Question 1

Perfect price discrimination results in zero dollars of consumer surplus.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is NOT an example of tying?

Accepted Answer

A)  game consoles and game cartridges 
B)  cell phones and phone calls 
C)  printers and print cartridges 
D)  automobiles and engines 
A)  game consoles and game cartridges 
B)  cell phones and phone calls 
C)  printers and print cartridges 
D)  automobiles and engines

Question 3

Reference: Ref 14-6 (Table: Willingness to Pay) Refer to the table. If the firm were to engage in bundling, total surplus is:

Accepted Answer

A)  $65. 
B)  $50. 
C)  $160. 
D)  $225. 
A)  $65. 
B)  $50. 
C)  $160. 
D)  $225.

Question 4

The difference between tying and bundling in pricing strategies is that:

Accepted Answer

A)  they both are strategies that firms use to maximize profit. 
B)  tying does not require the purchase of both goods, but bundling does. 
C)  tying involves the combination of goods that are complements, whereas bundling involves the combination of substitutes. 
D)  tying does not lead to as much profit as bundling does. 
A)  they both are strategies that firms use to maximize profit. 
B)  tying does not require the purchase of both goods, but bundling does. 
C)  tying involves the combination of goods that are complements, whereas bundling involves the combination of substitutes. 
D)  tying does not lead to as much profit as bundling does.

Question 5

Reference: Ref 14-3 (Figure: PPD) Refer to the figure. Which of the following statements best explains why a firm that perfectly price discriminates would sell additional units beyond a units of output?

Accepted Answer

A)  A firm will not sell beyond a units of output. The firm will only sell exactly a, as it is the profit-maximizing rate of output for this firm. 
B)  The marginal cost is less than consumers' willingness to pay for these units. 
C)  The marginal cost is greater than consumers' willingness to pay for these units. 
D)  A firm will not sell beyond a units of output, since the marginal cost is greater than the marginal revenue for these units. 
A)  A firm will not sell beyond a units of output. The firm will only sell exactly a, as it is the profit-maximizing rate of output for this firm. 
B)  The marginal cost is less than consumers' willingness to pay for these units. 
C)  The marginal cost is greater than consumers' willingness to pay for these units. 
D)  A firm will not sell beyond a units of output, since the marginal cost is greater than the marginal revenue for these units.

Question 6

Suppose that GSK sells one of its drugs for $25/pill in the United States and $13/pill in Canada. Which of the following statements is true? I. The price discrimination benefits the Canadians since they pay a lower price. II. The price discrimination benefits the Americans since GSK's larger profits means more research and development of new drugs for Americans. III. Price discrimination is beneficial in industries with large fixed costs, since price discrimination increases the size of the market, helping to spread large costs over a greater number of consumers.

Accepted Answer

A)  I only 
B)  I and II only 
C)  I and III only 
D)  I, II, and III 
A)  I only 
B)  I and II only 
C)  I and III only 
D)  I, II, and III

Question 7

Which of the following is TRUE?

Accepted Answer

A)  Bundling in the cable industry is required by the government. 
B)  There is little benefit in bundling varied TV channels, though there are added costs in doing so. 
C)  Bundling has come under attack in the cable TV industry, but not in other industries. 
D)  Bundling is rarely practiced by firms in the cable TV industry. 
A)  Bundling in the cable industry is required by the government. 
B)  There is little benefit in bundling varied TV channels, though there are added costs in doing so. 
C)  Bundling has come under attack in the cable TV industry, but not in other industries. 
D)  Bundling is rarely practiced by firms in the cable TV industry.

Question 8

Reference: Ref 14-4 (Figure: Perfect Price Discrimination) Refer to the figure. For a firm practicing perfect price discrimination, calculate the dollar amount of consumer surplus in this market.

Accepted Answer

A)  $15,000 
B)  $20,000 
C)  $0 
D)  $5,000 
A)  $15,000 
B)  $20,000 
C)  $0 
D)  $5,000

Question 9

To maximize profit GlaxoSmithKline sets a higher price for Combivir in Europe than in Africa because demand curve in Africa is:

Accepted Answer

A)  lower and more inelastic. 
B)  lower and more elastic. 
C)  higher and more inelastic. 
D)  higher and more elastic. 
A)  lower and more inelastic. 
B)  lower and more elastic. 
C)  higher and more inelastic. 
D)  higher and more elastic.

Question 10

Which of the following would be an effective method for firms to ensure profit from price discrimination when the possibility of arbitrage exists?

Accepted Answer

A)  set a single price for all markets 
B)  supply products only to one market 
C)  make products sold to each market have an exclusive feature 
D)  request law enforcement to eliminate the possibility of arbitrage 
A)  set a single price for all markets 
B)  supply products only to one market 
C)  make products sold to each market have an exclusive feature 
D)  request law enforcement to eliminate the possibility of arbitrage

Question 11

Why would firms use the practice of tying?

Accepted Answer

A)  It allows firms to tie goods that are highly valued together with goods that are not highly valued, hence increasing profits for firms. 
B)  It is a way to force consumers to buy more than what they would without tying. 
C)  It is a subtle way to raise prices for those consumers who have a low willingness to pay. 
D)  It is a subtle way to charge higher prices to those consumers with a high willingness to pay, and a lower price to consumers with a low willingness to pay. 
A)  It allows firms to tie goods that are highly valued together with goods that are not highly valued, hence increasing profits for firms. 
B)  It is a way to force consumers to buy more than what they would without tying. 
C)  It is a subtle way to raise prices for those consumers who have a low willingness to pay. 
D)  It is a subtle way to charge higher prices to those consumers with a high willingness to pay, and a lower price to consumers with a low willingness to pay.

Question 12

In general, price discrimination exists because:

Accepted Answer

A)  higher prices are required when costs are higher. 
B)  lower prices are possible when profits are not a goal of the entrepreneur. 
C)  higher prices are charged because some customers are willing to pay more. 
D)  lower prices encourage arbitrage. 
A)  higher prices are required when costs are higher. 
B)  lower prices are possible when profits are not a goal of the entrepreneur. 
C)  higher prices are charged because some customers are willing to pay more. 
D)  lower prices encourage arbitrage.

Exam 14: Price Discrimination and Pricing Strategy

Perfect price discrimination results in zero dollars of consumer surplus.

Which of the following is NOT an example of tying?

Reference: Ref 14-6 (Table: Willingness to Pay) Refer to the table. If the firm were to engage in bundling, total surplus is:

The difference between tying and bundling in pricing strategies is that:

Reference: Ref 14-3 (Figure: PPD) Refer to the figure. Which of the following statements best explains why a firm that perfectly price discriminates would sell additional units beyond a units of output?

Which of the following is TRUE?

Reference: Ref 14-4 (Figure: Perfect Price Discrimination) Refer to the figure. For a firm practicing perfect price discrimination, calculate the dollar amount of consumer surplus in this market.

To maximize profit GlaxoSmithKline sets a higher price for Combivir in Europe than in Africa because demand curve in Africa is:

Which of the following would be an effective method for firms to ensure profit from price discrimination when the possibility of arbitrage exists?

Why would firms use the practice of tying?

In general, price discrimination exists because:

The Big Ideas in Economics

The Power of Trade and Comparative Advantage

Business Fluctuations: Aggregate Demand and Supply

Equilibrium: How Supply and Demand Determine Prices

Elasticity and Its Applications

Taxes and Subsidies

The Price System: Signals, Speculation, and Prediction

Price Ceilings and Floors

International Trade

Externalities: When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Oligopoly and Game Theory

Competing for Monopoly: the Economics of Network Goods

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Asymmetric Information: Moral Hazard and Adverse Selection

Consumer Choice

Gdp and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth, Capital Accumulation, and the Economics of Ideas: Catching up Vs the Cutting Edge

Saving, Investment, and the Financial System

Supply and Demand

Unemployment and Labor Force Participation

Inflation and the Quantity Theory of Money

Transmission and Amplification Mechanisms

The Federal Reserve System and Open Market Operations

Monetary Policy

The Federal Budget: Taxes and Spending

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