Management Economics

Essay Questions – Final Exam BUSN 6120 Spring I 2011

Each Question counts 4 points vs. 1 point for multiple choice and T/F. Your answers should be approximately ¼ to ½ page.

1. In situations where firms have pricing power the goal is to maximize profitability by setting marginal revenue equal to marginal cost. This results in a new product markup factor of:

Markup= EF___

(1 + EF)

Discuss what if any adjustments might be made to the markup and why.

• The above markup does not indicate...If product is unique, or not easily copied. This in fact implies a higher profit-maximizing markup

• Firm managers who use the above markup should be aware that, the more elastic the demand for firms product, the lower the profit maximizing mark-up.

• The higher the marginal cost, the higher the profit-maximizing price. Firms with higher marginal costs will charge higher prices than firms with lower marginal costs.

• When firm alters the good or service, the elasticity of demand will also change.

2. What is the ultimate goal of First Degree Price Discrimination and the requirements to accomplish it.

The ultimate goal of this type of price discrimination is to increase the firm’s profit. First degree price discrimination allows the seller to get more money for less goods. Each consumer pays the max he or she is willing to pay for each quantity of output sold.

To accomplish first degree price discrimination…

• A seller needs to know the highest demand price that every buyer is willing and able to pay for each quantity purchased.

• A seller needs to have market control and segmentation. There must be a means to discourage discount customers from becoming resellers and, by extension, competitors. This entails keeping the different price groups separate, making price comparisons difficult, or restricting pricing information

3. From a practical real world aspect, discuss how transfer pricing is...