BUSI 620 Questions for Critical Thinking 6 Salvatore Chapter 12: a. Discussion Questions: 7, 8, and 13. 7. Quantity discounts are not a form of price discrimination because the firm saves on handling large orders. True or False? Explain 8. Why are first and second-degree price discrimination less common than third-degree price discrimination? (b) Are lower airline fares at midweek an example of third-degree price discrimination? (c) Under what conditions would it not be useful to change different prices in different markets not be useful to change different prices in different markets (i.e., practice third-degree price discrimination) even if possible? 13. What are (a) the advantage and (b) the disadvantage of cost-plus pricing? (c) Why is incremental cost pricing the correct pricing method? Why is full-cost pricing equal to it? b. Problems: 5 and 12. 5. The dairy farm company, a small producer of milk and cheese, has estimated the quantities of milk and cheese that it can produce with three levels of total expenditures or total costs. These are indicated in the following table. If the price of milk (product A) and the price of cheese (product B) that the firm receives are $1 each per unit of the products, draw a figure showing the maximum total profit ( ) that the firm can earn at each level of TC and the overall maximum profit that the firm can earn for the three different levels of TC. TC=$70 TC=$90 Product A Product B Product A Product B 80 0 100 0 70 40 90 60 50 70 70 90 20 90 30 120 0 95 0 130 TC=$140 Product A Product B 130 0 110 70 80 120 40 150 0 160 Source: Fictitious data, for illustration purposes only 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? Note: P12) Think about which case(smaller or larger batches) would allow a monopolist to take a larger consumer surplus. Example) in the diagram below, there seems to be only three batches drawn. You can draw as many as batches you want 1. P12: You could use figure 12-4 as a reference (p. 506). With D as the demand curve faced by a monopolist, the firm could sell Q=40 at P= $2 for TR=$80 (the area of rectangle CF0G). Consumers, however, would be willing to pay ACF0=$160 for 40 units of the product. The difference of $80 (the area of triangle ACG) is the consumer’s surplus. With first-degree price discrimination (i.e., by selling each unit of the product separately at the highest price possible), the firm can extract all the consumers’ surplus from consumers. If, however, the firm charged the price of P=$4 per unit for the first 20 units of the product and $2 per unit on the next 20 units, the total revenue of the firm would be $120 (the sum of the areas of rectangles BJ0H and CFJK), so that the firm would extract $40 (the area of rectangle BKGH), or half of the consumers’ surplus from consumers. ...

1. BUSI 620
Questions for Critical Thinking 6
Salvatore Chapter 12:
a. Discussion Questions: 7, 8, and 13.
7. Quantity discounts are not a form of price discrimination
because the firm saves on handling large orders. True or False?
Explain
8. Why are first and second-degree price discrimination less
common than third-degree price discrimination? (b) Are lower
airline fares at midweek an example of third-degree price
discrimination? (c) Under what conditions would it not be
useful to change different prices in different markets not be
useful to change different prices in different markets (i.e.,
practice third-degree price discrimination) even if possible?
13. What are (a) the advantage and (b) the disadvantage of cost-
plus pricing? (c) Why is incremental cost pricing the correct
pricing method? Why is full-cost pricing equal to it?
b. Problems: 5 and 12.
5. The dairy farm company, a small producer of milk and
cheese, has estimated the quantities of milk and cheese that it
can produce with three levels of total expenditures or total
costs. These are indicated in the following table. If the price of
milk (product A) and the price of cheese (product B) that the
firm receives are $1 each per unit of the products, draw a figure
showing the maximum total profit ( ) that the firm can earn at
each level of TC and the overall maximum profit that the firm
can earn for the three different levels of TC.
TC=$70

2. TC=$90
Product A
Product B
Product A
Product B
80
0
100
0
70
40
90
60
50
70
70
90
20
90
30
120
0
95
0
130
TC=$140
Product A
Product B
130
0
110
70
80

3. 120
40
150
0
160
Source: Fictitious data, for illustration purposes only
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?
Note:
P12) Think about which case(smaller or larger batches) would
allow a monopolist to take a larger consumer surplus. Example)
in the diagram below, there seems to be only three batches
drawn. You can draw as many as batches you want
1. P12: You could use figure 12-4 as a reference (p. 506).
With D as the demand curve faced by a monopolist, the firm
could sell Q=40 at P= $2 for TR=$80 (the area of rectangle
CF0G). Consumers, however, would be willing to pay
ACF0=$160 for 40 units of the product. The difference of $80
(the area of triangle ACG) is the consumer’s surplus. With
first-degree price discrimination (i.e., by selling each unit of the
product separately at the highest price possible), the firm can
extract all the consumers’ surplus from consumers. If, however,
the firm charged the price of P=$4 per unit for the first 20 units
of the product and $2 per unit on the next 20 units, the total
revenue of the firm would be $120 (the sum of the areas of
rectangles BJ0H and CFJK), so that the firm would extract $40
(the area of rectangle BKGH), or half of the consumers’ surplus
from consumers. This is second-degree price discrimination.
H

4. Froeb et al. Chapter 14:
a. Individual problems: 14–1 and 14–4.
14-1. why Mattel might set a much lower contribution margin
on its Barbie dolls than on the accessories for the dolls?
Note: P14-1) Think about how you would do pricing if you were
the seller. .Note that consumers differ in their willingness to
pay for the Barbie experience.
14-4. A manufacturer of microwaves has discovered the 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 incorporation an auto-defrost feature. Since mem ad 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?
Note: P14-4) Assume the following: 1) the market for women
and the market for men are not separated. In other words, you
cannot charge for men and women differently. 2) each person
does not purchase more than one microwave.
Salvatore Chapter 13:
a. Discussion Questions: 8 and 10.
8. What is the basic difference between using a subsidy to
induce producers to install antipollution equipment and a tax on

5. producers who pollute?
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?
b. Problems: 12, 13, and 15.
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.
13. (Library research) Explain (a) in that way the U.S. trucking
industry exemplified the capture theory hypothesis of
government regulation prior to the passage of the Motor Carrier
Actof 1980 and (b) the result of the passage of the motor carrier
act in 1980.
15. Integrating Problem from figure 13-5 referring to a natural
monopolist, indicate (a) the best level of output, price, and
profits per unit and in total for the monopolist, (b) the best
level of output and price with a lump sum tax that would
eliminate all the 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? (See Figure 13-
5)
Note:
1. P12: Need to calculate and compare the Herfindahl index
before and after the merger.
2. P13: Use an Internet search or other sources to answer this
problem.
3. P15) This requires a though understanding for a natural
monopolist, lump sum tax, per unit tax, etc. Lump sum tax does

6. not vary by the amount of the product, while per unit tax varies
by the amount of the product. Then does lump sum tax change
marginal cost or average cost? What about per unit tax then?
Note that you cannot get answers without playing the figure 13-
5.
4. Problem #15a: Best level of output is where MC = MR. The
monopolist sets P = $12 (point A on the D curve), faces AC = ?
, and thus earns a profit of ? per unit and ? million in total.
5. Problem #15b: 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. 'Then?
6. Problem #15c: 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.
Then?
7. Problem #15d: Best level of output = 8 million units, profit
per unit = ?, total profit = ?
8. Problem #15e: The best method of controlling monopoly
power is by regulating the price to ? Without control, the
monopolist is not incentivized to produce more output even
though P > MC. With the control, the best level of output for
society is ? units and P > AC, ensuring the company makes at
least a normal return in the long run. Also how about setting at
P = AC, the intersection between AC and D?
9. P15 (b): Use the following graph for reference. A lump sum
tax is a fixed cost. (figure 13-5)
P15 (c): Use the following graph for reference. A $3 per unit
tax is a variable cost which will cause AC and MC to increase
by $3.
Submit this assignment by 11:59 p.m. (ET) on Sunday of
Module/Week 6.
P ($)
A
B

7. C
0 10 20 30 40 50 60 6 5 4 2 0
Quantity
Price ($)
Page 2 of 5
Week 7- Webliography Assignment
Global Warming
This assignment is worth up to 60 points and involves
researching and writing an entry for the Webliography section
of our course. The assignment references TCO 6 as is applies to
a controversial topic.
Your task in this assignment is to use the Internet to find an
article about the social dilemma of global warming, approaching
it from the perspective of a two-sided debate that has the
potential to end up in a stalemate that threatens all mankind that
has been described as the Tragedy of the Commons.
Process:
1. Read Myer’s (2009) on the Tragedy of the Commons
2. Using the Internet locate a relevant article about global
warming
3. Compose a summary of the contents of the article that
includes the following information:
a. A brief description of the contents of the article
b. A description of least two specific examples from the article
c. Your evaluation of how a reader could use this information
(for what purposes)
4. Prepare your article for Webliography using one of the
following processes:

8. a. write your descriptive text as a Word document that you copy
and paste into Webliography OR
b. type your descriptive text straight into Webliography
5. To add your entry to Webliography, use this process:
a. click on Webliography in the gray/white bar in the blue space
at the top of the course website – it is the last component on the
right side of the bar
b. click on “Add New Entry”
c. type in the title of your entry and the URL
d. add your text
e. click on “Add Entry”
Note: You cannot edit your entry once you have submitted it.
If you want to change your entry simply submit the new version.
Your instructor will know to grade the newest article and will
disregard the earlier version
Expectations:
· Your entry must have a working URL that goes directly to the
article and does not require drilling down (navigating) through
layers of a website
· Do not use an article that triggers advertising
· A Webliography entry on this subject that is sufficiently
informative requires at least 200 words
· Your entry is free of spelling and grammatical errors
Grading:
· 35 points for the informational quality of your entry
· 20 points for clear and orderly presentation of your content
· 5 points for freedom from spelling and grammar errors
Sheet1Salvatore Chapter 12 Spreadsheet Problem (p.
537)TRConsumer's SurplusTotal amount that consumer is
willing to payQ624933P41st DegreeTRConsumer's Surplus2
PricesTRConsumer's SurplusP15.5P24The

9. DataQP1401211028364452607
The Demand Curve
P 14 12 10 8 6 4 2 0 0 1 2 3
4 5 6 7
Sheet2
Sheet3