Exam 10: Pricing Strategies for the Firm

When the macroeconomy is doing poorly as it was in 2009), profits of existing firms decrease, creating an incentive for existing firms to exit unprofitable markets. This in turn makes it more difficult for the remaining firms to mark up price over average or marginal cost.

The suggestion that a seller will try to set price based on "what the market will bear" is explicit recognition of the constraint imposed by:

As practiced by book publishers, versioning involves first selling the hardcover edition of a book and then switching to a paperback edition to sell additional copies. As such, this is an application of second-degree price discrimination.

It is frequently observed that when a city is located next to a major highway, gas stations located close to the highway charge higher prices than gas stations located farther away. This is an example of:

So long as the absolute value of the price elasticity of demand for a firm's output is greater than 0, the firm's optimal markup factor will be positive as well.

Which of the following statements is not correct?

Unlike markup pricing, the strategy of price discrimination is totally independent of the price elasticity of demand for the good in question.

Which of the following statements is correct?

As the price elasticity of demand for an item increases, so does the firm's ability to mark up the price of the item above average cost.

The managerial technique of markup pricing is consistent with the economic theory of profit maximization when the markup is positively related to the price elasticity of demand.

Certain vendors that market their goods via mail order have been known to send out catalogues to different regions of the country with items priced differently across regions. Assuming prices are matched to regions on a random basis, this practice would be considered an example of group pricing, or third-degree price discrimination.

The text describes three different "degrees" of price discrimination. Of these, which one is theoretically capable of generating the greatest amount of economic profit for the firm? Why? In contrast, which one do you think has the greatest applicability to the range of goods and services consumers typically purchase?

Assume the economy is headed into a recession. Considering this, and recognizing that firms are slow to change the prices they charge for their products, are firms more or less likely to be able to pursue an effective markup pricing strategy in their pursuit of positive economic profit? Why?

The situation in which a firm is able to charge the maximum price consumers are willing to pay for each unit of output the firm sells is referred to as:

When the marginal revenue resulting from a decrease in price is negative, demand for the product is:

The difference between the total willingness to pay for a good and the amount actually spent measures:

All else constant, as the price elasticity of demand for a good at the equilibrium price decreases, the amount of consumer surplus derived from purchasing the equilibrium quantity of the good increases.

Many restaurants offer "early-bird specials " to dinner customers. These specials consist of a significant price reduction on selected menu items purchased before some pre-determined time, e.g., 6 p.m. Is such a practice a form of price discrimination? If so, what type?

When demand is elastic, the marginal revenue resulting from a decrease in price is:

Applying a uniform markup to set the price of the various products sold by a firm is more profitable than varying the markup based on differences in the price elasticity of demand for the firm's products.