Deck 17: Sophisticated Pricing Strategies

Question 1

Price discrimination occurs when a company

A)refuses to sell its product to certain customers based on some distinguishing factor such as race or religion.
B)produces different versions of its product.
C)buys a given input from several sellers and pays a different price to each seller.
D)charges different prices to different customers who are all buying the same product.

Answer 1

D

Question 2

When a company sells its product to different customers for different prices, the company is practicing

A)revenue extortion.
B)price differentiation.
C)price discrimination.
D)revenue differentiation.

Answer 2

C

Question 3

Selling the same good at different prices to different buyers is

A)price differentiation.
B)price discrimination.
C)revenue differentiation
D)alternative revenue collection.

Answer 3

B

Question 4

Which of the following is an example of a company practicing price discrimination?

A)A restaurant charges different prices for fountain drinks based on their size.
B)Johann's bakery charges $2 for a cookie, and Bella's bakery charges $3 for an identical cookie.
C)The average price of a haircut is $20 in Dayton and $30 in Cincinnati.
D)Most passengers traveling on an airplane pay different prices for their tickets.

Question 5

A reservation price is

A)the price you pay a producer to guarantee that a unit of a product will be available when you need it.
B)a lower than normal price that a seller "reserves" for (or makes available to) his best customers.
C)the lowest price at which a seller is willing to make a sale.
D)the highest price that a customer is willing to pay for a product.

Question 6

The highest price that a customer is willing and able to pay for a product is the customer's

A)trigger price.
B)market equilibrium price.
C)reservation price.
D)perfect price.

Question 7

The goal of price discrimination is to increase

A)profit by charging each customer the highest price he is willing to pay.
B)profits by raising the demand to sell at higher prices.
C)sales by advertising to gain more customers who are willing to pay more.
D)sales by attracting new groups of customers who are willing to pay more for the product.

Question 8

If a company engages in perfect price discrimination, it is attempting to

A)attract more customers by charging lower prices to groups of new customers.
B)try different prices until it finds the exact market equilibrium price.
C)charge each customer the lowest price they would be willing to pay.
D)charge each customer their reservation price.

Question 9

The highest price that a buyer would be willing to pay for a product is

A)the market equilibrium price.
B)based on their income.
C)the value of the marginal benefit they would receive from the product.
D)above their reservation price, which is the lowest price the seller might charge.

Question 10

A buyer's reservation price for a product is equal to the _____ and the _____.

A)market equilibrium price; perfect discrimination price
B)product's marginal benefit to the buyer; maximum price the buyer would pay for the product
C)maximum price the customer would pay for the product; market equilibrium price
D)perfect discrimination price; the minimum price a customer would pay for the product

Question 11

Perfect price discrimination consists of

A)charging each customer their reservation price.
B)charging each customer based on the marginal cost.
C)basing price on the highest marginal cost the customer is willing to pay.
D)charging each customer the lowest price they are willing to pay.

Question 12

Ariel owns an automobile dealership that sells several car models. Ariel negotiates the price with each customer so that they are willing to pay the highest price possible. This results in customers paying different prices for the same model. Ariel is

A)exploiting customers.
B)giving customers a bargain by selling at prices below the demand curve.
C)practicing perfect price discrimination.
D)seeking to sell at market equilibrium.

Question 13

How does the price customers pay under price discrimination compare to the price with no price discrimination or the one that is set according to the marginal cost = marginal benefit?

A)There is no difference in the prices.
B)Under price discrimination, the price is higher.
C)Under price discrimination, the price is lower.
D)Under price discrimination, some customers pay a higher price, and some pay a lower price.

Question 14

When price discrimination is practiced, a company sells _____ and charges _____ compared to what it would do without practicing price discrimination.

A)a larger output; a greater range of prices
B)the same output; a greater range of prices
C)a smaller output; higher prices
D)a higher output; higher prices

Question 15

Two objectives a company owner tries to achieve through price discrimination are to _____ and to _____.

A)charge each person the highest possible price; sell to the maximum number of customers
B)charge each person the highest possible price; reduce the marginal cost
C)sell to every customer whose marginal benefit exceeds the firm's marginal cost; charge each person the highest possible price
D)sell to every customer whose marginal benefit exceeds the firm's marginal cost; sell to the maximum number of customers

Question 16

Which of the following is NOT something companies try to achieve through price discrimination?

A)Charge each customer the highest price they are willing to pay.
B)Create barriers to entry.
C)Sell to every customer whose marginal benefit exceeds the firm's marginal cost.
D)To increase profits.

Question 17

When a price-discriminating company charges some customers a higher price than it would have charged without price discrimination, total economic surplus

A)stays the same, but there is a transfer from buyers to sellers.
B)rises, with the seller receiving the increase.
C)stays the same, but there is a transfer from sellers to buyers.
D)rises with the gain shared by sellers and buyers.

Question 18

A price-discriminating company can attract more customers by _____ price, as long as _____.

A)reducing; the price is above marginal benefit and below marginal cost
B)reducing; the price is above its marginal cost
C)raising; the price is above marginal benefit and below marginal cost
D)raising; new customers are convinced to pay the price

Question 19

When a price-discriminating company lowers price for potential new customers who wouldn't buy otherwise, total economic surplus

A)stays the same, but there is a transfer from buyers to sellers.
B)rises, with the buyers receiving all the increase.
C)stays the same, but there is a transfer from sellers to buyers.
D)rises with the gain shared by sellers and buyers.

Question 20

A price-discriminating company can attract additional customers by _____, this will add to its profits if the _____.

A)shifting the company's demand curve to the left; price is above the customer's marginal benefit
B)shifting the company's demand curve to the left; price is below the company's marginal cost
C)reducing price; price is above the company's marginal benefit
D)reducing price; price is above the company's marginal cost

Question 21

When price discriminating, a company owner should set price _____ for each customer.

A)equal to marginal cost
B)at the competitive market equilibrium
C)no higher than marginal cost
D)at or just below the marginal benefit

Question 22

When a company price discriminates, it ends up selling

A)in a different product market.
B)at a consistent price across all customers.
C)more than it would sell otherwise.
D)less than it would sell otherwise.

Question 23

Compared to charging the same price to all customers, the quantity that a price-discriminating company sells is _____ as some customers pay _____ prices.

A)higher; lower
B)higher; higher
C)lower; lower
D)lower; higher

Question 24

What impact does price discrimination have on the quantity a company sells?

A)The quantity increases.
B)The quantity decreases.
C)The quantity remains the same.
D)The quantity increases and then decreases.

Question 25

In a market without price discrimination

A)when the firm lowers price to attract new customers, all customers pay the lower price.
B)any change in price will raise profits.
C)total revenue will fall.
D)businesses do not experience economic surplus.

Question 26

When a company owner practices price discrimination, the marginal revenue of an extra unit sold

A)is greater than its price.
B)is less than its price.
C)equals its price.
D)is less than marginal cost.

Question 27

When a company practices price discrimination, it will keep adding customers until the point where the

A)last customer's marginal benefit equals the marginal quantity.
B)last customer's marginal benefit exceeds the company's marginal cost.
C)company's marginal cost exceeds the last customer's marginal benefit.
D)company's marginal cost equals the last customer's marginal benefit.

Question 28

The efficient quantity of output occurs where the

A)company's marginal cost equals the last customer's marginal benefit.
B)company's marginal benefit equals the last customer's marginal cost.
C)price exceeds the marginal benefit.
D)price is just less than marginal benefit.

Question 29

With price discrimination, a company ends up selling

A)less but earning more profits.
B)less but at an efficient level.
C)more but at an efficient output level.
D)more but earning less in profits.

Question 30

How does price discrimination move a market that is not perfectly competitive to an efficient output level?

A)Price discrimination causes businesses to charge the price where marginal cost equals marginal benefit for all customers.
B)Price discrimination gives businesses the incentive to increase output to the level where their marginal cost equals the marginal benefit of their last customer.
C)Price discrimination causes a business to raise its output to the level where the average cost is at its minimum.
D)Price discrimination gives businesses the incentive to move revenue to its highest possible level.

Question 31

Price discrimination leads businesses to _____ than they would under a single-price model.

A)sell a larger quantity
B)sell a smaller quantity
C)produce a smaller quantity at a lower price
D)produce a bigger quantity to sell at a higher price

Question 32

Price discrimination leads to _____ than a one-price system.

A)a lower average price
B)fewer buyers
C)a lower average cost
D)a more efficient output

Question 33

What problem does price discrimination resolve that occurs when businesses exploit market power?

A)High price
B)High costs
C)Underproduction
D)Overproduction

Question 34

_____ is a problem in markets where companies exercise market power and it is resolved when companies practice price discrimination.

A)Overproduction
B)Underproduction
C)Excess profits
D)Excess costs

Question 35

When companies exercise market power, _____ occurs. _____ can solve this problem.

A)overproduction; Price competition
B)underproduction; Price discrimination
C)high costs; Price competition
D)high levels of competition; Price discrimination

Question 36

Price discrimination _____ the quantity that a company sells and _____ its efficiency.

A)raises; improves
B)reduces; improves
C)raises; reduces
D)reduces; reduces

Question 37

(Figure: Price Discrimination) A business that price discriminates will produce at what output level?

A)Quantity 1
B)Quantity 2
C)Quantity 3
D)Quantity 4

Question 38

(Figure: Price Discrimination 2) The following figure shows a business that price discriminates. The business will produce at output level C. What range of buyers will be given a discount so that they are induced to buy the good?

A)Between A and B
B)Between B and C
C)Between C and D
D)Between A and C

Question 39

(Figure: Price Discrimination 2) The following figure shows a business that price discriminates. The business will produce at output level C. What range of buyers will pay a higher price to the seller to buy the good?

A)Between A and B
B)Between B and C
C)Between C and D
D)Between A and C

Question 40

How can price discrimination improve efficiency in a market compared to a single-price situation?

A)The price is pushed down to the level of average costs.
B)The average cost ends up at the level of minimum average costs.
C)The company's output is where marginal cost equals the last customer's marginal benefit.
D)Everyone willing and able to pay for the product gets the same low price.

Question 41

Why is an expert hairstylist more likely to price discriminate than an expert jam maker?

A)A hairstylist has no market power, but a jam maker can have market power.
B)A haircut cannot be resold, but a jar of jam can be resold.
C)There are many substitutes for a hairstyle but few substitutes for a particular jam.
D)The stylist uses fewer inputs than the jam maker.

Question 42

Price discrimination can be successful only if

A)the market is highly competitive.
B)the product cannot be resold.
C)there are many sellers.
D)the company lacks market power.

Question 43

As a company manager, what do you need to know about your customers before you can successfully price discriminate?

A)You need to know your own costs.
B)You need to know that the product is a tangible good rather than a service.
C)You need to know how long each customer has been buying the product.
D)You need to know each customer's reservation price.

Question 44

What three conditions must be present before a company can price discriminate?

A)The company has market power; the product is homogeneous; the demand is elastic.
B)The product cannot be resold; consumers have differing willingness to pay; there are many sellers.
C)The company can identify how much each customer is willing to pay; the product cannot be resold; the company has market power.
D)Product demand is highly elastic; the company can identify how much each customer is willing to pay; the company is seeking market power.

Question 45

Price discrimination is feasible only when certain conditions are present for the company in the market. Which of the following is NOT one of these necessary conditions?

A)The company has market power.
B)The market is overproducing.
C)The company can identify customers' reservation prices.
D)The product cannot be resold.

Question 46

Which of the following is NOT one of the conditions a business must meet to price discriminate?

A)The product is identical across all producers.
B)The product cannot be resold.
C)The company knows how much different customers value the product.
D)The company has market power.

Question 47

Inez owns a technology company. Which of the following conditions would make it difficult for her to price discriminate?

A)Her market is highly competitive.
B)Her product cannot be resold.
C)She is aware of how much each customer is willing to pay.
D)She is eager to increase her profits.

Question 48

Arlo owns a barbershop. What condition would make it difficult for him to price discriminate?

A)His product cannot be resold by customers.
B)He is aware of how much each customer is willing to pay.
C)He seeks to earn a profit.
D)He lacks market power.

Question 49

Why is market power necessary for price discrimination?

A)Market power increases competitive pressures, which facilitates discriminatory pricing.
B)When a seller has market power, his product cannot be resold.
C)Market power allows a seller to control the market demand, and that allows him to set price.
D)Without market power, a seller would lose customers if he tried to charge a higher price.

Question 50

Marta owns a food truck. Which of the following would limit Marta's ability to price discriminate?

A)Marta's product is good only if it is consumed immediately, making it difficult to store for resale.
B)Marta has considerable market power because she is the only seller in town of of that kind of food.
C)Marta has little understanding of how much each customer values her product.
D)Marta is facing rising costs.

Question 51

Which of the following is NOT a condition needed for price discrimination?

A)The company faces a flat demand curve.
B)The company knows how much different customers are willing to pay for the product.
C)The company has market power in its product market.
D)The company can keep customers from reselling the product after they have purchased it.

Question 52

Price discrimination by charging different prices to different groups of people is called

A)group discrimination.
B)price partitioning.
C)segmentation.
D)group pricing.

Question 53

Sellers that use group pricing can avoid resentment towards those who pay less by publicizing a pricing structure where certain groups _____ rather than where other groups _____.

A)receive a discount off the normal price; pay a premium above the normal price
B)earn a lower price; are forced to subsidize others.
C)are penalized with a higher than normal price; qualify for a discounted price.
D)pay less than their marginal benefit; pay more than their marginal benefit.

Question 54

When a seller uses group pricing, members of the same group pay

A)a price equal to that buyer's marginal benefit.
B)an individually negotiated price.
C)the same price for the product.
D)an escalating price.

Question 55

When using group pricing, each group's price should be set by what two steps?

A)Identify the group's average income or ability to pay, and multiply this by the average share of income spent on this product.
B)Identify the quantity where the marginal cost equals marginal revenue for each group, and then find the price for that quantity on each group's demand curve.
C)Divide the demand by the number of segments, and choose the price on the marginal revenue curve associated with each segment's quantity.
D)Choose the profit-maximizing price according to the rational rule for sellers, and then adjust the price up or down based on the number of segments.

Question 56

Which of the following is NOT done when setting group prices?

A)Consider each group as a separate market.
B)Produce at the quantity where marginal revenue equals marginal cost.
C)Charge the price on the demand curve for the chosen quantity.
D)Assume that group demand equals market demand.

Question 57

(Figure: Group Pricing) The diagram represents the demand and costs facing BJ's Smoothies for two different groups of consumers. What price and quantity should BJ choose for each group?

A)Group A: P = $5; Q = 200; Group B: P = $5, Q = 50
B)Group A: P = $10, Q = 200; Group B: P = $5, Q = 100
C)Group A: P = $9, Q = 50; Group B: P = $10, Q = 100
D)Group A: P = $10, Q = 100; Group B: P = $9, Q = 50

Question 58

When setting prices for different groups of customers, a manager should charge higher prices for groups that

A)have a lower demand.
B)have a more elastic demand.
C)value the product more.
D)have lower marginal benefit.

Question 59

When setting prices for different groups of customers, a manager should charge lower prices to groups that

A)value the product more.
B)have a more elastic demand.
C)have a higher demand.
D)have a more inelastic demand.

Question 60

A useful rule of thumb is that the higher the marginal benefit a consumer gains from a product, the

A)more the consumer will seek substitutes for the product.
B)lower the consumer's demand for the product will be.
C)more price-sensitive the consumer will be.
D)higher the buyers' reservation price will be.

Question 61

A useful rule of thumb is that the lower the marginal benefit a consumer gains from a product, the

A)lower the consumer's reservation price will be.
B)less price-sensitive the consumer will be.
C)higher the consumer's demand for the product will be.
D)higher the price that the seller can charge.

Question 62

When a group of buyers is price-sensitive, then the

A)group's marginal benefit is high.
B)group has a high reservation price.
C)group's demand is inelastic.
D)group will not buy at higher prices.

Question 63

When setting prices for different groups of customers, a manager should charge higher prices to groups that have _____ and lower prices to groups that have _____.

A)higher marginal benefit; lower reservation prices
B)more elastic demand; more inelastic demand
C)higher reservation prices; more inelastic demand
D)lower reservation prices; lower marginal benefit

Question 64

(Figure: Group Pricing 2) Artem's Day Spa sells facials at different prices to different groups of customers. The demand that the owner faces from each of two groups is depicted below. What price should he charge, and how many facials should he plan to provide for each group?

A)Group A: P = $130, Q = 90; Group B: P = $100, Q = 50
B)Group A: P = $60, Q = 40; Group B: P = $60, Q =25
C)Group A: P = $130, Q = 40; Group B: P = $100, Q = 25
D)Group A: P = $60, Q = 90; Group B: P = $60, Q =90

Question 65

Which of the following statements is FALSE about group pricing?

A)The higher the reservation price of a group, the higher its marginal benefit from the product.
B)The higher the reservation price of a group, the more inelastic the group's demand for the product.
C)The higher the reservation price of a group, the more the group members value the product.
D)The higher the reservation price of a group, the more sensitive the group is to price changes.

Question 66

Which of the following statements is FALSE about group pricing?

A)The lower the reservation price of a group, the more price-sensitive the group is.
B)The lower the reservation price of a group, the less the group members value the product.
C)The lower the reservation price of a group, the more inelastic the group's demand for the product.
D)The lower the reservation price of a group, the lower the marginal benefit from the product.

Question 67

Pak has divided his customers into two groups so that he can charge a higher price to one group than the other. Which of the following should be TRUE about the group that pays a higher price?

A)This group gains a higher marginal benefit from the product than the group paying a lower price.
B)This group has a lower reservation price than the group paying a lower price.
C)This group has less market power than the group paying a lower price.
D)This group has a more elastic demand than the group paying a lower price.

Question 68

Hendra has divided her customers into two groups so that she can charge a higher price to one group than the other. Which of the following is TRUE about the group paying the lower price?

A)This group gains a higher marginal benefit from the product than the group paying the higher price.
B)This group has a lower reservation price than the group paying the higher price.
C)This group has more market power than the group paying the higher price.
D)This group has a more inelastic demand than the group paying the higher price.

Question 69

Marcella owns a sandwich shop. She targets one group of potential customers by giving them a discount coupon and the other group no coupons. Which of the following would be a characteristic of the group that receives the discount coupon? They _____ than other potential customers.

A)have a higher reservation price
B)must be more price-sensitive
C)have a more inelastic demand
D)receive more marginal benefit from the product

Question 70

Kate owns a food truck. She divides her potential customers into two groups and gives discount coupons to the one she thinks are especially price sensitive. How should she set the price for each group? Kate should consider the _____ for each group separately and then choose each group's price _____.

A)marginal benefit; so that it is equal to marginal cost where it intersects with marginal benefit
B)marginal benefit; at the point on the marginal benefit curve where the average cost is minimum
C)demand curve; at the point on marginal cost curve where marginal cost equals marginal revenue
D)demand curve; on its demand curve based on the quantity where marginal cost equals marginal revenue

Question 71

Hassan is a student who received a coupon to buy pizza from Pizza House at $4 off the regular price. Students at Hassan's school seem to receive the coupons frequently. Which of the following is an assumption that the owners of Pizza House are making about students at Hassan's school?

A)Their demand for pizza is highly inelastic.
B)They have a high reservation price for pizza.
C)Their marginal benefit from pizza is very high.
D)They are price-sensitive.

Question 72

The two rules to use in setting group prices are to charge higher prices to those _____ and charge lower prices to those _____.

A)with lower marginal benefit; with higher marginal benefit
B)who value the product more; who are especially price-sensitive
C)with low reservation prices; with higher reservation prices
D)with elastic demand; with unit elastic demand

Question 73

Which of the following is NOT one of the three steps to take in segmenting customers into groups?

A)Divide the consumers into groups whose demand differs.
B)Charge higher prices to groups with more elastic demand.
C)Give discounts to chosen groups based on identifiable characteristics.
D)Base discounts on characteristics that are hard to change.

Question 74

When segmenting your market demand into groups, base them on _____ and _____ characteristics.

A)income; preference
B)equal; unifying
C)easy-to-observe; demand-unifying
D)verifiable; difficult-to-change

Question 75

To practice group pricing, you would segment your market so as to identify groups that

A)differ in the reservation price.
B)have an inelastic demand.
C)represent average demographic characteristics.
D)are based on difficult-to-identify characteristics.

Question 76

What factor determines how many segments to divide your demand in for group pricing?

A)Whether the product is a tangible good or an intangible service.
B)The similarity of demand across segments.
C)The ability of the company to identify segments with similar reservation price.
D)The amount of consumer information available to the company.

Question 77

In deciding how many segments to divide its market into, a company should look for ways to identify clear segments that have _____ demand.

A)distinctly different
B)equal reservation
C)mirror image
D)overlapping

Question 78

The factors to use for easily separating customers into market segments are a proxy for the differing _____ of the customers.

A)reservation prices
B)average costs
C)minimum prices
D)marginal costs

Question 79

Which of the following correctly summarizes the process of segmenting a market into groups? The decision-maker should ensure that

A)there are differences in elasticities and costs of production across groups.
B)demand differs across groups and that consumers are separated based on easily verifiable and hard-to-change characteristics.
C)demand is equal and reservation prices are different across groups.
D)marginal benefit and group sizes vary across groups, and that demand curves are elastic.

Question 80

To prevent people from pretending to qualify for the market segment with the lowest price, a company manager that engages in group pricing needs to make sure that

A)segmentation is on a detailed set of qualifications.
B)each consumer has no way of knowing the range of prices paid by other consumers.
C)there are equivalent prices paid by consumers in each segment.
D)there is a simple way to verify the segment in which a consumer qualifies.