Price Discrimination 2
1. Many pharmaceuticals produced in the United States are sold at lower prices in other countries than in the United States. Proposed legislation would allow drugs sold by U.S. firms in Canada to be re?imported to the United States at prices available in Canada. If such legislation passed, which of the following would most likely occur?
A. The profits earned by pharmaceutical companies will not be affected because their patents give them monopoly power in supplying many types of drugs.
B. The price at which pharmaceuticals are sold in the United States will fall, and the price at which they are sold in Canada will rise.
C. The prices at which pharmaceuticals are sold in the United States will fall to the levels that now exist in Canada.
2. The EarthCom Company prices its wireless service differently in the two market segments it serves even though the cost of adding a new customer is the same in each segment. Market research has shown that EarthCom can increase its profits by price?discriminating, rather than charging the same price to all customers. Currently, the extra revenue that EarthCom obtains from a monthly subscription is $25 in market one and $15 in market two. (Note that these figures are marginal revenues, not prices.) Which of the following statements is most likely correct?
a. EarthCom’s price?discrimination policy is not maximizing EarthCom’s profits.
b. EarthCom’s price?discrimination policy is probably maximizing its profits.
c. From the information provided, we can’t determine whether EarthCom’s pricing policy is maximizing its profits.
3. After the patent on a drug has expired, the same pharmaceutical is often sold for very different prices under its brand?name label and as a generic (even by the same company). True or False: This practice does not constitute price discrimination because all customers have the opportunity to buy the lower?priced generic drug. 4. An advertisement for a motel chain says that if you stay for three nights at the motel you can stay a fourth night for free. This represents a 25% reduction in price for people who stay four nights. Which of the following statements is more likely to be correct?
a. This practice represents market segmentation for the motel. It lowers the price for people whose demand for rooms is more sensitive to price.
b. If the motel were filled to capacity, it wouldn’t run this kind of “sale” on rooms. This practice is just off?peak pricing, not price discrimination.
5. You own the Whitney Farm in central Iowa. You grow and sell corn as do all the neighboring farmers. You and your fellow Iowa farmers grow essentially the same corn, most of which is bought by ranchers as feed for their livestock. Your experience tells you that some ranchers raise livestock that eat only corn while other ranchers raise livestock that will eat a number of different grains. In other words, different types of ranchers have different demands for corn. Which of the following is most likely to occur, assuming you are a profit?seeker?
a. You will charge a lower price to the ranchers who have a less price?elastic demand for corn and a higher price to those who have a more price?elastic demand.
b. You will charge a higher price to the ranchers who have a less price?elastic demand for corn and a lower price to those who have a more price?elastic demand for corn.
c. You would like to price?discriminate but you don’t believe that it willbe feasible in a market in which there are so many corn farmers.
6. The graph below illustrates the demand for rooms at The Open Arms Hotel. It shows the total demand for rooms as well as the demand in both market segments, A and B. All rooms in the hotel are identical. The graph also shows the corresponding marginal revenue curves and marginal cost, which is $40 per room. 6.1 If the management of The Open Arms Hotel decided to charge the same price for all rooms, which of the following prices would it charge to maximize its profits?
6.2 If hotel management decides to price all rooms at the same price and tries to maximize its profits, what will be the marginal revenue in each of the two market segments, A and B?
a. $40 in A; $40 in B
b. $100 in A; $160 in B
c. $80 in A; $140 in B
d. $120 in A; $120 in B
6.3 Suppose that hotel management is able to price?discriminate and that it decides to rent rooms to consumers in segments A and B at different prices. What price would it charge in each of the segments? (Assume that management price?discriminates in a way that maximizes profit and that people who are eligible for the lower price cannot “resell” to those who are charged a higher price.)
a. 50 in A; 130 in B
b. 100 in A, 160 in B
c. 120 in A, 120 in B
d. 110 in A, 130 in B
6.4 If hotel management decides to price?discriminate in a manner that maximizes profit, what will be the marginal revenue in each of the market segments, A and B?
a. 120 in A, 120 in B
b. 100 in A, 160 in B
c. 40 in A, 40 in B
d. 80 in A, ?40 in B
6.5 Suppose that the management of The Open Arms Hotel pursues its price?
discrimination strategy rather than charge a uniform price for all rooms rented. This policy will result in renting more rooms in one segment and fewer in the other. Which of the following room reallocations will occur?
a. 40 from B and 40 to A
b. 20 from A and 40 to B
c. 20 from A and 20 to B
d. 40 from B and 20 to A