Question 1

What is meant by the "law of one price"?

Accepted Answer

A)  Identical products should sell for the same price everywhere. 
B)  A law was passed in 1913 that made it illegal to sell the same good or service to different people for different prices. 
C)  This is a section of the Sherman Act that forced trusts (for example, the Standard Oil Company) to charge the same price for the same good or service in different states. 
D)  Foreign companies should not be allowed to sell a product in the United States for prices different from prices these companies charge in other countries. 
A)  Identical products should sell for the same price everywhere. 
B)  A law was passed in 1913 that made it illegal to sell the same good or service to different people for different prices. 
C)  This is a section of the Sherman Act that forced trusts (for example, the Standard Oil Company) to charge the same price for the same good or service in different states. 
D)  Foreign companies should not be allowed to sell a product in the United States for prices different from prices these companies charge in other countries.

Question 2

What is cost-plus pricing? Why do some firms use cost-plus pricing even when the firms' managers have the resources to devise a pricing strategy that would result in greater profits?

Accepted Answer

When a firm uses cost-plus pricing to se

Question 3

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services are called

Accepted Answer

A)  exchange costs. 
B)  implicit costs. 
C)  transactions costs. 
D)  selling costs. 
A)  exchange costs. 
B)  implicit costs. 
C)  transactions costs. 
D)  selling costs.

Question 4

Economists believe that cost-plus pricing may be the best way for a firm to determine its optimal product price when the firm's marginal cost and average cost are about the same and when it is difficult to estimate the product's demand curve.

Accepted Answer

A) True 
 B)False

Question 5

With a monopolist engages in perfect price discrimination, the quantity produced and sold

Accepted Answer

A)  is lower than the quantity produced and sold if it adopted a single price. 
B)  is larger than the quantity produced and sold if it adopted a single price. 
C)  is the same level as that produced and sold if it adopted a single price. 
D)  could be lower, higher or the same as that produced and sold if it adopted a single price. 
A)  is lower than the quantity produced and sold if it adopted a single price. 
B)  is larger than the quantity produced and sold if it adopted a single price. 
C)  is the same level as that produced and sold if it adopted a single price. 
D)  could be lower, higher or the same as that produced and sold if it adopted a single price.

Question 6

If a monopolist practices perfect price discrimination,

Accepted Answer

A)  the firm will break even in the long run. 
B)  consumers surplus will be equal to the deadweight loss. 
C)  producer surplus will equal consumer surplus. 
D)  consumer surplus will be zero. 
A)  the firm will break even in the long run. 
B)  consumers surplus will be equal to the deadweight loss. 
C)  producer surplus will equal consumer surplus. 
D)  consumer surplus will be zero.

Question 7

Figure 16-7   The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-There is no evidence that odd pricing succeeds in convincing consumers that prices are lower than they really are.

Accepted Answer

A) True 
 B)False

Question 8

What three conditions must hold for a firm to successfully price discriminate?

Accepted Answer

Successful price discrimination has thre

Question 9

Suppose Dublin Electronics charges regular customers $90 for a Blu-ray player but allows senior citizens to purchase the same item for $75. Is this likely to be a successful price discriminating strategy?

Accepted Answer

A)  Yes, firms price discriminate to maximize profits. 
B)  No, price discrimination will not be effective because the store cannot prevent senior citizens from buying large quantities of Blu-ray players and reselling them for a profit. 
C)  Yes, because senior citizens are likely to have a more elastic demand and therefore will be willing to pay a lower price compared to regular customers. 
D)  No, because there are many different brands of Blu-ray players and consumers will shop around. 
A)  Yes, firms price discriminate to maximize profits. 
B)  No, price discrimination will not be effective because the store cannot prevent senior citizens from buying large quantities of Blu-ray players and reselling them for a profit. 
C)  Yes, because senior citizens are likely to have a more elastic demand and therefore will be willing to pay a lower price compared to regular customers. 
D)  No, because there are many different brands of Blu-ray players and consumers will shop around.

Question 10

Book publishers often use a cost-plus pricing strategy. One reason for this is

Accepted Answer

A)  most publishers do not hire economists who can determine the number of books they must sell to equate marginal cost and marginal revenue. 
B)  publishers do not want to incur the expense of determining the profit-maximizing strategy. They prefer cost-plus pricing because of its lower cost. 
C)  much of the cost of publishing textbooks is difficult to assign to any particular book. 
D)  bookstores, not publishers, ultimately determine how many books will be produced. 
A)  most publishers do not hire economists who can determine the number of books they must sell to equate marginal cost and marginal revenue. 
B)  publishers do not want to incur the expense of determining the profit-maximizing strategy. They prefer cost-plus pricing because of its lower cost. 
C)  much of the cost of publishing textbooks is difficult to assign to any particular book. 
D)  bookstores, not publishers, ultimately determine how many books will be produced.

Question 11

Figure 16-4  
-Refer to Figure 16-4. Graph (a) represents a monopolist who cannot price discriminate and graph (b) represents a monopolist practicing perfect price discrimination. On each graph, identify the monopoly price, the monopoly output, the efficient output, and the areas representing profit, consumer surplus, and deadweight loss.

Accepted Answer

In graph (b), the monopoly output is equ

Question 12

Cost-price pricing typically does not result in profit-maximization. As a result, economists have two views of cost-plus pricing. One of these views is

Accepted Answer

A)  cost-plus pricing is more likely to lead to profit-maximization for large firms than for small firms. 
B)  cost-plus pricing is a good way to approximate the profit-maximizing price when marginal revenue or marginal cost is difficult to determine. 
C)  cost-plus pricing is more likely to lead to profit-maximization for monopolistically competitive firms than for oligopoly firms. 
D)  cost-plus pricing is more likely to result in profit-maximization the more elastic the firm's demand curve is. 
A)  cost-plus pricing is more likely to lead to profit-maximization for large firms than for small firms. 
B)  cost-plus pricing is a good way to approximate the profit-maximizing price when marginal revenue or marginal cost is difficult to determine. 
C)  cost-plus pricing is more likely to lead to profit-maximization for monopolistically competitive firms than for oligopoly firms. 
D)  cost-plus pricing is more likely to result in profit-maximization the more elastic the firm's demand curve is.

Question 13

Many colleges and universities practice yield management. As a result, they offer different financial aid packages to different students. One result of yield management is that colleges often

Accepted Answer

A)  offer a less generous financial aid package to students who apply for an early admission decision. 
B)  offer a more generous financial aid package to students who apply for an early admission decision. 
C)  offer a less generous financial aid package to students with relatively high family incomes. 
D)  offer a less generous financial aid package to students who don't participate in many extracurricular activities when they are in high school. 
A)  offer a less generous financial aid package to students who apply for an early admission decision. 
B)  offer a more generous financial aid package to students who apply for an early admission decision. 
C)  offer a less generous financial aid package to students with relatively high family incomes. 
D)  offer a less generous financial aid package to students who don't participate in many extracurricular activities when they are in high school.

Question 14

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. Which group of customers is likely to have a more elastic demand curve (more sensitive to price)?

Accepted Answer

A)  the other residents of the neighborhood-market B 
B)  There is no difference in the elasticity of demand between the two groups. 
C)  the customers from "The Chateau"-market A 
D)  There is insufficient information to answer this question. 
A)  the other residents of the neighborhood-market B 
B)  There is no difference in the elasticity of demand between the two groups. 
C)  the customers from "The Chateau"-market A 
D)  There is insufficient information to answer this question.

Question 15

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 charges the competitive price for his classes, what is the maximum amount of admission fee that he can collect from his customers?

Accepted Answer

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

Question 16

Firms price discriminate

Accepted Answer

A)  to reduce the quantity sold so as to reduce production costs. 
B)  to increase profits. 
C)  to take advantage of customers. 
D)  to increase total economic surplus. 
A)  to reduce the quantity sold so as to reduce production costs. 
B)  to increase profits. 
C)  to take advantage of customers. 
D)  to increase total economic surplus.

Question 17

Clarissa Kessler operates a store that sells recorded music. Her business suffered tremendously when a giant discount store chain opened a store in the area and is able to sell its products for less than Clarissa's wholesale cost. Is this evidence of illegal price discrimination on the part of the discount store chain?

Accepted Answer

A)  Yes, it is clearly a violation of the Robinson-Patman Act. 
B)  No, because it can be argued that the discount store chain is justified in charging lower prices because it is a large-volume buyer and is able to purchase recorded music at a lower wholesale price than Clarissa. 
C)  Yes, the discount store chain is engaging in predatory pricing. 
D)  No, even if the price discrimination is based on differences in cost, the law states that it is not illegal. 
A)  Yes, it is clearly a violation of the Robinson-Patman Act. 
B)  No, because it can be argued that the discount store chain is justified in charging lower prices because it is a large-volume buyer and is able to purchase recorded music at a lower wholesale price than Clarissa. 
C)  Yes, the discount store chain is engaging in predatory pricing. 
D)  No, even if the price discrimination is based on differences in cost, the law states that it is not illegal.

Question 18

In the 1950s, Walt Disney began to plan the development of a theme park that would eventually become Disneyland. Disney hired an economist to help determine whether the park would be a financial success. This economist surveyed managers of existing amusement parks for advice. Many of these managers

Accepted Answer

A)  believed that a theme park would be very successful because the Disney name created a market among children and parents who had watched Disney cartoons and movies such as Snow White. 
B)  recommended that the theme park be located in California because population in the state would increase greatly in the future. Disney followed this advice. 
C)  recommended that Disney not build the park and leave the amusement park business to those who knew what they were doing. 
D)  recommended that Disney first build an audience for his park by offering the ABC television network a weekly program that would feature Disney movies, cartoons and original programming. Walt Disney followed this advice. Both the television program and Disneyland were financial successes. 
A)  believed that a theme park would be very successful because the Disney name created a market among children and parents who had watched Disney cartoons and movies such as Snow White. 
B)  recommended that the theme park be located in California because population in the state would increase greatly in the future. Disney followed this advice. 
C)  recommended that Disney not build the park and leave the amusement park business to those who knew what they were doing. 
D)  recommended that Disney first build an audience for his park by offering the ABC television network a weekly program that would feature Disney movies, cartoons and original programming. Walt Disney followed this advice. Both the television program and Disneyland were financial successes.

Question 19

Differentiating products to suit customers' tastes is a form of price discrimination.

Accepted Answer

A) True 
 B)False

Question 20

The airline industry routinely engages in price discrimination across time.

Accepted Answer

A) True 
 B)False

Exam 16: Pricing Strategy

What is meant by the "law of one price"?

What is cost-plus pricing? Why do some firms use cost-plus pricing even when the firms' managers have the resources to devise a pricing strategy that would result in greater profits?

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services are called

Economists believe that cost-plus pricing may be the best way for a firm to determine its optimal product price when the firm's marginal cost and average cost are about the same and when it is difficult to estimate the product's demand curve.

With a monopolist engages in perfect price discrimination, the quantity produced and sold

If a monopolist practices perfect price discrimination,

Figure 16-7 The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails. -There is no evidence that odd pricing succeeds in convincing consumers that prices are lower than they really are.

What three conditions must hold for a firm to successfully price discriminate?

Suppose Dublin Electronics charges regular customers $90 for a Blu-ray player but allows senior citizens to purchase the same item for $75. Is this likely to be a successful price discriminating strategy?

Book publishers often use a cost-plus pricing strategy. One reason for this is

Cost-price pricing typically does not result in profit-maximization. As a result, economists have two views of cost-plus pricing. One of these views is

Many colleges and universities practice yield management. As a result, they offer different financial aid packages to different students. One result of yield management is that colleges often

Firms price discriminate

In the 1950s, Walt Disney began to plan the development of a theme park that would eventually become Disneyland. Disney hired an economist to help determine whether the park would be a financial success. This economist surveyed managers of existing amusement parks for advice. Many of these managers

Differentiating products to suit customers' tastes is a form of price discrimination.

The airline industry routinely engages in price discrimination across time.

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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