Question 1

If the selling price of a firm's product is $500 and the estimated average cost of producing this product is $400, what is the firm's markup?

Accepted Answer

A)  15 percent 
B)  20 percent 
C)  25 percent 
D)  40 percent 
A)  15 percent 
B)  20 percent 
C)  25 percent 
D)  40 percent

Question 2

Which of the following does not arise from price discrimination?

Accepted Answer

A)  an increase in producer surplus 
B)  an increase in consumer surplus 
C)  an increase in quantity sold 
D)  an increase in profits 
A)  an increase in producer surplus 
B)  an increase in consumer surplus 
C)  an increase in quantity sold 
D)  an increase in profits

Question 3

Lou buys an Iron Man 2 poster at a garage sale for $30 and resells it on eBay to Kyle for $60. Which of the following statements is true?

Accepted Answer

A)  The transaction has made Lou better off and Kyle worse off. 
B)  The transaction is economically inefficient. 
C)  The transaction has made Lou and Kyle better off. 
D)  It is not possible for Kyle to enjoy any consumer surplus from this transaction. 
A)  The transaction has made Lou better off and Kyle worse off. 
B)  The transaction is economically inefficient. 
C)  The transaction has made Lou and Kyle better off. 
D)  It is not possible for Kyle to enjoy any consumer surplus from this transaction.

Question 4

Assume that a monopolist practices perfect price discrimination. The firm's marginal revenue curve will

Accepted Answer

A)  be perfectly elastic. 
B)  be equal to its demand curve. 
C)  will be perfectly inelastic. 
D)  will lie below its demand curve. 
A)  be perfectly elastic. 
B)  be equal to its demand curve. 
C)  will be perfectly inelastic. 
D)  will lie below its demand curve.

Question 5

Table 16-3
   Julie plans to start a pet-sitting service. She surveyed her neighborhood to determine the demand for this service. Assume that each person surveyed demands only one hour of pet sitting services per period. Table 16-3 above shows a portion of her survey results.
-Refer to Table 16-3. Suppose Julie's marginal cost of providing this service is constant at $7 and she charges each customer according to his or her willingness to pay instead of a uniform price of $7. Which of the following statements is true?

Accepted Answer

A)  Julie is worse off because the demand for her services is reduced. 
B)  Julie has converted the consumer surplus (from a uniform price) into economic profit. 
C)  Julie's customers are better off because their consumer surplus has increased. 
D)  Julie has converted the producer surplus (from a uniform price) into consumer surplus. 
A)  Julie is worse off because the demand for her services is reduced. 
B)  Julie has converted the consumer surplus (from a uniform price) into economic profit. 
C)  Julie's customers are better off because their consumer surplus has increased. 
D)  Julie has converted the producer surplus (from a uniform price) into consumer surplus.

Question 6

Figure 16-6   Watanabe Sensei operates the only martial arts school in Hartfield. For simplicity, assume that consumers have identical demand curves and that Sensei knows what this demand curve is. Figure 16-6 shows this demand curve.
-Refer to Figure 16-6. If Sensei acts as a monopolist and charges the profit-maximizing price, what is his producer surplus?

Accepted Answer

A)  the area B + D + G 
B)  the area A + B + C + D + H + G 
C)  the area C + D + H + G 
D)  the area A + C + H 
A)  the area B + D + G 
B)  the area A + B + C + D + H + G 
C)  the area C + D + H + G 
D)  the area A + C + H

Question 7

With perfect price discrimination, the marginal revenue curve

Accepted Answer

A)  is below the demand curve. 
B)  is above the demand curve. 
C)  is equal to the demand curve. 
D)  is horizontal. 
A)  is below the demand curve. 
B)  is above the demand curve. 
C)  is equal to the demand curve. 
D)  is horizontal.

Question 8

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 exceeds that received under perfect price discrimination. 
C)  The total revenue received under an optimal two-part tariff is less than that received under perfect price discrimination. 
D)  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. 
A)  The total revenue received under the two pricing schedules is the same. 
B)  The total revenue received under an optimal two-part tariff exceeds that received under perfect price discrimination. 
C)  The total revenue received under an optimal two-part tariff is less than that received under perfect price discrimination. 
D)  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.

Question 9

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

Accepted Answer

A)  Telephone companies hope to discourage customers from calling long distance during the day to keep their labor costs down. 
B)  The cost of making long-distance connections is higher during the day than in the evenings. 
C)  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. 
D)  Increasingly, businesses who must call suppliers or customers during business hours resort to the internet, thereby reducing demand for long-distance calls. To make up for this fall in demand, telephone companies charge higher rates. 
A)  Telephone companies hope to discourage customers from calling long distance during the day to keep their labor costs down. 
B)  The cost of making long-distance connections is higher during the day than in the evenings. 
C)  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. 
D)  Increasingly, businesses who must call suppliers or customers during business hours resort to the internet, thereby reducing demand for long-distance calls. To make up for this fall in demand, telephone companies charge higher rates.

Question 10

Most supermarkets charge the same price for the majority of goods sold. This suggest that

Accepted Answer

A)  the government regulates prices of most products sold in supermarkets. 
B)  supermarkets have colluded to fix prices on most of the goods sold. 
C)  mark-ups reflect the degree of competition in the supermarket industry. 
D)  the large supermarket chains are price leaders and smaller grocers take these prices as given. 
A)  the government regulates prices of most products sold in supermarkets. 
B)  supermarkets have colluded to fix prices on most of the goods sold. 
C)  mark-ups reflect the degree of competition in the supermarket industry. 
D)  the large supermarket chains are price leaders and smaller grocers take these prices as given.

Question 11

Price discrimination is a rational strategy for a profit-maximizing firm when

Accepted Answer

A)  it is possible to engage in arbitrage across market segments. 
B)  it is not possible to segment consumers into identifiable markets. 
C)  there is no opportunity for arbitrage across market segments. 
D)  firms want to increase the amount of consumer surplus received by its customers. 
A)  it is possible to engage in arbitrage across market segments. 
B)  it is not possible to segment consumers into identifiable markets. 
C)  there is no opportunity for arbitrage across market segments. 
D)  firms want to increase the amount of consumer surplus received by its customers.

Question 12

Publishers practice price discrimination when they sell books at high prices to

Accepted Answer

A)  early adopters. 
B)  local bookstores. 
C)  large chain bookstores. 
D)  online book sellers. 
A)  early adopters. 
B)  local bookstores. 
C)  large chain bookstores. 
D)  online book sellers.

Question 13

Which of the following is not a way by which price discriminating firms can segment a market?

Accepted Answer

A)  on the basis of time of purchase, for example long-distance calling 
B)  by requiring an advance purchase, for example air tickets 
C)  on basis of the buyer's location, for example requiring out-of-state students to pay higher tuition 
D)  on the basis of the supplier's marginal cost of production, for example requiring customers to pay a premium for customizing options 
A)  on the basis of time of purchase, for example long-distance calling 
B)  by requiring an advance purchase, for example air tickets 
C)  on basis of the buyer's location, for example requiring out-of-state students to pay higher tuition 
D)  on the basis of the supplier's marginal cost of production, for example requiring customers to pay a premium for customizing options

Question 14

The law of one price holds exactly only if

Accepted Answer

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

Question 15

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. How many tubes of toothpaste will Neem sell in West Fall and at what price?

Accepted Answer

A)  Q = 2 units; P = $4.50 
B)  Q = 3 units; P = $4 
C)  Q = 4 units; P = $3.50 
D)  Q = 5 units; P = $3 
A)  Q = 2 units; P = $4.50 
B)  Q = 3 units; P = $4 
C)  Q = 4 units; P = $3.50 
D)  Q = 5 units; P = $3

Question 16

Figure 16-2   Plato Playhouse, a theatre company in the university town of Wegg, caters to two groups of customers: students and the non-student population. Figure 16-2 shows the demand curves for the two groups of customers.
-Refer to Figure 16-2. What is the price charged in the two markets?

Accepted Answer

A)  price in the student market = price in the non-student market = Pa 
B)  price in the student market = price in the non-student market = Pb 
C)  price in the student market = Pd; price in the non-student market = Pe 
D)  price in the student market = Pc; price in the non-student market = Pe 
A)  price in the student market = price in the non-student market = Pa 
B)  price in the student market = price in the non-student market = Pb 
C)  price in the student market = Pd; price in the non-student market = Pe 
D)  price in the student market = Pc; price in the non-student market = Pe

Question 17

When colleges use yield management techniques, they

Accepted Answer

A)  rank students on the basis of academic merit and award higher financial aid offers to those at the top of the ranking. 
B)  increase financial aid offers to students whose demand for college education is likely to be more price elastic and reduce financial aid offers to students whose demand for college education is likely to be less price elastic. 
C)  rank students on the basis of academic merit and award higher financial aid offers to those at the bottom of the ranking. 
D)  increase financial aid offers to students whose demand for college education is likely to be more price inelastic and reduce financial aid offers to students whose demand for college education is likely to be less price inelastic. 
A)  rank students on the basis of academic merit and award higher financial aid offers to those at the top of the ranking. 
B)  increase financial aid offers to students whose demand for college education is likely to be more price elastic and reduce financial aid offers to students whose demand for college education is likely to be less price elastic. 
C)  rank students on the basis of academic merit and award higher financial aid offers to those at the bottom of the ranking. 
D)  increase financial aid offers to students whose demand for college education is likely to be more price inelastic and reduce financial aid offers to students whose demand for college education is likely to be less price inelastic.

Question 18

Erin and Deidre, two residents in Ithaca, New York, are planning a trip to Boston. Erin, the sales manager for a large retailer, has to attend a business meeting. Deidre, a college student on vacation, is planning a leisurely trip to visit friends and relatives. Whose demand curve for air travel is likely to be more elastic?

Accepted Answer

A)  Erin 
B)  Deidre 
C)  There is no difference in their price elasticities of demand. 
D)  The elasticity of the demand curves for Erin and Deidre cannot be determined without more information. 
A)  Erin 
B)  Deidre 
C)  There is no difference in their price elasticities of demand. 
D)  The elasticity of the demand curves for Erin and Deidre cannot be determined without more information.

Question 19

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 price it will charge?

Accepted Answer

A)  It should charge a range of prices from $40 to $16. 
B)  It should charge a range of prices from $40 to $12. 
C)  $2 
D)  $8 
A)  It should charge a range of prices from $40 to $16. 
B)  It should charge a range of prices from $40 to $12. 
C)  $2 
D)  $8

Question 20

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. How many tubes of toothpaste will Neem sell in Middle Fall and at what price?

Accepted Answer

A)  Q = 2 units; P = $7 
B)  Q = 3 units; P = $6 
C)  Q = 4 units; P = $5 
D)  Q = 5 units; P = $4 
A)  Q = 2 units; P = $7 
B)  Q = 3 units; P = $6 
C)  Q = 4 units; P = $5 
D)  Q = 5 units; P = $4

Exam 16: Pricing Strategy

If the selling price of a firm's product is $500 and the estimated average cost of producing this product is $400, what is the firm's markup?

Which of the following does not arise from price discrimination?

Lou buys an Iron Man 2 poster at a garage sale for $30 and resells it on eBay to Kyle for $60. Which of the following statements is true?

Assume that a monopolist practices perfect price discrimination. The firm's marginal revenue curve will

With perfect price discrimination, the marginal revenue curve

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

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

Most supermarkets charge the same price for the majority of goods sold. This suggest that

Price discrimination is a rational strategy for a profit-maximizing firm when

Publishers practice price discrimination when they sell books at high prices to

Which of the following is not a way by which price discriminating firms can segment a market?

The law of one price holds exactly only if

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. How many tubes of toothpaste will Neem sell in West Fall and at what price?

Figure 16-2 Plato Playhouse, a theatre company in the university town of Wegg, caters to two groups of customers: students and the non-student population. Figure 16-2 shows the demand curves for the two groups of customers. -Refer to Figure 16-2. What is the price charged in the two markets?

When colleges use yield management techniques, they

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 price it will charge?

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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