Exam 16: Pricing Strategy

Are sellers who practice arbitrage taking advantage of buyers?

Which of the following products allows the seller to identify different groups of consumers (segment the market) at virtually no cost?

Buying at a low price in one market and reselling at a higher price in another market will

Table 16-2 Neem Products sells its Ayurvedic Neem toothpaste in two completely isolated markets with demand schedules as shown in Table 16-2. The average cost of production is constant at $2 per tube. -Refer to Table 16-2. What are the total profits from both markets combined?

Successful price discrimination cannot take place if

Many colleges and universities practice yield management to maximize the revenue they receive from tuition and

To successfully price discriminate, a firm must ensure that there are no opportunities for arbitrage.

Article Summary Brandeis University economist Benjamin Shiller has written a paper which explains how Netflix could combine demographic data with customers' Web browsing habits to more accurately predict how much a customer would be willing to pay for a Netflix subscription, and how using this method of first-degree price discrimination would generate higher profits. Shiller explains that the more information a company has about its customers, the better it is at being able to set prices to increase profits. As he stated in his paper, "Using all variables to tailor prices, one can yield variable profits 1.39 percent higher than variable profits obtained using non-tailored 2nd degree price-discrimination. Using demographics alone to tailor prices raises profits by much less, yielding variable profits only 0.14% higher than variable profits attainable under 2nd degree [price discrimination]." Source: Brian Fung, "How Netflix could use Big Data to make twice as much money off you," Washington Post, September 4, 2013. -Refer to the Article Summary. The pricing method described in the article is referred to as first-degree price discrimination. First-degree price discrimination is also known as

What is meant by the "law of one price"? In discussing the law of demand, Hubbard and O'Brien claim there has been no evidence of an exception to the law (that is, no evidence of an upward-sloping demand curve). Are there exceptions to the law of one price?

Figure 16-1 -Refer to Figure 16-1. What is the economically efficient output level?

Figure 16-3 Chantal owns a hairdressing salon which caters to two main groups of customers: residents of "The Chateau," a retirement community, and other residents in the neighborhood. Figure 16-3 shows the demand curves for the residents of the retirement community, labeled Market A, and other residents in the neighborhood, labeled Market B. The demand curves are not identical. -Refer to Figure 16-3. Suppose Chantal charges all her customers a uniform price of $10 for a haircut. Which of the following statements is true?

One method of setting price using the cost-plus method is to add

"Buy low and sell high is advice given to people who want to make a profit by buying and selling shares of stock. Arbitrage is defined as buying a product in one market at a low price and reselling it in another market at a high price. Therefore, when stock brokers buy and sell stocks to earn a profit they are engaging in arbitrage." Evaluate this statement; state whether it is true or false and explain your answer.

Suppose a restaurant is trying to determine how much to charge for a bowl of chili, and decides to run an experiment to see how much its customers are willing to pay by allowing them to set their own price for this menu item. a. Is charging a customer the price he or she is willing to pay for the bowl of chili an example of price discrimination? Briefly explain. b. What is it called when a firm knows every consumer's willingness to pay, and can charge every consumer a different price? What happens to consumer surplus in this situation?

Figure 16-5 -Refer to Figure 16-5. Suppose the firm represented in the diagram decides to act as a monopolist and charge a single price. What is the profit maximizing quantity produced and what is the price charged?

Lou buys an Iron Man 2 poster from Evan for $30 and resells it on eBay for $60. Which of the following statements is false?

Because each customer pays according to her willingness to pay, a consumer maximizes her consumer surplus under first-degree 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 total revenue collected by the firm?

Which of the following firms is most likely to use cost-plus pricing?

Under what circumstances will the law of one price hold, and when might it not hold?