) With first-degree price discrimination, the monopolist?s TR = $33 and the consumer?s
surplus is zero.
(c) By charging P = $5.50 for the first 3 units of the commodity and $4 for the next 3
units, the monopolist?s TR = $28.50 and the consumer?s surplus is $4.50. In this case, the
monopolist would be practicing second-degree price discrimination
Froeb and McCann?s chapter 14:
a. Individual problems:
Newspaper vs. Soft Drink Vending Machines
For most people, the marginal value of a second newspaper is zero. So even when given
the chance to take a second newspaper, most consumers won?t do it. In contrast, the
marginal value of a second can of soda is positive. Many consumers would take the extra
soda if given the chance.
14-2 Movie Theater Price Discrimination
You should charge $7.00 for movies and offer a $2.00 senior citizen discount.
Optimal Price w/ No Price Discrimination
Price Quantity Revenue MR
-25.00 If you charge a single price, operating profits are largest at a price of $7 and a quantity of
4. You earn $14.
Optimal Price for Low-Value Consumers
Price Quantity Revenue MR
-12.50 If you can offer senior citizens discounts, you want to offer a $2 discount for seniors, i.e.
a price of $5. This allows you to gain an additional $1.50 in profit. Salvatore?s chapter 13:
a. Discussion Questions:
8. Even though either a subsidy to install antipollution equipment or a tax on polluters
reduces the level of pollution, they represent basically different approaches to pollution
control because of their different implications as to who owns the environment.
A subsidy implies that the firm has the right to pollute so that society must subsidize
the firm to install antipollution equipment. A tax implies that society has the right to
a clean environment and the tax is a penalty on polluters. Polluters must, thus, reimburse
society for the damages created by the pollution they generate. Most people prefer taxes to reduce pollution because they recognize society's right to a clean environment.
10. Given the difficulties of regulating public utilities, many European countries have
nationalized the companies that supply electricity, gas, water, local telephone, and local
transportation services. The difficulty with this policy is that it removes, even more than
regulation does, any incentive for economic efficiency in the provision of these basic
services. Specifically, in the absence of any competition and facing even less scrutiny
than the managers of regulated public utility companies, the public servants who manage
the nationalized public utility companies have less incentive than the managers of
regulated public utilities to produce the best-quality service at the lowest possible price.
Nationalization, therefore, does not seem to be the answer to the efficiency problems
faced by public utilities.
12. Before the merger, the Herfindahl index for the 10 equal-sized firms is 1,000. After
the merger, H = 1,200 for the nine remaining firms. Since the postmerger index falls
between 1,000 and 1,800 and the index increases by 300 points as a result of the merger,
the Justice Department was likely to challenge the merger based on its 1984 Herfindahl
index guideline only.
13. (a) Prior to the passage of the Motor Carrier Act of 1980, trucking in interstate
commerce was regulated by the Interstate Commerce Commission (ICC). The ICC was
originally set up in the nineteenth century to regulate railroads. In the early part of the
twentieth century, the ICC sought to protect railroads from the emerging trucking
As the trucking industry grew and matured, the ICC introduced a maze of regulations to
protect large established trucking firms from the competition of smaller firms. These
regulations restricted entry into the industry and severely stifled competition. Because
regulation in the trucking industry resulted from pressure from large trucking firms and
restricted competition, it can be regarded as a good example of the capture theory of
(b) The passage of the Motor Carrier Act of 1980 led to the removal of most restrictions
to entry into the trucking industry. Many geographical and commodity restrictions on
independent truckers were also abolished. The result was sharply increased
competition in the industry, lower shipping rates, improved service, and lower profits.
Since 1980?1982 were years of recession and high inflation and interest rates, however,
it is difficult or impossible to determine how much of the pressure on trucking firms was
the result of deregulation and how much was due to the poor economic climate.
15. (a) See Figure 9.
The best level of output of the monopolist is 6 million units of the product or service
and is given by point E, at which the MC curve intersects the MR curve. The monopolist
sets P = $12 (point A on the D curve), faces AC = $8 (point B on the AC curve), and thus
earns a profit of $4 (AB) per unit and $24 million in total (the area of rectangle ABCF). (b) See Figure 10.
A lump-sum tax is like a fixed cost. As such, it shifts only the monopolist's AC curve up.
A lump-sum tax of $24 million would shift the AC curve up to AC', so that P = AC = $12
at the best level of output of 6 million units (given by point E, at which MR = MC) and
the monopolist breaks even.
(c) See Figure 11.
A per-unit tax of $3 is like a variable cost. As such, it shifts the monopolist's AC and
MC curves up by $3. Thus, the best level of output of the monopolist is 5 million units
and is given by point E', at which the MC' curve intersects the MR curve. At Q = 5
million, P = $13 (point A' on the D curve) and AC' = $13 (point A' on the AC'
curve), so that the monopolist earns a profit of $0 per unit and in total.
(d) See Figure 12.
If the government sets the price of the product or service that the monopolist sells at
P = $10, the market demand curve that the monopolist faces is given by GE?D and his or
her marginal revenue curve is given by GE?HNR. The monopolist would then behave as
a perfect competitor and produce 8 million units of the product or service, as indicated by
point E', at which P = MR = MC. At Q = 8 million units, AC = $7.5 (point H on the AC
curve), so that the firm would earn a profit of $2.5 (E?H) per unit and $20 million (the
area of rectangle E?HTG) in total.
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