Question 1

The law of one price states that identical products should sell for the same price everywhere as long as transactions costs are zero.

Accepted Answer

A) True 
 B)False

Question 2

Perfect price discrimination is also known as

Accepted Answer

A)  monopoly. 
B)  first-degree price discrimination. 
C)  third-degree price discrimination. 
D)  yield management. 
A)  monopoly. 
B)  first-degree price discrimination. 
C)  third-degree price discrimination. 
D)  yield management.

Question 3

When you buy at a low price in one market then sell at a higher price in another market, you are engaging in

Accepted Answer

A)  odd pricing. 
B)  arbitrage. 
C)  an antitrust prohibited practice. 
D)  price discrimination. 
A)  odd pricing. 
B)  arbitrage. 
C)  an antitrust prohibited practice. 
D)  price discrimination.

Question 4

In the real world,

Accepted Answer

A)  all sellers charge one price equal to the marginal cost of production. 
B)  profitable sellers will set one price based on the average elasticity of demand of buyers. 
C)  many firms charge different prices based on consumers' willingness to pay. 
D)  all sellers charge one price set by the government. 
A)  all sellers charge one price equal to the marginal cost of production. 
B)  profitable sellers will set one price based on the average elasticity of demand of buyers. 
C)  many firms charge different prices based on consumers' willingness to pay. 
D)  all sellers charge one price set by the government.

Question 5

Which of the following statements about perfect price discrimination is false?

Accepted Answer

A)  There is no consumer surplus if a firm engages in perfect price discrimination. 
B)  Perfect price discrimination occurs when the seller charges the highest price each consumer would be willing to pay for the product. 
C)  A condition for perfect price discrimination is that it must be costlier to service some customers than others. 
D)  For the price-discriminating firm, its marginal revenue curve coincides with its demand curve. 
A)  There is no consumer surplus if a firm engages in perfect price discrimination. 
B)  Perfect price discrimination occurs when the seller charges the highest price each consumer would be willing to pay for the product. 
C)  A condition for perfect price discrimination is that it must be costlier to service some customers than others. 
D)  For the price-discriminating firm, its marginal revenue curve coincides with its demand curve.

Question 6

Racial discrimination and other forms of discrimination based on irrelevant factors are illegal. Can price discrimination be illegal as well?

Accepted Answer

In 1936, Congress passed the Robinson-Pa

Question 7

Some firms practice odd pricing because

Accepted Answer

A)  they believe that customers will buy a larger quantity with an odd price. 
B)  it is a way to price discriminate. 
C)  it is too difficult for sellers to reeducate buyers into accepting even prices. 
D)  it lowers transactions costs. 
A)  they believe that customers will buy a larger quantity with an odd price. 
B)  it is a way to price discriminate. 
C)  it is too difficult for sellers to reeducate buyers into accepting even prices. 
D)  it lowers transactions costs.

Question 8

Figure 16-7   The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-Movie theaters often charge different people different prices for admission. Why don't theaters charge different prices for popcorn and other food items?

Accepted Answer

A)  Although the elasticity of demand for admission differs among customers, most people have the same the elasticity of demand for food items. 
B)  Concession stand personnel are too busy to ensure that different people pay different prices for food items. 
C)  Once people are in the theater, concession stands have monopoly power and can charge everyone the same high prices for food. 
D)  It is difficult to limit the resale of food items from those who pay low prices to those who would have to pay high prices from the concession stand. 
A)  Although the elasticity of demand for admission differs among customers, most people have the same the elasticity of demand for food items. 
B)  Concession stand personnel are too busy to ensure that different people pay different prices for food items. 
C)  Once people are in the theater, concession stands have monopoly power and can charge everyone the same high prices for food. 
D)  It is difficult to limit the resale of food items from those who pay low prices to those who would have to pay high prices from the concession stand.

Question 9

Compared to monopoly pricing, an optimal two-part tariff

Accepted Answer

A)  reduces economic efficiency. 
B)  eliminates the deadweight loss. 
C)  equates marginal revenue and average revenue. 
D)  increases consumer surplus. 
A)  reduces economic efficiency. 
B)  eliminates the deadweight loss. 
C)  equates marginal revenue and average revenue. 
D)  increases consumer surplus.

Question 10

Which of the following is a reason why a firm would not engage in price discrimination?

Accepted Answer

A)  Price discrimination is illegal in some western states and the owners of firms in these states face civil or criminal prosecution if they engage in price discrimination. 
B)  Some firms are not able to segment the market for the products they sell. 
C)  Some firms do not want to violate the law of one price. 
D)  The transactions costs associated with selling the product exceed the price of the product. 
A)  Price discrimination is illegal in some western states and the owners of firms in these states face civil or criminal prosecution if they engage in price discrimination. 
B)  Some firms are not able to segment the market for the products they sell. 
C)  Some firms do not want to violate the law of one price. 
D)  The transactions costs associated with selling the product exceed the price of the product.

Question 11

Consider the following actions undertaken by a firm: a. charging the same price for products of different quality
B. charging different prices to different consumers for the same product when the variation cannot be explained by cost differences
C. charging different prices for products of different qualities
D. charging a lower price to match a competitor's price
Which of the above will be considered price discrimination?

Accepted Answer

A)  a, b, c, and d 
B)  a, b, and d only 
C)  b and d only 
D)  a and b only 
A)  a, b, c, and d 
B)  a, b, and d only 
C)  b and d only 
D)  a and b only

Question 12

Reporters from the Wall Street Journal found that the office supply store Staples charged different prices for the same product to different online customers based primarily on

Accepted Answer

A)  the age of the customer. 
B)  how close the customer's zip code was to competitors' stores. 
C)  the gender of the customer. 
D)  how many times the customer had looked up the product on its Website. 
A)  the age of the customer. 
B)  how close the customer's zip code was to competitors' stores. 
C)  the gender of the customer. 
D)  how many times the customer had looked up the product on its Website.

Question 13

Until the early 1980s, The Walt Disney Company used a pricing strategy in which visitors to its theme parks paid a low admission fee and also paid for rides. This pricing strategy is an example of

Accepted Answer

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

Question 14

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

Accepted Answer

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

Question 15

A perfectly competitive firm cannot practice price discrimination because

Accepted Answer

A)  a firm that breaks even in the long run cannot afford to engage in yield management. 
B)  it does not advertise; this prevents the firm from marketing its product to different segments of the market. 
C)  each consumer in a perfectly competitive market has the same willingness to pay. 
D)  the firm can only charge the market price. 
A)  a firm that breaks even in the long run cannot afford to engage in yield management. 
B)  it does not advertise; this prevents the firm from marketing its product to different segments of the market. 
C)  each consumer in a perfectly competitive market has the same willingness to pay. 
D)  the firm can only charge the market price.

Question 16

Consider a discount retailer such as Costco which uses a two-part tariff pricing strategy. The Costco membership fee

Accepted Answer

A)  buys the consumer the right to make future purchases at Costco. 
B)  is a resalable asset to the consumer. 
C)  is a resalable asset to the producer. 
D)  is used by Costco to cover its fixed costs of production. 
A)  buys the consumer the right to make future purchases at Costco. 
B)  is a resalable asset to the consumer. 
C)  is a resalable asset to the producer. 
D)  is used by Costco to cover its fixed costs of production.

Question 17

Arnold's Airport Transport provides passenger transportation to and from the local airport. Arnold charges a flat rate of $30 per person for round-trip service, and he gives a $5 discount to senior citizens. Assume Arnold's marginal cost is $3.00 per person. Draw two graphs, one showing demand and marginal cost for his $30 customers, of which he has 300 per month, and the other graph showing demand and marginal cost for his senior citizen customers, of which he has 100 per month. If Arnold charged all of his customers $30, he would have 325 customers per month.

Accepted Answer

The answer of Arnold's Airport Transport provides passenger transportation to...

Question 18

Figure 16-7   The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-In an optimal two-part tariff pricing schedule, consumer surplus is zero.

Accepted Answer

A) True 
 B)False

Question 19

Insurance companies typically charge women lower prices than men for automobile insurance. Is this an example of price discrimination?

Accepted Answer

A)  No, because, on average, women have better driving records than men and the costs of insuring men are greater than the costs of insuring women. 
B)  Yes, because the costs of selling insurance to men and women are the same. 
C)  Yes, because insurance companies can prevent arbitrage; that is, women cannot transfer their insurance coverage to men. 
D)  No, because there are too many insurance companies for any one company to have market power. A firm must possess market power in order to practice price discrimination. 
A)  No, because, on average, women have better driving records than men and the costs of insuring men are greater than the costs of insuring women. 
B)  Yes, because the costs of selling insurance to men and women are the same. 
C)  Yes, because insurance companies can prevent arbitrage; that is, women cannot transfer their insurance coverage to men. 
D)  No, because there are too many insurance companies for any one company to have market power. A firm must possess market power in order to practice price discrimination.

Question 20

Figure 16-5  
-Refer to Figure 16-5. Suppose the firm represented in the diagram decides to practice perfect price discrimination. What is the profit-maximizing quantity?

Accepted Answer

A)  320 units 
B)  480 units 
C)  560 units 
D)  640 units 
A)  320 units 
B)  480 units 
C)  560 units 
D)  640 units

Exam 16: Pricing Strategy

The law of one price states that identical products should sell for the same price everywhere as long as transactions costs are zero.

Perfect price discrimination is also known as

When you buy at a low price in one market then sell at a higher price in another market, you are engaging in

In the real world,

Which of the following statements about perfect price discrimination is false?

Racial discrimination and other forms of discrimination based on irrelevant factors are illegal. Can price discrimination be illegal as well?

Some firms practice odd pricing because

Figure 16-7 The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails. -Movie theaters often charge different people different prices for admission. Why don't theaters charge different prices for popcorn and other food items?

Compared to monopoly pricing, an optimal two-part tariff

Which of the following is a reason why a firm would not engage in price discrimination?

Reporters from the Wall Street Journal found that the office supply store Staples charged different prices for the same product to different online customers based primarily on

Until the early 1980s, The Walt Disney Company used a pricing strategy in which visitors to its theme parks paid a low admission fee and also paid for rides. This pricing strategy is an example of

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

A perfectly competitive firm cannot practice price discrimination because

Consider a discount retailer such as Costco which uses a two-part tariff pricing strategy. The Costco membership fee

Figure 16-7 The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails. -In an optimal two-part tariff pricing schedule, consumer surplus is zero.

Insurance companies typically charge women lower prices than men for automobile insurance. Is this an example of price discrimination?

Figure 16-5 -Refer to Figure 16-5. Suppose the firm represented in the diagram decides to practice perfect price discrimination. What is the profit-maximizing quantity?

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

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

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

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

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