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Revenue maximization price and price discrimination

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Revenue maximization occurs when a firm sells at a price:

Select one:
a. that is equal to its minimum average variable cost
b. where its marginal revenue is equal to its marginal cost
c. where its marginal revenue is zero
d. None of the above

Which of the following is true for price discrimination:

Select one:
a. Regards normative assessment of the pricing practice
b. Means the price to marginal cost ratio differs between or among similar products
c. Is primarily concerned with ascertaining the social welfare effects of charging different prices to different customers
d. None of the above are true in regard to price discrimination

When a firm engages in cost-plus pricing:

Select one:
a. It is ignoring principles of profit maximization as fixed cost is included in the determination of the selling price
b. The resulting level of output the firm produces may be consistent with a marginal pricing approach if the long-run average cost curve exhibits constant returns to scale over the relevant range of output
c. The firm may appear to be engaging in a marginal pricing practice even if the markup is not a reflection of a normal profit
d. All of the above are correct

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Solution Preview

Revenue maximization occurs when a firm sells at a price:
Answer: c. where its marginal revenue is zero

Which of the following is true ...

Solution Summary

Revenue maximization price and price discrimination are given. Marginal revenues maximization are given.

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See Also This Related BrainMass Solution

Pricing: Lerner Index, Profit Maximization, first-degree price discrimination, etc.

The patented drug, Botox, is currently sold by Allergan, Inc. The current price for a vial of Botox, is $400, and the marginal cost to produce a vial is $25.

a) Using the Lerner index, find the price elasticity of demand for Botox and interpret what this value means to total revenue if the price of Botox were increased one percentage point.

Note: Lerner Index is the difference between price and marginal cost dived by price. L = (p-MC)/P The larger the L the greater the degree if monopoly power.

b) The inverse demand for Botox is: P = 775 - 375Q, where Q represents millions of vials of Botox and P is in dollars per vial. Derive the marginal revenue curve and find the price and quantity Allergen will set in order to maximize its monopoly profits.

c) Draw a diagram of the firm's inverse demand, marginal revenue, MC, and optimal price and quantity. In addition, show the areas of consumer surplus, producer surplus, and deadweight loss and calculate their values (in dollars).

d) If Allergen is able to use first-degree price discrimination, what is the lowest price it will charge for a vial of Botox? Explain the concept of first degree price discrimination, and show how social welfare will be affected if Allergen is permitted to set price in this way.

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