BUSI620-Global Economic Environment
Critical Thinking Questions 6

Questions for Critical Thinking 6

Chapter 12: A. Discussion Questions: 7, 11, and 13.
7. Quantity discounts are not a form of price discrimination because the firm saves on handling large orders. True or False? Explain True, quantity discounts are not a form of price discrimination because the firm saves on handling large orders (Salvatore, 2012, p. 492). Large orders can be shipped at a lesser price compared to smaller orders, saving on shipping cost. There are many companies that reduce the price of the product if the company buys in bulk. In addition, larger orders cost less than smaller orders when dealing with production. For example, if a manufacturing wanted to make only 5 items the time spent on making that smaller order would take just as much time to do a larger order.
11. How is the transfer price of an intermediate product determined when (a) there is no external market for the intermediate product (b) a perfectly competitive external market for the intermediate product exists, and (c) an imperfectly competitive external market for the intermediate product exists? (A) “When there is no external demand for the intermediate product, the production division can sell the intermediate product only internally to the marketing division of the firm, and the marketing division can purchase the intermediate product only from the production division of the firm,” (Salvatore, 2012, p. 502). (B) In addition, if the external market for the intermediate product exist, the amount produced by production does not have to be the same as the amount produced of the ending product. (C) Furthermore, an imperfectly competitive external market for the intermediate product exists, the transfer price of the intermediate product for intrafirm sales will be different from the cost of the intermediate product on the imperfectly competitive external market.
13. What are (a) the advantages and (b) the disadvantages of cost-plus pricing? (c) Why is incremental cost-plus pricing the correct pricing method? Why is full-cost pricing equal to it? (A) The advantages of cost-plus pricing are less information and precise data (Salvatore, 2012, p. 509). In addition, the other advantage of cost-plus pricing is how straightforward and basic it is to use. Furthermore, cost-plus pricing typically have the end results of reasonably constant rates when costs do not differ significantly over time. Changing prices can be very costly. (B) “One criticism is that cost-plus pricing is based on accounting and historical costs, rather than on replacement and opportunity cost,” (Salvatore, 2012, p. 510). An another disadvantage is cost-plus pricing is established from the average cost of production compared to being based on the marginal cost of production. Lastly, cost-plus pricing disregards conditions of demand. (C) Incremental cost-plus pricing is the correct pricing method because it provides companies with elasticity and are distinctly an indication in pricing policies abided by other outstanding accomplished companies (Salvatore, 2012, p. 513). In addition, the companies take into account the short-run and long-run implications for pricing policies along with the demand and production relations when using incremental cost-plus pricing. Full-cost and incremental-cost pricing leads to identical outcomes when a company is manufacturing at capacity, decreasing the product’s cost to upsurge sales or bring in another invention would result in an increase of all expenses, in addition to the expenses for plant and equipment.
Problems: 6* and 12(a).
6. Show graphically the maximum total profits that the firm of Problem 5 earns if the the price of milk (product A) falls to $0.50 while the price of cheese (product B) remains at $1. * Please review “Optimal Pricing and Output of Joint Products Produced in Variable Proportions,” pp. 488-490, before you answer this problem. Just work on the case of TC=$90. You may need to draw the figure to find the answer, but you do not need to submit the figure to me.

|PRODUCT A |TC=$90 |PRODUCT B |
|100 x 0.50=50 |50 + 0=50 |0x 1.00=0 |
| |TR=50 | |
| |TR-TC=π | |
| |50-90= -40 | |
| |Π= -40 | |
|90 x 0.50=45 |45 + 60 =105 |60x 1.00=60 |
| |Tr=105 | |
| |105-90=15 | |
| |Π=15 | |
|70 X 0.50=35 |35+90=125 |90x1.00=90 |
| |TR=125 | |
| |125-90=35 | |
| |Π=35 | |
|30x 0.50=15 |15+120=135 |120x 1.00=120 |
| |Tr=135 | |
| |135-90=45 | |
| |Π=45 | |
|0x.50=0 |130+0=130 |130x1.00=130 |
| |130-90=40 | |
| |Π=40 | |
|The overall Maximum Total Profit=45 and | | |
|because of product a of 30 and product b of| | |
|120 | | |

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? Second degree price discrimination, a monopolist’s total revenue will be larger when the batches on which it charges a uniform price at a smaller unit price (Salvatore, 2012, p. 494). The reason why monopolist’s would benefit more is because the bulk purchasers receive more reductions compared to purchasers that are getting single items. In addition, vendors would not be able to distinguish between dissimilar types of customers. Buying in bulk allows the supplier to have multiple prices to different customers in order to get a greater fraction of the total market surplus.
Chapter 13: Discussion Questions: 5*, 8 and 10.
5. Why is it likely that in a system of private education (i.e., a system in which individuals pay for their own education) there will be underinvestment in education? * Please review the right panel of Figure 13-1, p. 548, the case of yard work before you answer this question. Education, likes yard work, provides additional social benefit to the society. Yes, education does give one additional social benefit to the society. A system of private education there will be underinvestment in education because where the marginal social benefit does not equal the marginal social cost. “Specifically, if social costs exceed private costs, too much of the product is being produced, while if the social benefits exceed private benefits, too little of the product is being consumed,” (Salvatore, 2012, p. 548). If the marginal private benefit does not equal the private marginal cost there will be an underinvestment in education.
8. What is the basic difference between using a subsidy to induce producers to install antipollution equipment and a tax on producers who pollute? Using a subsidy to induce producers to install antipollution equipment would be established through the government. If a company installs antipollution equipment; as a result the following event would reduce income, which gives a better tax advantage. In contrast, when using tax on producers who pollute companies will have a greater income.
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. No, it would not be better nationalize public utilities, as some European countries have done if done the prices would be higher, fluctuate, and constantly change (Salvatore, 2012, p. 553). The local government right now regulates prices, which is definitely better for consumers and the companies. If the local government did not regulate the following other companies would come in and some companies would be put out of the business if the price was very low. Consumers want the lowest price available and will switch company to company in order to receive the following.
Problems: 12, and 13*
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.
10 firms at 10% each the Herinfindahl index 10 x 10= 100, which is 10 hundreds which is 1000 the Herinfindahl prior merger it would be 1000. Post merger Herfindahl index with 2 firms merger leaves us with 9 firms. The 1 firms that merge would be at 20% and than the 8 left at 10% each.
1 firm = 20²=400
8 firms = 10² x 8= 100 x 8=800
800+400=1,200
The Justice deparment will challenge the merger because the points changed more than 100. After the merger it actually changed to 200 so the following will be challenged.
13. (Library research) Explain (a) in what way the U. S. trucking industry exemplified the capture theory hypothesis of government regulation prior to the passage of the Motor Carrier Act of 1980 and (b) the result of the passage of the Motor Carrier Act in 1980. * Please use the internet search or other sources to answer this problem. (A) “According to the economic theory of regulation (sometimes called the “capture theory of regulation”) expounded by Stigler and others, regulation is the result of pressure-group action and results in laws and policies to support business and to protect consumers, workers, and the environment,” (Salvatore, 2012, p. 541). Prior to 1980 the trucking industry was regulated by the ICC in 1935, which was very monopolized. The ICC allowed price setting. In addition, the ICC did not allow many other companies to enter into the market; as result there was not a lot of competition. If other companies could not enter than there was no room for growth. (B) The Motor Carrier Act in 1980, provided regulation which let other companies to enter into the market; as a result prices dropped (United States, Congress, Senate, Committee on Commerce, Science, & Transporation, 1984). The customers and shippers profited from the price drop. In addition, The Motor Carrier Act in 1980, allowed for more competition in the trucking industry. Lastly, The Motor Carrier Act in 1980, lead to new service options as well.

References
Salvatore, D., (2012). Managerial Economics in a Global Economy (7th ed.). New York: Oxford University Press.
United States, Congress, Senate, Committee on Commerce, Science, & Transporation, (1984). Retrieved on December 12, 2012. http://archive.org/stream/motorcarrieract00conggoog/motorcarrieract00conggoog_djvu.txt