Chapter 10: Bundling and Intrafirm Pricing

MULTIPLE CHOICE
1.
When a firm requires a customer to buy additional products in order to buy
one of its products, this is known as a(n):
a.
bundling contract.
b.
price differentiation.
c.
oligopolistic device.
d.
two-part tariff.
e.
maximizing device.
ANS: A
Bundling
MSC: Factual

DIF: Easy

REF: 357

TOP: The Mechanics of

2.
The reservation prices, in dollars, for three classes of demanders (A, B, and
C) for two restaurants (1 and 2) are given in the following table. What is the maximum
revenue that can be generated by setting a separate price for each restaurant?
a.
b.
c.
d.
e.
ANS: A
Bundling
MSC: Applied

$49.
$45.
$36.
$84.
$60.
DIF: Easy

REF: 358

TOP: The Mechanics of

3.
The reservation prices, in dollars, for three classes of demanders (A, B, and
C) for three restaurants (1, 2, and 3) are given in the following table. What is the maximum
revenue that can be generated by setting a separate price for each of the three restaurants?
a.
b.
c.
d.
e.
ANS: A
Bundling
MSC: Applied

$59.
$75.
$81.
$89.
None of the above.
DIF: Easy

REF: 358

TOP: The Mechanics of

4.
The reservation prices, in dollars, for three classes of demanders (A, B, and
C) for two restaurants (1 and 2) are given in the following table. What is the maximum
revenue that can be generated by setting a bundled price for the two restaurants?
a.
b.
c.
d.
e.

$49.
$45.
$36.
$34.
$30.

a.
b.
c.
d.
e.
ANS: B
Bundling
MSC: Applied

$49.
$45.
$36.
$34.
$30.
DIF: Easy

REF: 358

TOP: The Mechanics of

5.
The reservation prices, in dollars, for three classes of demanders (A, B, and
C) for three restaurants (1, 2, and 3) are given in the following table. What is the maximum
revenue that can be generated by setting a bundled price for the three restaurants?
a.
b.
c.
d.
e.
ANS: B
Bundling
MSC: Applied

$59.
$75.
$81.
$89.
None of the above.
DIF: Easy

REF: 358

TOP: The Mechanics of

6.
The reservation prices, in dollars, for three classes of demanders (A, B, and
C) for two restaurants (1 and 2) are given in the following table. What is the maximum
revenue that can be generated by setting a separate price for each restaurant?
a.
b.
c.
d.
e.
ANS: C
Bundling
MSC: Applied

$49.
$45.
$36.
$34.
$30.
DIF: Easy

REF: 358

TOP: The Mechanics of

7.
The reservation prices, in dollars, for three classes of demanders (A, B, and
C) for three restaurants (1, 2, and 3) are given in the following table. What is the maximum
revenue that can be generated by setting a separate price for each of the three restaurants?
a.
b.
c.
d.
e.
ANS: C
Bundling
MSC: Applied

$46.
$52.
$63.
$72.
$84.
DIF: Easy

REF: 358

TOP: The Mechanics of

8.
The reservation prices, in dollars, for three classes of demanders (A, B, and
C) for three restaurants (1, 2, and 3) are given in the following table. What is the maximum
revenue that can be generated by setting a bundled price for the three restaurants?

a.
b.
c.
d.
e.
ANS: D
Bundling
MSC: Applied

$46.
$52.
$63.
$72.
$84.
DIF: Easy

REF: 358

TOP: The Mechanics of

9.
The reservation prices, in dollars, for three classes of demanders (A, B, and
C) for two restaurants (1 and 2) are given in the following table. What is the maximum
revenue that can be generated by setting a bundled price for the two restaurants?
a.
b.
c.
d.
e.
ANS: E
Bundling
MSC: Applied

$49.
$45.
$36.
$84.
$60.
DIF: Easy

REF: 358

TOP: The Mechanics of

10.
When consumers can purchase a set of goods as a bundle or separately, then
the seller is engaging in:
a.
simple bundling.
b.
complex bundling.
c.
performance bundling.
d.
mixed bundling.
e.
engaged bundling.
ANS: D
Bundling
MSC: Factual

DIF: Moderate

REF: 358

TOP: The Mechanics of

11.
There are 12,000 fans attending a basketball tournament featuring three
regional powerhouses in Charlotte, North Carolina. There are 4,000 of each of three types of
fans, identified by the school for which they cheer. The fans value a ticket to see a game
according to which teams are competing as shown in the following table. The stadium holds
12,000, and the marginal cost of seating another viewer is zero. What is the change in the
maximum profits that organizers can earn for the tourney if they sell the three games as a
package instead of as individual games?

a.
b.
c.
d.
e.
ANS: B

$20,000.
$120,000.
$160,000.
$200,000.
$220,000.
DIF: Moderate

REF: 358

TOP: The Mechanics of

Bundling
MSC: Applied
12.
If Chip and Cathy have different valuations on dancing and dinner as in the
following table, what is the maximum profit Sammy can extract from Chip and Cathy for an
evenings entertainment at Sammys dinner theater if Sammys marginal cost is $25 for dinner
and $5 for dancing per person?
Dinner
Dancing

Chip
$40
$35

a.
b.
c.
d.
e.

Cathy
$30
$50
$60.
$70.
$80.
$90.
$100.

ANS: D
Bundling
MSC: Applied
13.
a.
b.
c.
d.
e.

DIF: Moderate

REF: 358

TOP: The Mechanics of

Tying can sometimes be justified as helping consumers by:

brand-name quality protection.
different consumer evaluations of the main
good.
transportation costs.
standard industry practice.
offsetting price reductions in the main good.

ANS: A
DIF: Easy
REF: 386
TOP: Tying at IBM, Xerox, and Microsoft

MSC: Factual

14.
Play It Again Sam is a producer of high-end CD burners. It requires
customers to purchase high-quality blank CDs from it in order to maintain warranty
agreements. This is an example of a:
a.
bundle.
b.
two-part tariff.
c.
tying contract.
d.
transfer price.
e.
joint product.
ANS: C
DIF: Easy
REF: 386
TOP: Tying at IBM, Xerox, and Microsoft

MSC: Applied

15.
When the NCAA basketball tournament will only sell tickets to all three
games held at a given site as a package, it is practicing:
a.
first-degree price discrimination.
b.
second-degree price discrimination.
c.
third-degree price discrimination.
d.
markup pricing.
e.
tying.
ANS: E

DIF: Easy

REF: 386

TOP: Tying at IBM, Xerox, and Microsoft

16.
price when:
a.

The transfer price of an upstream product should always equal the market
there is an outside market for the upstream
product.
the price elasticity of demand for the
upstream product is greater than 1 (in
absolute value).
there is a perfectly competitive market for
the downstream product.
the marginal cost of the downstream
product is greater than 1.
the firm is a monopolist in its downstream
market.

b.
c.
d.
e.
ANS: A
MSC: Factual

MSC: Applied

DIF: Easy

REF: 388

TOP: Transfer Pricing

17.
The Two Stage Photo Company has a division for each stage of photo
processing. There is no external market for the first stages output. For a fixed quantity of
photo processing, the transfer price should depend on:
a.
whatever management wants.
b.
marginal costs at stage 1 only.
c.
marginal costs at each stage.
d.
average costs at stage 1 only.
e.
average costs at each stage.
ANS: B
MSC: Factual

DIF: Easy

REF: 388

TOP: Transfer Pricing

18.
If a firm uses optimal transfer pricing between production division A and
marketing division B, and a competitive external market for the output of division A exists,
then production division A will surely:
a.
make positive economic profits.
b.
make normal economic profits.
c.
sell at marginal costs.
d.
sell at the external price.
e.
sell at less than the external price.
ANS: C
MSC: Factual
19.
a.
b.
c.
d.
e.

ANS: C

DIF: Easy

REF: 388

TOP: Transfer Pricing

Transfer prices are needed when:

firms purchase raw materials from other
firms.
consumers sell goods and services to one
another.
markets must be simulated within firms.
products are bundled and sold as a package.
firms charge different prices to customers
where there are no differences in production
costs.
DIF: Easy

REF: 388

TOP: Transfer Pricing

MSC: Factual
20.
The XYZ Steel Company produces its own coal for use in its production
facility. The demand for steel is given by Ps = 500 2Qs and the total cost of producing steel
is given by TCs = 175Qs, where Qs is tons of steel per week. The price of coal in a perfectly
competitive market outside the firm is $250 per ton, and the total cost of producing coal is
given by TCc = 40 + 5Qc2, where Qc is tons of coal per week. How much should XYZ steel
charge itself for coal?
a.
$250 per ton.
b.
$350 per ton.
c.
$500 per ton.
d.
$750 per ton.
e.
$1,000 per ton.
ANS: A
MSC: Applied

DIF: Easy

REF: 388

TOP: Transfer Pricing

21.
The XYZ Steel Company produces its own coal for use in its production
facility. The demand for steel is given by Ps = 500 2Qs and the total cost of producing steel
is given by TCs = 175Qs, where Qs is tons of steel per week. The price of coal in a perfectly
competitive market outside the firm is $250 per ton, and the total cost of producing coal is
given by TCc = 40 + 5Qc2, where Qc is tons of coal per week. How much coal should the
XYZ Company produce?
a.
2 tons.
b.
25 tons.
c.
100 tons.
d.
200 tons.
e.
250 tons.
ANS: B
MSC: Applied

DIF: Easy

REF: 388

TOP: Transfer Pricing

22.
A firm has a division that produces X, whose total costs are TC = 10 + Q2
(where Q is the quantity of X). The marketing division adds its own total costs of 5 + 3Q. In
the competitive external market for X, the wholesale price is $10. The transfer price of X
should be:
a.
$2.
b.
$5.
c.
$10.
d.
$12.
e.
$15.
ANS: C
MSC: Applied

DIF: Easy

REF: 388

TOP: Transfer Pricing

23.
A firm has a division that produces chemical Y, whose average total costs are
ATC = 50 + 2Q (where Q is the quantity of Y), and a marketing division that adds its own
average total costs of ATC = 20 + 3Q. There is no external market price of Y. The transfer
price of Y should be:
a.
$50.
b.
$4Q.
c.
$50 + 4Q.
d.
$2Q.
e.
$5Q.

a.
b.
c.
d.
e.
ANS: C
MSC: Applied

$50.
$4Q.
$50 + 4Q.
$2Q.
$5Q.
DIF: Easy

REF: 388

TOP: Transfer Pricing

24.
The XYZ Steel Company produces its own coal for use in its production
facility. The demand for steel is given by Ps = 500 2Qs and the total cost of producing steel
is given by TCs = 175Qs, where Qs is tons of steel per week. The price of coal in a perfectly
competitive market outside the firm is $250 per ton, and the total cost of producing coal is
given by TCc = 40 + 5Qc2, where Qc is tons of coal per week. How much coal will XYZ sell
outside the firm?
a.
6.25 tons.
b.
18.75 tons.
c.
25 tons.
d.
43.75 tons.
e.
75 tons.
ANS: A
MSC: Applied

DIF: Moderate

REF: 388

TOP: Transfer Pricing

25.
The XYZ Steel Company produces its own coal for use in its production
facility. The demand for steel is given by Ps = 500 2Qs and the total cost of producing steel
is given by TCs = 175Qs, where Qs is tons of steel per week. The price of coal in a perfectly
competitive market outside the firm is $250 per ton, and the total cost of producing coal is
given by TCc = 40 + 5Qc2, where Qc is tons of coal per week. How much steel should the
XYZ Company produce?
a.
6.25 tons.
b.
18.75 tons.
c.
25 tons.
d.
43.75 tons.
e.
75 tons.
ANS: B
MSC: Applied

DIF: Moderate

REF: 388

TOP: Transfer Pricing

26.
If a firm has a marketing division and a production division with increasing
costs, and a competitive external market for the production divisions output exists, then the
marketing division should always buy:
a.
from the production division at productions
price.
b.
all it wants at the external market price from
the production division.
c.
only externally.
d.
all the production division can produce at
the external price.
e.
what it wants at the external market price,
first from whatever the production division
wishes to sell and then, if necessary,
externally.
ANS: E
MSC: Conceptual

DIF: Moderate

REF: 388

TOP: Transfer Pricing