Question 1

A firm's efforts to increase profit by price discrimination can be undermined by

Accepted Answer

A)  arbitrage by buyers. 
B)  consumer ignorance. 
C)  differences in elasticity of demand. 
D)  seller market power. 
A)  arbitrage by buyers. 
B)  consumer ignorance. 
C)  differences in elasticity of demand. 
D)  seller market power.

Question 2

Which of the following products allows the seller to identify different groups of consumers (segment the market) and practice price discrimination?

Accepted Answer

A)  clothing items sold through Macy's Department Store 
B)  a hamburger sold at Burger King 
C)  a cafe latte sold at Starbucks 
D)  tickets to matinee shows at a movie theatre 
A)  clothing items sold through Macy's Department Store 
B)  a hamburger sold at Burger King 
C)  a cafe latte sold at Starbucks 
D)  tickets to matinee shows at a movie theatre

Question 3

Walt Disney began planning for Disneyland in the early 1950s. When he began to consider how the amusement park would be funded

Accepted Answer

A)  he decided to use the profits earned from his company's cartoons and motion pictures. 
B)  he had trouble raising the required funds. Eventually, he convinced a television network to fund the amusement park in exchange for providing a weekly television program. 
C)  he decided to borrow money from Hollywood banks. The banks quickly agreed to loan Disney the money because of Disney's reputation and previous success. 
D)  he had trouble raising the required funds from banks, so he decided to issue "Disney bonds." He had no trouble paying the interest and principal on the bonds with profits from Disneyland. 
A)  he decided to use the profits earned from his company's cartoons and motion pictures. 
B)  he had trouble raising the required funds. Eventually, he convinced a television network to fund the amusement park in exchange for providing a weekly television program. 
C)  he decided to borrow money from Hollywood banks. The banks quickly agreed to loan Disney the money because of Disney's reputation and previous success. 
D)  he had trouble raising the required funds from banks, so he decided to issue "Disney bonds." He had no trouble paying the interest and principal on the bonds with profits from Disneyland.

Question 4

One reason why McDonald's charges a single price for its products is that it is difficult and costly for the company to determine each individual consumer's willingness to pay.

Accepted Answer

A) True 
 B)False

Question 5

Even though it often does not result in profit maximization, some small firms use a cost-plus pricing strategy anyway because

Accepted Answer

A)  it is easy to use. 
B)  they do not understand what marginal revenue and marginal cost mean. 
C)  it is expensive to hire an economist who can determine what the profit-maximizing price is. 
D)  they sell several products, each of which sells for a different price. The time and expense involved in finding the profit-maximizing price for each product are not worth the effort. 
A)  it is easy to use. 
B)  they do not understand what marginal revenue and marginal cost mean. 
C)  it is expensive to hire an economist who can determine what the profit-maximizing price is. 
D)  they sell several products, each of which sells for a different price. The time and expense involved in finding the profit-maximizing price for each product are not worth the effort.

Question 6

Yield management and price discrimination have enabled firms to increase profits and, at the same time,

Accepted Answer

A)  reduce the cost of production. 
B)  capture some consumer surplus. 
C)  reduce transactions costs. 
D)  transfer some producer surplus to consumers. 
A)  reduce the cost of production. 
B)  capture some consumer surplus. 
C)  reduce transactions costs. 
D)  transfer some producer surplus to consumers.

Question 7

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

Accepted Answer

A)  Toot 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. 
B)  Toot Sweets is trying to prevent the opportunity to make arbitrage profit. 
C)  Toot Sweets is trying to minimize its loss. 
D)  Toot Sweets has underestimated the demand for its muffins. 
A)  Toot 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. 
B)  Toot Sweets is trying to prevent the opportunity to make arbitrage profit. 
C)  Toot Sweets is trying to minimize its loss. 
D)  Toot Sweets has underestimated the demand for its muffins.

Question 8

What is the difference between price discrimination and other forms of discrimination?

Accepted Answer

Discrimination based on race or gender a

Question 9

The expenses you encounter when you buy in one market and sell in a distant market are known as

Accepted Answer

A)  production costs. 
B)  fixed costs. 
C)  transactions costs. 
D)  sunk costs. 
A)  production costs. 
B)  fixed costs. 
C)  transactions costs. 
D)  sunk costs.

Question 10

Price discrimination

Accepted Answer

A)  is the practice of charging different prices to different customers based on a seller's personal preferences and prejudices. 
B)  is the practice of charging different prices to different customers based on the different costs of supplying the product to different customers. 
C)  is the practice of charging different prices to different customers when the price differences cannot be attributed to variations in cost. 
D)  is the practice of giving preferential treatment to certain groups of customers based on their long-standing relationship to the producer. 
A)  is the practice of charging different prices to different customers based on a seller's personal preferences and prejudices. 
B)  is the practice of charging different prices to different customers based on the different costs of supplying the product to different customers. 
C)  is the practice of charging different prices to different customers when the price differences cannot be attributed to variations in cost. 
D)  is the practice of giving preferential treatment to certain groups of customers based on their long-standing relationship to the producer.

Question 11

Figure 16-5  
-Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the monopoly price. What is the profit earned under this pricing scheme?

Accepted Answer

A)  $5,760 
B)  $6,400 
C)  $7,680 
D)  $7,870 
A)  $5,760 
B)  $6,400 
C)  $7,680 
D)  $7,870

Question 12

Some consumer electronic products such as plasma TVs, DVD players and digital cameras, are introduced at very high prices but over time, their prices start falling (beyond what could be attributed to falling costs as companies take advantage of economies of scale and cheaper technologies). Which of the following is the best explanation for this observation?

Accepted Answer

A)  More firms are likely to enter the consumer electronic market over time, forcing market prices down. 
B)  Early adopters of these new products typically have a higher demand and higher income compared to those who are willing to wait. 
C)  Early adopters are more quality conscious and are willing to pay higher prices for the initial production of these goods. 
D)  After satisfying the demand for early adopters, firms lower price to attract the more price sensitive consumers. 
A)  More firms are likely to enter the consumer electronic market over time, forcing market prices down. 
B)  Early adopters of these new products typically have a higher demand and higher income compared to those who are willing to wait. 
C)  Early adopters are more quality conscious and are willing to pay higher prices for the initial production of these goods. 
D)  After satisfying the demand for early adopters, firms lower price to attract the more price sensitive consumers.

Question 13

If firms differentiate their products in different ways and charge different price because of these differentiation factors, then

Accepted Answer

A)  the law of one price is not violated. 
B)  transaction costs are being ignored. 
C)  the firm must not be maximizing profit. 
D)  demand must be perfectly elastic. 
A)  the law of one price is not violated. 
B)  transaction costs are being ignored. 
C)  the firm must not be maximizing profit. 
D)  demand must be perfectly elastic.

Question 14

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. If Netflix chose to use Shiller's pricing method,

Accepted Answer

A)  consumer surplus would be zero. 
B)  producer surplus would be zero. 
C)  deadweight loss would be maximized. 
D)  consumer surplus, producer surplus, and deadweight loss would all be equal. 
A)  consumer surplus would be zero. 
B)  producer surplus would be zero. 
C)  deadweight loss would be maximized. 
D)  consumer surplus, producer surplus, and deadweight loss would all be equal.

Question 15

Which of the following undermines a firm's ability to engage in price discrimination?

Accepted Answer

A)  the seller's market power 
B)  the inability to prevent resale of the product from one market segment to another 
C)  buyers having different elasticities of demand for the product 
D)  the seller's ability to segment the total market 
A)  the seller's market power 
B)  the inability to prevent resale of the product from one market segment to another 
C)  buyers having different elasticities of demand for the product 
D)  the seller's ability to segment the total market

Question 16

Odd pricing became common in the late 19th century. Although the origins of odd pricing are uncertain, several explanations for the practice have been given. Which of the following is one of these explanations?

Accepted Answer

A)  Odd pricing forced employees to give customers change. This made it more likely that employees would record sales rather than pocketing their customers' money. 
B)  Odd pricing began in an era when it was difficult for owners and managers of firms to determine the marginal cost of the goods and services they sold. Odd prices were rough estimates designed to cover costs plus earn firms a profit. 
C)  Odd pricing was begun in England in the 1700s when America was part of the British Empire. Members of the British Royal Court were given the task of pricing products. After independence, merchants in the United States carried on the practice of odd pricing. 
D)  After the passage of the Sherman Act in 1890, merchants used odd pricing as a means of avoiding prosecution for antitrust violations. 
A)  Odd pricing forced employees to give customers change. This made it more likely that employees would record sales rather than pocketing their customers' money. 
B)  Odd pricing began in an era when it was difficult for owners and managers of firms to determine the marginal cost of the goods and services they sold. Odd prices were rough estimates designed to cover costs plus earn firms a profit. 
C)  Odd pricing was begun in England in the 1700s when America was part of the British Empire. Members of the British Royal Court were given the task of pricing products. After independence, merchants in the United States carried on the practice of odd pricing. 
D)  After the passage of the Sherman Act in 1890, merchants used odd pricing as a means of avoiding prosecution for antitrust violations.

Question 17

Why might a producer practice price discrimination?

Accepted Answer

A)  to make its products more affordable to those with low incomes 
B)  to maximize economic efficiency 
C)  to maximize profits 
D)  to maximize quantity demanded 
A)  to make its products more affordable to those with low incomes 
B)  to maximize economic efficiency 
C)  to maximize profits 
D)  to maximize quantity demanded

Question 18

What is yield management? How is yield management being used in the airline industry?

Accepted Answer

Yield management is the use of sophistic

Question 19

Arbitrage

Accepted Answer

A)  is the act of buying an item at a low price and reselling the item at a higher price. 
B)  is the act of selling an item on consignment and collecting a huge portion of the proceeds to compensate for the seller's time. 
C)  is the act of buying an item at a low price, bundling it with another and selling the new package at a much higher price. 
D)  is any act of buying and selling that results in the seller earning an above normal profit. 
A)  is the act of buying an item at a low price and reselling the item at a higher price. 
B)  is the act of selling an item on consignment and collecting a huge portion of the proceeds to compensate for the seller's time. 
C)  is the act of buying an item at a low price, bundling it with another and selling the new package at a much higher price. 
D)  is any act of buying and selling that results in the seller earning an above normal profit.

Question 20

Cost-plus pricing is a reasonable way to determine the optimal price when

Accepted Answer

A)  marginal cost and average cost are roughly equal. 
B)  fixed cost and variable costs are roughly equal. 
C)  fixed costs vary. 
D)  fixed costs are high. 
A)  marginal cost and average cost are roughly equal. 
B)  fixed cost and variable costs are roughly equal. 
C)  fixed costs vary. 
D)  fixed costs are high.

Exam 16: Pricing Strategy

A firm's efforts to increase profit by price discrimination can be undermined by

Which of the following products allows the seller to identify different groups of consumers (segment the market) and practice price discrimination?

Walt Disney began planning for Disneyland in the early 1950s. When he began to consider how the amusement park would be funded

One reason why McDonald's charges a single price for its products is that it is difficult and costly for the company to determine each individual consumer's willingness to pay.

Even though it often does not result in profit maximization, some small firms use a cost-plus pricing strategy anyway because

Yield management and price discrimination have enabled firms to increase profits and, at the same time,

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

What is the difference between price discrimination and other forms of discrimination?

The expenses you encounter when you buy in one market and sell in a distant market are known as

Price discrimination

Figure 16-5 -Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the monopoly price. What is the profit earned under this pricing scheme?

If firms differentiate their products in different ways and charge different price because of these differentiation factors, then

Which of the following undermines a firm's ability to engage in price discrimination?

Odd pricing became common in the late 19th century. Although the origins of odd pricing are uncertain, several explanations for the practice have been given. Which of the following is one of these explanations?

Why might a producer practice price discrimination?

What is yield management? How is yield management being used in the airline industry?

Arbitrage

Cost-plus pricing is a reasonable way to determine the optimal price when

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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