Question 1

The law of one price states

Accepted Answer

A)  that identical products should sell for the same price everywhere. 
B)  government statutes that prohibit price discrimination. 
C)  government regulation of prices for all firms. 
D)  that all customers should pay the same price. 
A)  that identical products should sell for the same price everywhere. 
B)  government statutes that prohibit price discrimination. 
C)  government regulation of prices for all firms. 
D)  that all customers should pay the same price. A

Question 2

Jannah is a marketing consultant. Irene and Dalia are potential customers interested in commissioning Jannah to undertake a market survey and compile the findings in a report. Irene is willing to pay $500 for the service while Dalia is willing to pay $800. Suppose that the opportunity cost of Jannah's time is $1,200. Assume that Irene and Dalia do not know each other. If the price is $500 per copy,

Accepted Answer

A)  only Dalia will purchase Jannah's services and Jannah will undertake the job for her. 
B)  only Irene will purchase Jannah's services and Jannah will undertake the job for her. 
C)  both Irene and Dalia will purchase Jannah's services and Jannah will undertake the job. 
D)  both Irene and Dalia will want to purchase Jannah's services but Jannah will not be willing to undertake the job. 
A)  only Dalia will purchase Jannah's services and Jannah will undertake the job for her. 
B)  only Irene will purchase Jannah's services and Jannah will undertake the job for her. 
C)  both Irene and Dalia will purchase Jannah's services and Jannah will undertake the job. 
D)  both Irene and Dalia will want to purchase Jannah's services but Jannah will not be willing to undertake the job. D

Question 3

The law of one price holds exactly only if

Accepted Answer

A)  transactions costs are zero. 
B)  it is impossible for buyers to resell the good. 
C)  antitrust laws are being enforced. 
D)  buyers have complete information. 
A)  transactions costs are zero. 
B)  it is impossible for buyers to resell the good. 
C)  antitrust laws are being enforced. 
D)  buyers have complete information. A

Question 4

In Bahrain, the famous Australian casual restaurant, The Crepe Café, offers a lunch menu that has exactly the same meals as the dinner menu but at much lower prices. The same pricing strategy is applied by Applebees, Steak House, and some Indian restaurants across the Gulf region. Based on the information above, what can you conclude about the price elasticity of demand for going out for dinner?

Accepted Answer

A)  Customers who go out for dinner more often are likely view going out for lunch as a substitute for going out for dinner, so making this group pay less for lunch will have a relatively small impact on demand for going out for dinner . 
B)  Customers who go out for dinner are likely to have a more elastic demand than customers who go out for lunch. 
C)  Customers who go out for dinner are likely view this as a complement to having take -aways, so making this group pay less for lunch will have a relatively small impact on demand for going out for dinner . 
D)  Customers who go for dinner are likely to have less elastic demand compared with those who go for lunch. 
A)  Customers who go out for dinner more often are likely view going out for lunch as a substitute for going out for dinner, so making this group pay less for lunch will have a relatively small impact on demand for going out for dinner . 
B)  Customers who go out for dinner are likely to have a more elastic demand than customers who go out for lunch. 
C)  Customers who go out for dinner are likely view this as a complement to having take -aways, so making this group pay less for lunch will have a relatively small impact on demand for going out for dinner . 
D)  Customers who go for dinner are likely to have less elastic demand compared with those who go for lunch.

Question 5

Taj Almolok Sweets Bakery sells freshly baked muffins from 6.30 am at $1.20 per muffins. By 4 pm in the afternoon, the remaining muffins are marked down to $0.60 each. Which of the following statements is true?

Accepted Answer

A)  Taj Almolok Sweets is trying to minimize its loss. 
B)  Taj Almolok Sweets is trying to prevent the opportunity to make arbitrage profit. 
C)  Taj Almolok Sweets has underestimated the demand for its muffins. 
D)  Taj Almolok Sweets engages in price discrimination; a higher price for those who cannot wait and a lower price for those willing to wait until 4 pm. 
A)  Taj Almolok Sweets is trying to minimize its loss. 
B)  Taj Almolok Sweets is trying to prevent the opportunity to make arbitrage profit. 
C)  Taj Almolok Sweets has underestimated the demand for its muffins. 
D)  Taj Almolok Sweets engages in price discrimination; a higher price for those who cannot wait and a lower price for those willing to wait until 4 pm.

Question 6

Why is price discrimination legal but not discrimination based on race or gender?

Accepted Answer

A)  because price discrimination involves charging people different prices based on their willingness to pay rather than on the basis of arbitrary characteristics 
B)  because price discrimination enables firms to increase output and employment but race or gender based discrimination reduces employment 
C)  because price discrimination reduces deadweight loss but discrimination based on race or gender increases deadweight loss 
D)  because price discrimination increases profits and therefore tax revenues for the government but discrimination based on race or gender reduces tax revenues 
A)  because price discrimination involves charging people different prices based on their willingness to pay rather than on the basis of arbitrary characteristics 
B)  because price discrimination enables firms to increase output and employment but race or gender based discrimination reduces employment 
C)  because price discrimination reduces deadweight loss but discrimination based on race or gender increases deadweight loss 
D)  because price discrimination increases profits and therefore tax revenues for the government but discrimination based on race or gender reduces tax revenues

Question 7

Dental services would be an example of a product that is not a good candidate for price discrimination.

Accepted Answer

A) True 
 B)False

Question 8

Laila buys a Spider -Man 3 poster from Edward for $30 and resells it on eBay for $60. Which of the following statements is false?

Accepted Answer

A)  It is possible that Edward has earned some producer surplus from this transaction. 
B)  The transaction has made Edward worse off because he undersold the poster. 
C)  Laila has probably incurred some costs in connection with this sale. 
D)  Laila has earned some arbitrage profits, assuming that transaction costs are negligible. 
A)  It is possible that Edward has earned some producer surplus from this transaction. 
B)  The transaction has made Edward worse off because he undersold the poster. 
C)  Laila has probably incurred some costs in connection with this sale. 
D)  Laila has earned some arbitrage profits, assuming that transaction costs are negligible.

Question 9

From an economic perspective, price discrimination is desirable because

Accepted Answer

A)  it redistributes wealth from wealthy consumers to highly innovative firms. 
B)  it enables firms to increase profits with no loss in economic surplus, and in turn, this could provide firms with incentives to engage in beneficial product innovation. 
C)  the increase in profits is more than offset by the loss in consumer surplus, resulting in a net increase in economic surplus. 
D)  the increase in profits results in higher corporate tax revenues received by the government which could be used to subsidize consumption for low -income individuals. 
A)  it redistributes wealth from wealthy consumers to highly innovative firms. 
B)  it enables firms to increase profits with no loss in economic surplus, and in turn, this could provide firms with incentives to engage in beneficial product innovation. 
C)  the increase in profits is more than offset by the loss in consumer surplus, resulting in a net increase in economic surplus. 
D)  the increase in profits results in higher corporate tax revenues received by the government which could be used to subsidize consumption for low -income individuals.

Question 10

Calling long distance is more expensive on weekdays between 8 am and 5 pm than in the evening hours. Why is this the case?

Accepted Answer

A)  Businesses who must call suppliers or customers during business hours have few alternatives and therefore have an inelastic demand during the workday compared to after -work hours. 
B)  The cost of making long -distance connections is higher during the day than in the evenings. 
C)  Increasingly, businesses who must call suppliers or customers during business hours resort to the internet, thereby reducing demand for long -distance calls. To make for this fall in demand, telephone companies slap on higher rates. 
D)  Telephone companies hope to discourage customers from calling long distance during the day to keep their labor costs down. 
A)  Businesses who must call suppliers or customers during business hours have few alternatives and therefore have an inelastic demand during the workday compared to after -work hours. 
B)  The cost of making long -distance connections is higher during the day than in the evenings. 
C)  Increasingly, businesses who must call suppliers or customers during business hours resort to the internet, thereby reducing demand for long -distance calls. To make for this fall in demand, telephone companies slap on higher rates. 
D)  Telephone companies hope to discourage customers from calling long distance during the day to keep their labor costs down.

Question 11

All of the following are disadvantages of cost -plus pricing except

Accepted Answer

A)  It ignores the price elasticity of demand: for example, it may be possible to increase profits by raising or lowering price. 
B)  If the industry comprises identical firms (with identical costs), markups could be consistent among firms leading to no one firm having a competitive edge in terms of price. 
C)  Allocating and apportioning business overheads to individual products could be somewhat arbitrary. 
D)  The business has less incentive to cut or control costs: if costs increase, then selling prices increase. Consequently, this might further erode a firm's competitiveness. 
A)  It ignores the price elasticity of demand: for example, it may be possible to increase profits by raising or lowering price. 
B)  If the industry comprises identical firms (with identical costs), markups could be consistent among firms leading to no one firm having a competitive edge in terms of price. 
C)  Allocating and apportioning business overheads to individual products could be somewhat arbitrary. 
D)  The business has less incentive to cut or control costs: if costs increase, then selling prices increase. Consequently, this might further erode a firm's competitiveness.

Question 12

Fullah Playhouse, a theatre company in Kuwait city, caters to two groups of customers: students and the non-student population. Figure 12-2 shows the demand curves for the two groups of customers.
-Refer to Figure 12 -2. Suppose Fullah Playhouse charges a single price of Pd for each performance. Which of the following statements is true?

Accepted Answer

A)  The company is selling less than the profit -maximizing quantity in both markets. 
B)  The company is selling more than the profit -maximizing quantity in the non -student market and less than the profit -maximizing quantity in the student market. 
C)  The company is selling less than the profit -maximizing quantity in the non -student market and more than the profit -maximizing quantity in the student market. 
D)  The company is selling less than the profit -maximizing quantity in both markets but it is maximizing its revenue. 
A)  The company is selling less than the profit -maximizing quantity in both markets. 
B)  The company is selling more than the profit -maximizing quantity in the non -student market and less than the profit -maximizing quantity in the student market. 
C)  The company is selling less than the profit -maximizing quantity in the non -student market and more than the profit -maximizing quantity in the student market. 
D)  The company is selling less than the profit -maximizing quantity in both markets but it is maximizing its revenue.

Question 13

Which of the following statements is true about optimal two -part tariff and perfect price discrimination for a given demand curve?

Accepted Answer

A)  The total revenue received under the two pricing schedules is the same. 
B)  The total revenue received under an optimal two -part tariff could be greater than, less than or equal to that received under perfect price discrimination, depending on the fixed -fee portion of the two -part tariff. 
C)  The total revenue received under an optimal two -part tariff exceeds that received under perfect price discrimination. 
D)  The total revenue received under an optimal two -part tariff is less than that received under perfect price discrimination. 
A)  The total revenue received under the two pricing schedules is the same. 
B)  The total revenue received under an optimal two -part tariff could be greater than, less than or equal to that received under perfect price discrimination, depending on the fixed -fee portion of the two -part tariff. 
C)  The total revenue received under an optimal two -part tariff exceeds that received under perfect price discrimination. 
D)  The total revenue received under an optimal two -part tariff is less than that received under perfect price discrimination.

Question 14

Jannah is a marketing consultant. Irene and Dalia are potential customers interested in commissioning Jannah to undertake a market survey and compile the findings in a report. Irene is willing to pay $500 for the service while Dalia is willing to pay $800. Suppose that the opportunity cost of Jannah's time is $1,200. Assume that Irene and Dalia do not know each other Which of the following statements is true?

Accepted Answer

A)  Jannah should charge Irene $500 and Dalia $800; that way economic surplus is maximized. 
B)  Jannah should charge each customer $600; that way he will earn his opportunity cost and it will be fair to both Irene and Dalia. 
C)  Jannah should charge Irene $500 and Dalia no more than $700; that way he earns his opportunity cost and there is no loss in economic surplus. 
D)  Jannah should charge Iris $500 but charging Dalia $800 is unfair because it allows Jannah to earn more than his opportunity cost. 
A)  Jannah should charge Irene $500 and Dalia $800; that way economic surplus is maximized. 
B)  Jannah should charge each customer $600; that way he will earn his opportunity cost and it will be fair to both Irene and Dalia. 
C)  Jannah should charge Irene $500 and Dalia no more than $700; that way he earns his opportunity cost and there is no loss in economic surplus. 
D)  Jannah should charge Iris $500 but charging Dalia $800 is unfair because it allows Jannah to earn more than his opportunity cost.

Question 15

Car rental companies use yield management when they set rental prices based on time of the week (weekday as opposed to weekend) and length of the rental (weeklong versus one day).

Accepted Answer

A) True 
 B)False

Question 16

The ability of Dream Park to charge for admission to the park and also to charge for each ride is an example of

Accepted Answer

A)  cost -plus pricing. 
B)  monopoly pricing. 
C)  perfect price discrimination. 
D)  a two -part tariff. 
A)  cost -plus pricing. 
B)  monopoly pricing. 
C)  perfect price discrimination. 
D)  a two -part tariff.

Question 17

The price elasticity of demand for shampoo for two groups of customers, users and non -users of coupons are as follows: Group I: -1.04 and Group II: -0.84. The information indicates that Group I are the users of coupons.

Accepted Answer

A) True 
 B)False

Question 18

The Egyptian and Jordanian governments charge a higher electricity and gas fee for energy intensive industries. They can do so because they are the only providers of these services. The Jordanian and Egyptian governments are trying to

Accepted Answer

A)  discourage energy intensive industries. 
B)  increase competition between energy intensive and less energy intensive industries. 
C)  apply price discrimination. 
D)  None of the above. 
A)  discourage energy intensive industries. 
B)  increase competition between energy intensive and less energy intensive industries. 
C)  apply price discrimination. 
D)  None of the above.

Question 19

In first degree price discrimination, each buyer pays according to his ability to pay for the product.

Accepted Answer

A) True 
 B)False

Question 20

The deadweight loss under price discrimination in which markets are segmented is greater than that under first degree price discrimination.

Accepted Answer

A) True 
 B)False

Exam 12: Pricing Strategy

The law of one price states

The law of one price holds exactly only if

Taj Almolok Sweets Bakery sells freshly baked muffins from 6.30 am at $1.20 per muffins. By 4 pm in the afternoon, the remaining muffins are marked down to $0.60 each. Which of the following statements is true?

Why is price discrimination legal but not discrimination based on race or gender?

Dental services would be an example of a product that is not a good candidate for price discrimination.

Laila buys a Spider -Man 3 poster from Edward for $30 and resells it on eBay for $60. Which of the following statements is false?

From an economic perspective, price discrimination is desirable because

Calling long distance is more expensive on weekdays between 8 am and 5 pm than in the evening hours. Why is this the case?

All of the following are disadvantages of cost -plus pricing except

Which of the following statements is true about optimal two -part tariff and perfect price discrimination for a given demand curve?

Car rental companies use yield management when they set rental prices based on time of the week (weekday as opposed to weekend) and length of the rental (weeklong versus one day).

The ability of Dream Park to charge for admission to the park and also to charge for each ride is an example of

The price elasticity of demand for shampoo for two groups of customers, users and non -users of coupons are as follows: Group I: -1.04 and Group II: -0.84. The information indicates that Group I are the users of coupons.

The Egyptian and Jordanian governments charge a higher electricity and gas fee for energy intensive industries. They can do so because they are the only providers of these services. The Jordanian and Egyptian governments are trying to

In first degree price discrimination, each buyer pays according to his ability to pay for the product.

The deadweight loss under price discrimination in which markets are segmented is greater than that under first degree price discrimination.

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: The Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Elasticity: The Responsiveness of Demand and Supply

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: The Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Externalities, Environmental Policy, and Public Goods

Comparative Advantage and the Gains From International Trade Macro

GDP: Measuring Total Production and Income

Economic Growth, the Financial System, and Business Cycles

Unemployment and Inflation

The Markets for Labor and Other Factors of Production

Output and Expenditure in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Central Bank

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Central Bank Policy

Macroeconomics in an Open Economy

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