Deck 14: Price Discrimination and Pricing Strategy

Question 1

Which of the following is NOT a principle of price discrimination?

A) It is more profitable to set different prices in markets with different demand curves than a single price that covers all markets.
B) To maximize profit the firm should set a higher price in markets with more elastic demand.
C) To maximize profit the firm should set a higher price in markets with more inelastic demand.
D) Arbitrage makes it difficult for a firm to set different prices in different markets thereby reducing the profit from price discrimination.

Answer 1

B

Question 2

Pfizer sells Atgam in New Zealand for $14/pill and Brazil for $8/pill. This implies that the demand curve in New Zealand must be ________ than in Brazil.

A) more inelastic
B) less inelastic
C) more elastic
D) closer to perfectly elastic

Answer 2

A

Question 3

Price discrimination can be defined as:

A) selling different products to the same consumers in the same market.
B) selling the same product in two different markets.
C) selling the same product at two different prices in two different markets.
D) exporting goods to foreign countries.

Answer 3

C

Question 4

Price discrimination is defined as selling:

A) the same products at the same prices to the same customers.
B) different products at the different prices to the same customers.
C) the same product at different prices to different customers.
D) different products at the same prices to different customers.

Question 5

Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets- Market A and Market B-through the process of price discrimination, how much profit is the monopolist making in Market B?

A) $260
B) $780
C) $1,040
D) $520

Question 6

After a severe hurricane in South Carolina, the price of electric generators quadrupled. People living outside of South Carolina purchased electric generators in their home states and drove them to South Carolina to sell at a much higher price. What is this an example of?

A) arbitrage
B) perfect price discrimination
C) price gouging
D) marginal-price geography

Question 7

Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets- Market A and Market B-if the monopolist were to charge a uniform price of $10 in both markets, how much profit would the monopolist lose?

A) $234.75
B) $146.25
C) $48.75
D) $97.50

Question 8

(Figure: Market for Lithotripters) Refer to the figure. Suppose that a German manufacturer can sell its kidney lithotripter in two markets: Country X and Country Y. If this firm is interested in maximizing profits, it should set a price of ________ in Country X and ________ in Country Y.

A) d; z
B) b; d
C) b; z
D) a; d

Question 9

A museum in Russia has two entrances: one for locals (written in Russian) and one for tourists (written in English). People who enter through the entrance written in Russian will end up paying 81.93 Rubles ($3.00). English-speaking tourists will use the entrance written in English, but they will end up paying 409.67 Rubles ($15.00). This practice is an example of:

A) price manipulation.
B) price exploitation.
C) international price mediation.
D) price discrimination.

Question 10

Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets- Market A and Market B-what price should the monopolist charge in Market A?

A) $5
B) $10
C) $7
D) any price higher than $10.

Question 11

Figure: Monopolist Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets- Market A and Market B-what price should the monopolist charge in Market B?

A) $9
B) $5
C) $7
D) any price higher than $5.

Question 12

The chapter opens with a story about GlaxoSmithKline (GSK) and Combivir, the anti-AIDS drug. What was one of the reasons that GSK was selling Combivir for such low prices in Africa as compared to Europe?

A) It is much cheaper to produce the drug in Africa than in Europe.
B) Government regulations in Europe forced it to charge higher prices.
C) African governments imposed price ceilings.
D) Lower prices were charged for humanitarian reasons.

Question 13

Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets- Market A and Market B-through the process of price discrimination, how much profit is the monopolist making in Market A?

A) $270
B) $450
C) $830
D) $627.50

Question 14

To maximize profit the monopolist should set a:

A) lower price in markets with less elastic demand.
B) lower price in markets with more inelastic demand.
C) higher price in markets with more elastic demand.
D) higher price in markets with more inelastic demand.

Question 15

Price discrimination is used when a seller faces different demand curves in different markets because:

A) no other pricing methods are feasible.
B) the practice eliminated waste.
C) profits are greater than selling at a single price.
D) profits are less than when selling at monopoly prices.

Question 16

An important lesson of price discrimination is that:

A) price discrimination will always lead to lower profits in one of the two markets.
B) firms can increase profits by differentiating their product attributes.
C) all firms can perfectly price discriminate.
D) it only increases profits when the demand curves in two different markets are not the same.

Question 17

Which of the following statements is FALSE? I. If the demand curves are different, it is more profitable to set a single price than different prices in markets. II. To maximize profit the firm should set a lower price in markets with more elastic demand. III. The presence of arbitrage makes it easy for a firm to price discriminate.

A) I and II only
B) II only
C) III only
D) I and III only

Question 18

Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets- Market A and Market B-if the monopolist were to charge a uniform price PU between the two markets, that price would fall in what range?

A) $5 < PU < $9
B) $5 < PU < $10
C) $9 < PU < $10
D) $7 < PU < $10

Question 19

Arbitrage is ________ in one market and ________ in another market.

A) selling low; buying higher
B) selling high; buying higher
C) buying high; selling lower
D) buying low; selling higher

Question 20

Reference: Ref 14-2 (Figure: Price Discriminating Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-if the monopolist were to charge a uniform price PU between the two markets, that price would fall in what range?

A) $6 < PU < $14
B) $6 < PU < $10
C) $10 < PU < $16
D) $10 < PU < $14

Question 21

Which of the following would be an effective method for firms to ensure profit from price discrimination when the possibility of arbitrage exists?

A) set a single price for all markets
B) supply products only to one market
C) make products sold to each market have an exclusive feature
D) request law enforcement to eliminate the possibility of arbitrage

Question 22

Arbitrage prevention is:

A) always easy to achieve.
B) not necessary to practice price discrimination.
C) easier in the case of selling services.
D) easier in the case of selling goods.

Question 23

Why is it important for firms practicing price discrimination to prevent arbitrage of their product?

A) Arbitrage is unrelated to firms' profits since the products are still being sold.
B) Smugglers alter product quality as they pass from market to market, hence harming the reputation and future profits of firms.
C) Arbitrage reduces the profits from price discrimination for firms, and increases profits for smugglers.
D) Arbitrage increases deadweight loss in the market.

Question 24

Which of the following is an example of price discrimination?

A) You pay less for a movie ticket if you show your student ID.
B) Business travelers pay more for airline tickets.
C) Faculty members pay less for computers they order on Apple's Web site.
D) All of the answers are correct.

Question 25

Rohm and Haas were considering:

A) putting arsenic in its plastics to prevent it from being resold to dentists.
B) dyeing all of its women's underwear pink so that fewer men would buy it.
C) charging the Pentagon 500 times the going market price for Styrofoam cups.
D) declaring bankruptcy to sell its granite countertops below the government mandated minimum price.

Question 26

One would expect more arbitrage to occur between two markets if:

A) the products are differentiated in terms of their fundamental characteristics.
B) the products have built in tracking mechanisms that enable the discovery of the distributors.
C) the demand curves in the two markets are essentially the same.
D) products are non-differentiated and the different markets have good transportation networks between them.

Question 27

To maximize profit GlaxoSmithKline sets a higher price for Combivir in Europe than in Africa because demand curve in Africa is:

A) lower and more inelastic.
B) lower and more elastic.
C) higher and more inelastic.
D) higher and more elastic.

Question 28

How did IBM price discriminate its laser printers?

A) IBM provided special financing terms to different customers.
B) IBM offered two different printers: a fast printer and a slow printer.
C) IBM offered printers in different colors.
D) IBM charged seniors lower prices than businesses.

Question 29

Which of the following is the fundamental condition that would allow a firm to practice price discrimination?

A) All customers possess identical willingness to pay for the product.
B) The good can be purchased at one market and resold at another market.
C) There are two or more different demand curves for the good.
D) Demand for the good is high.

Question 30

For price discrimination to work, the young should ________ than/to the old.

A) be charged less for a product
B) be charged more for a product
C) sometimes be charged more and sometimes charged less
D) be charged a price equal to the marginal cost

Question 31

Which of the following conditions would prevent a firm from setting different prices in different markets?

A) possibility of arbitrage for buyers between different markets
B) law enforcement preventing smuggling from occurring
C) government intervention forcing the firm to reduce the level of output
D) government imposition of a price ceiling

Question 32

Which of the following lists of products and services would be the most resistant to arbitrage?

A) gasoline, movie tickets, consumer bleach
B) dental root canals, haircuts, and cosmetic surgery
C) third party car stereos, full-service restaurant meals, and novels
D) computer software, computer hardware, and tickets to sporting events

Question 33

Which of the following is NOT an easy way to split markets in order to practice price discrimination?

A) using age of customers
B) releasing different versions of a product over time
C) relying on the self-reported marital status of customers
D) using characteristics that are correlated with a consumer's willingness to pay

Question 34

Which of the following statements is TRUE regarding arbitrage?

A) It is easier to prevent arbitrage for some products than for others.
B) The U.S. Constitution prevents the government from engaging in arbitrage prevention.
C) Arbitrage may increase the profits for firms, depending on the elasticity of demand in the market.
D) Firms will still be able to price discriminate across markets even when arbitrage is present.

Question 35

In general, price discrimination exists because:

A) higher prices are required when costs are higher.
B) lower prices are possible when profits are not a goal of the entrepreneur.
C) higher prices are charged because some customers are willing to pay more.
D) lower prices encourage arbitrage.

Question 36

To maximize profit using the practice of price discrimination, firms set different prices according to the characteristics that are correlated with buyers':

A) age.
B) purpose of consumption.
C) income.
D) willingness to pay.

Question 37

Airlines try to differentiate their customers by willingness to pay based on:

A) how long in advance a person books their flight.
B) a person's weight.
C) the ethnicity of a person's last name.
D) All of the answers are correct.

Question 38

Insurance companies charge men a higher price for automobile insurance than women. The costs of insuring men are higher because they get into more accidents than do women. Which of the following statements is TRUE?

A) The insurance companies are practicing price discrimination.
B) The insurance companies are not practicing price discrimination.
C) The insurance companies are practicing inter-temporal price discrimination.
D) The insurance companies are using a bundling/tying strategy.

Question 39

Which of the following is the main principle behind price discrimination?

A) If the demand curves are different, it is more profitable to set different prices in different markets than a single price that covers all markets.
B) To maximize profit the firm should set a higher price in markets with more inelastic demand.
C) Arbitrage makes it difficult for a firm to set different prices in different markets thereby reducing the profit from price discrimination.
D) All of the answers are correct.

Question 40

Which of the following does not practice price discrimination on a regular basis?

A) universities
B) farmers
C) movie theaters
D) airline companies

Question 41

Charging each customer his or her maximum willingness to pay is:

A) unethical.
B) perfect price discrimination.
C) not a profit-maximizing strategy.
D) impossible in practice.

Question 42

Reference: Ref 14-3 (Figure: PPD) Refer to the figure. A firm that perfectly price discriminates will sell:

A) a units of output.
B) b units of output.
C) c units of output.
D) d units of output.

Question 43

Which of the following conditions must be TRUE for perfect price discrimination? I. The seller must have very good information about the buyer's willingness to pay. II. Marginal revenue must equal demand. III. The marginal cost of production must be constant.

A) I only
B) I and II only
C) I and III only
D) I, II, and III.

Question 44

Reference: Ref 14-4 (Figure: Perfect Price Discrimination) Refer to the figure. Which curve represents the Marginal Revenue (MR) curve for the monopolist who practices perfect price discrimination?

A) the marginal cost curve
B) the demand curve
C) the average cost curve
D) a downward sloping line that lies beneath the demand curve.

Question 45

Which of the following is NOT an example of price discrimination?

A) children's menus in restaurants
B) peak and non-peak rates for cell phone usage
C) product innovations leading to lower prices
D) standby seats sold last minute by airlines

Question 46

Which of the following is a necessary condition for perfect price discrimination?

A) The firm must have very good information about its customers.
B) The firm can only have one market.
C) The demand curve for the product must be inelastic.
D) The firm must have no competition.

Question 47

Which of the following is an example of price discrimination?

A) value meals at fast-food restaurants
B) senior citizen discounts
C) tax-exempt status for non-profit organizations
D) holiday sales at retail stores

Question 48

A top-performing used-car salesman is able to sell his cars to each customer at their maximum willingness to pay, a practice known as:

A) insightful pricing.
B) pricing market-to-market.
C) perfect price discrimination.
D) price tying.

Question 49

Suppose that Southwestern Airlines flight 171 will depart BWI for Detroit in 3 hours. The marginal cost and average cost of flying a customer are $35 and $68, respectively. Southwestern Airlines can increase its profits by selling a ticket for no less than:

A) $68.
B) $103.
C) $34.
D) $35.

Question 50

(Figure: PPD Monopolist) Refer to the figure. A monopolist who cannot price discriminate earns profit equal to area(s) ________, and a monopolist practicing perfect price discrimination earns profit equal to areas ________.

A) b; ab
B) ab; abc
C) b; abc
D) b; bc

Question 51

Reference: Ref 14-4 (Figure: Perfect Price Discrimination) Refer to the figure. For a firm practicing perfect price discrimination, calculate the dollar amount of consumer surplus in this market.

A) $15,000
B) $20,000
C) $0
D) $5,000

Question 52

Reference: Ref 14-3 (Figure: PPD) Refer to the figure. Which of the following statements best explains why a firm that perfectly price discriminates would sell additional units beyond c units of output?

A) If the firm can perfectly price discriminate it can charge a price equal to the consumers' willingness to pay, which for all units beyond c is higher than the firm's marginal cost for those units.
B) The firm will continue to increase profits as long as consumers' willingness to pay is greater than zero.
C) A firm will not sell beyond c units of output. The marginal cost is greater than consumers' willingness to pay for these units.
D) A firm will not sell beyond c units of output. The marginal cost is greater than the firm's marginal revenue for these units.

Question 53

Perfect price discrimination results in:

A) marginal revenue being in excess of the price charged for the good.
B) zero dollars of consumer surplus.
C) maximization of consumer surplus.
D) marginal revenue becoming equal to the marginal cost of the product for every unit sold.

Question 54

Williams College used ________ as a means to ________.

A) student financial aid; price discriminate
B) payroll deductions; lower tuition
C) its nonexempt tax status; raise tuition
D) government subsidies; increase profits

Question 55

Which of the following statements is TRUE? I. Perfect price discrimination maximizes consumer surplus. II. Perfect price discrimination maximizes gains from trade. III. Under perfect price discrimination, the monopolist produces until price equals marginal cost.

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 56

Which of the following is a real example of price discrimination?

A) Airlines set different prices for business people and vacationers.
B) Publishers charge high prices on hardback and low price on paperback books.
C) IBM's regular version of a printer that prints at 10 pages per minute is more expensive than the Series E that prints five pages per minute.
D) All of these examples are real.

Question 57

Why is student financial aid a profit-maximizing decision for universities?

A) because universities only give financial aid to a very small number of students
B) because as long as the students on financial aid pay some amount that is still greater than the marginal cost of attending the classes, the university still gains positive marginal profit
C) because the university is able to charge no more than a dollar over the marginal cost of attending classes
D) because the university gains goodwill by providing financial aid

Question 58

Reference: Ref 14-3 (Figure: PPD) Refer to the figure. Which of the following statements best explains why a firm that perfectly price discriminates would sell additional units beyond a units of output?

A) A firm will not sell beyond a units of output. The firm will only sell exactly a, as it is the profit-maximizing rate of output for this firm.
B) The marginal cost is less than consumers' willingness to pay for these units.
C) The marginal cost is greater than consumers' willingness to pay for these units.
D) A firm will not sell beyond a units of output, since the marginal cost is greater than the marginal revenue for these units.

Question 59

A subtle form of price discrimination is for firms to offer:

A) the same version of a product for the purpose of separating customers into different markets.
B) the same version of a product for the purpose of separating customers into the same market.
C) different versions of a product for the purpose of separating customers into different markets.
D) different versions of a product for the purpose of separating customers into the same market.

Question 60

What is perfect price discrimination?

A) This occurs when a seller charges each separate consumer an amount that is exactly equal to his or her maximum willingness to pay.
B) This occurs when a seller is able to charge two different prices in different markets.
C) This occurs when consumer surplus is maximized in a given market.
D) All of the answers are correct.

Question 61

Which of the following statements is TRUE? I. People with common diseases live longer than people with rarer diseases. II. Developing drugs for common diseases is a lot less expensive than developing drugs for rare diseases. III. It is more profitable to make drugs for common diseases because the market is bigger than it is for rare diseases.

A) I and II only
B) I and III only
C) II only
D) III only

Question 62

To perfectly price discriminate, a firm must have full information of:

A) efficient level of output.
B) market price.
C) total cost of production.
D) every customer's willingness to pay.

Question 63

Which of the following statements is TRUE about price discrimination?

A) Price discrimination makes consumers worse off due to higher prices.
B) Price discrimination leads to deadweight loss and therefore makes the market less efficient.
C) Price-discriminating monopolists often produce more output than single-price monopolists and increase total surplus in the process.
D) Price discrimination is illegal in the United States.

Question 64

Suppose that GSK sells one of its drugs for $25/pill in the United States and $13/pill in Canada. Which of the following statements is true? I. The price discrimination benefits the Canadians since they pay a lower price. II. The price discrimination benefits the Americans since GSK's larger profits means more research and development of new drugs for Americans. III. Price discrimination is beneficial in industries with large fixed costs, since price discrimination increases the size of the market, helping to spread large costs over a greater number of consumers.

A) I only
B) I and II only
C) I and III only
D) I, II, and III

Question 65

A perfect price-discriminating seller:

A) cannot prevent arbitrage.
B) charges a single price.
C) maximizes consumer surplus.
D) eliminates deadweight loss.

Question 66

Using a strategy of price discrimination, a firm can increase its profits by offering lower prices to its customers who are willing to pay above the firm's:

A) average costs.
B) marginal costs.
C) fixed costs.
D) total costs.

Question 67

Price discrimination is considered bad when:

A) total surplus increases.
B) total surplus decreases.
C) deadweight loss is diminisheC.
D) it is practiced by any firm.

Question 68

Price discrimination is:

A) always better than single pricing.
B) always worse than single pricing.
C) sometimes better and sometimes worse than single pricing.
D) illegal in many countries.

Question 69

Price discrimination is considered bad when ________, but good when ________.

A) it increases output; it decreases output
B) it decreases output; it increases output
C) it increases deadweight loss; it decreases deadweight loss
D) it increases prices; it decreases prices

Question 70

Consumers are ________ with price discrimination than with single-pricing.

A) always better off
B) sometimes better off
C) never better off
D) neither better off nor worse off

Question 71

Perfectly price discriminating monopolists charge:

A) each consumer his or her maximum willingness to pay, so consumer surplus is zero.
B) all consumers the average of their willingness to pay, so consumer surplus is maximized.
C) each consumer his or her maximum willingness to pay, so consumer surplus is maximized.
D) all consumers the average of their willingness to pay, so consumer surplus is zero.

Question 72

A firm practices price discrimination by selling at a high price in its larger market, Market A, and a lower price in its smaller market, Market B. If this firm is forced to sell at a single-price in both markets and opts for the original price in Market A, the new single-pricing strategy makes:

A) consumers in both Market A and Market B worse off.
B) consumers in Market A no worse off, but consumers in Market B worse off.
C) consumers in Market B no worse off, but consumers in Market A worse off.
D) consumers in both markets better off, as single pricing is always better for consumers than price discrimination.

Question 73

Corresponding to the practice of price discrimination, Williams College offers different levels of financial aid to students based on students':

A) age.
B) family income.
C) high school GPA.
D) ACT/SAT scores.

Question 74

Why are patients who suffer from rare terminal diseases more likely to die if the cost of new drug development is about the same for rare and more common terminal diseases?

A) Federal regulations require that drugs for common diseases get developed before drugs for rare diseases.
B) The market is larger for more common diseases and so it is more likely drugs would be developed for the common diseases.
C) Drug firms practice perfect price discrimination.
D) Drugs for rare and common diseases can be sold as bundled goods.

Question 75

Pharmaceuticals with high fixed costs can benefit with the practice of price discrimination because:

A) high fixed costs create incentive for pharmaceuticals to sell more.
B) charging different prices to different customers generates different levels of fixed costs.
C) profit from customers paying high prices allows pharmaceuticals to cover part of the fixed costs.
D) extra profit from customers paying low prices allows pharmaceuticals to cover part of the fixed costs.

Question 76

A perfectly price discriminating monopolist produces until:

A) P = MC.
B) MR = MC.
C) P = MR.
D) MR = AC.

Question 77

Which of the following regarding the outcome of perfect price discrimination is true?

A) Consumer surplus increases.
B) Deadweight loss increases.
C) Producer surplus increases.
D) The economy becomes more efficient.

Question 78

In industries with high fixed costs, price discrimination:

A) is less common.
B) helps firms access more markets.
C) cannot help firms cover fixed costs.
D) is not practiced internationally.

Question 79

Total surplus increases with practice of price discrimination only if:

A) consumer surplus increases.
B) producer surplus increases.
C) price increases.
D) output increases.

Question 80

Price discrimination may be:

A) good in industries with high fixed costs.
B) good in industries with high marginal costs.
C) less efficient if the number of consumers in the market is low.
D) less efficient if it leads to higher prices.