Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

266 RECENT AND ADVANCED TOPICS IN MARKET STRUCTURE [CHAP. 11
8. Which of the following is true with regard to peak-load pricing? (a) It is applicable only for electrical public
utilities. (b) It leads to some substitution in consumption from the period of peak demand to the period of low
demand. (c) It leads to a reduction in customer welfare. (d) All of the above.
Ans. (b) See Problem 11.3.
9. Cost-plus pricing (a) is used when firms do not have knowledge of MR and SMC, (b) is fairly common in oligopolistic
industries, (c) is usually consistent with profit maximization, or (d) all of the above.
Ans. (d) See Section 11.5.
10. Transfer pricing refers to the price (a) that a firm pays for the intermediate products of another firm, (b) that a
foreign firm pays for the final products of a domestic firm, (c) of the intermediate products sold by one semiautonomous
division of a firm to another semiautonomous division of the same enterprise, (d) of the final products sold
by one semiautonomous division of a firm to another semiautonomous division of the same enterprise.
Ans. (c) See Section 11.6.
11. When there is no external market for an intermediate product and one unit of the intermediate product is required
to produce a unit of the final product of the firm, the appropriate transfer price of the inter-mediate product is the
(a) marginal cost of production of the intermediate product, (b) marginal cost of production of the final product,
(c) price of the final product, (d) marginal revenue of the final product.
Ans. (a) See Section 11.6 and Fig. 11-3.
12. Appropriate transfer pricing is essential in determining (a) the optimal output of each division of the firm, (b) the
optimal output of the firm, (c) evaluating divisional performance, (d) all of the above.
Ans. (d) See Section 11.6.
Solved Problems
THE LERNER INDEX AS A MEASURE OF A FIRM’S MONOPOLY POWER
11.1 What is the value of the Lerner index when (a) e ¼ 5? e ¼ 3? (b) P ¼ $10 and MR ¼ $5?
(a) When e ¼ 5, L ¼ 1/e ¼ 1/5 ¼ 0.20.
When e ¼ 3, L ¼ 1/3 ¼ 0.33.
(b) Since at the best level of output MR ¼ MC, we can substitute MR for MC in the formula for the Lerner index
and get
L ¼ P
MC ¼ P
P
MR ¼
P
11.2 Derive the formula for L ¼ 1/e from L ¼ (P 2 MC)/P.
$10 $5
¼ 0:50
$10
Since at the best level of output MR ¼ MC, we can substitute MR for MC into the formula and get
L ¼ (P 2 MR)/P. But from Section 9.2, we know that MR ¼ P(1 2 1/e). Substituting this value for MR into
the above formula for L, we get
P P(1 1=e)
L ¼ ¼ 1 1 1 1
¼ 1 1 þ 1 P
e
e ¼ 1 e
11.3 Explain why the value of the Lerner index can seldom, if ever, be equal to one (i.e., the value of L
usually ranges from zero to smaller than one).
Given that L ¼ 1/e, for L to be equal to 1, e has to have a value of 1. But at e ¼ 1, MR ¼ 0. For this to be the
best level of output of the firm, MC must also be equal to zero. This is seldom, if ever, the case.