Deck 12: Pricing Practices

Question 1

An imperfectly competitive firm produces two products (A and B) with interrelated demand functions. Consumers view these products as substitutes. If the firm increases the number of units of A sold from 150 to 151, total revenue from the sale of A will increase from $1,500 to $1,505. Taking into account the interdependence between A and B, the marginal revenue from the sale of one additional unit of A must be

A) $5.
B) greater than $5.
C) less than $5.
D) This question cannot be answered without additional information.

Answer 1

less than $5.

Question 2

An imperfectly competitive firm produces two products (A and B) with interrelated demand functions. Consumers view these products as complements. If the firm increases the number of units of A sold from 150 to 151, total revenue from the sale of A will increase from $1,500 to $1,505. Taking into account the interdependence between A and B, the marginal revenue from the sale of one additional unit of A must be

A) $5.
B) greater than $5.
C) less than $5.
D) This question cannot be answered without additional information.

Answer 2

greater than $5.

Question 3

An imperfectly competitive firm produces two products (A and B) with interrelated demand functions. If the firm increases the number of units of A sold from 150 to 151, total revenue from the sale of A will increase from $1,500 to $1,505. Taking into account the interdependence between A and B, the marginal revenue from the sale of one additional unit of A must be

A) $5.
B) greater than $5.
C) less than $5.
D) This question cannot be answered without additional information.

Answer 3

This question cannot be answered without additional information.

Question 4

A firm produces two products (A and B) jointly. Every time a unit of A is produced, a unit of B is also produced as a byproduct. At the current level of output, the marginal revenue from sales of A is $35 and from sales of B is $12. The marginal cost of producing a unit of A is $35, so the firm should

A) continue producing the current level of output.
B) increase its rate of production.
C) reduce its rate of production.
D) This question cannot be answered without additional information.

Question 5

A firm produces two products (A and B) jointly. Every time a unit of A is produced, a unit of B is also produced as a byproduct. At the current level of output, the marginal revenue from sales of A is $25 and from sales of B is $12. The marginal cost of producing a unit of A is $37, so the firm should

A) continue producing the current level of output.
B) increase its rate of production.
C) reduce its rate of production.
D) This question cannot be answered without additional information.

Question 6

Which of the following is not a condition required for the practice of price discrimination?

A) The firm must be a perfect competitor.
B) The price elasticity of demand for the product must be the same under all circumstances.
C) The market must not be segmented.
D) None of the above is a condition required for the practice of price discrimination.

Question 7

A firm practices first-degree price discrimination. The demand for the firm's product is defined as QD = 20 - 2P. If the firm has a constant marginal cost of production equal to $7 and the product is infinitely divisible, how much output should it produce to maximize profit?

A) 3
B) 5
C) 6
D) None of the above is correct.

Question 8

A firm practices first-degree price discrimination. The demand for the firm's product is defined as QD = 20 - 2P. If the firm maximizes profit by selling 4 units of output and the product is infinitely divisible, what is the firm's total revenue?

A) $32
B) $36
C) $40
D) None of the above is correct.

Question 9

A firm produces a product at a fixed marginal cost of $2 and sells the product on two different markets (A and B) . The demand on market A is Q_A = 10 - P. The demand on market B is Q_B = 20 - P. What price should the firm charge on market A?

A) 4
B) 6
C) 9
D) None of the above is correct.

Question 10

A firm produces a product at a fixed marginal cost of $2 and sells the product on two different markets (A and B) . The demand on market A is Q_A = 10 - P. The demand on market B is Q_B = 20 - P. What price should the firm charge on market B?

A) 4
B) 6
C) 9
D) None of the above is correct.

Question 11

A firm produces a product at a fixed marginal cost of $2 and sells the product on two different markets (A and B) . The demand on market A is Q_A = 10 - P. The demand on market B is Q_B = 20 - P. What quantity should the firm sell on market A?

A) 4
B) 6
C) 9
D) None of the above is correct.

Question 12

A firm produces a product at a fixed marginal cost of $2 and sells the product on two different markets (A and B) . The demand on market A is Q_A = 10 - P. The demand on market B is Q_B = 20 - P. What quantity should the firm sell on market B?

A) 4
B) 6
C) 9
D) None of the above is correct.

Question 13

Firms that use cost-plus pricing should

A) use a higher markup on products with a relatively inelastic demand.
B) use a higher markup on products with a relatively elastic demand.
C) base their calculations on the historical average cost of the product.
D) apply the same markup on every product that they sell.

Question 14

A firm charges $25 for a product. If the markup is 25 percent, then the fully allocated average cost of the product is

A) $6.25.
B) $18.75.
C) $20.00.
D) None of the above is correct.

Question 15

The fully allocated cost of a product is $45. If the firm wants to use a markup of 30 percent, then it should charge a unit price of

A) $48.00.
B) $58.50.
C) $60.00.
D) None of the above is correct.

Question 16

The fully allocated cost of a product is $10. If the price elasticity of demand for the product is -2, then the firm's optimal markup is

A) 10 percent.
B) 100 percent.
C) 200 percent.
D) None of the above is correct.

Question 17

The fully allocated cost of a product is $12. If the price elasticity of demand for the product is -4, then the firm should charge a price of

A) $16.00.
B) $15.00.
C) $12.50.
D) None of the above is correct.

Question 18

A firm produces a product at a fixed marginal cost of $10 and sells the product on two different markets (A and B) . The demand on market A is Q_A = 80 - 2P. The demand on market B is Q_B = 50 - P. What price should the firm charge on market B?

A) 20
B) 25
C) 30
D) None of the above is correct.

Question 19

A firm produces a product at a fixed marginal cost of $10 and sells the product on two different markets (A and B) . The demand on market A is Q_A = 80 - 2P. The demand on market B is Q_B = 50 - P. What price should the firm charge on market A?

A) 20
B) 25
C) 30
D) None of the above is correct.

Question 20

A firm produces a product at a fixed marginal cost of $10 and sells the product on two different markets (A and B) . The demand on market A is Q_A = 80 - 2P. The demand on market B is Q_B = 50 - P. What quantity should the firm sell on market A?

A) 20
B) 25
C) 30
D) None of the above is correct.

Question 21

Carolina Berries manufactures many varieties of jams and jellies. An increase in the price of their strawberry jam can be expected to

A) increase the demand for their strawberry jelly because the two are complements.
B) increase the demand for their strawberry jelly because the two are substitutes.
C) decrease the demand for their strawberry jelly because the two are complements.
D) decrease the demand for their strawberry jelly because the two are substitutes.

Question 22

The Nintari Company produces video-game-playing machines and a second firm, Necsega, owns exclusive rights to manufacture games that can be used with the Nintari game machine. Both of these imperfectly competitive firms are maximizing profits. If Nintari buys Necsega and nothing else changes, then profits will be maximized if Nintari

A) decreases the prices of game machines and games.
B) does not change the prices of game machines or games.
C) increases the prices of game machines and games.
D) None of the above is correct.

Question 23

Icarus Medical Supplies produces patented adhesives that are used to reassemble broken bones. Pindrop Medical Products manufactures patented pins that are also used to reassemble broken bones. Both of these imperfectly competitive firms are maximizing profit. If Icarus merges with Pindrop, then the merged firm will maximize profits if it

A) decreases the prices of pins and adhesives.
B) does not change the prices of pins or adhesives.
C) increases the prices of pins and adhesives.
D) None of the above is correct.

Question 24

A single-plant, multiproduct firm will introduce additional products

A) in order of diminishing price elasticities of demand.
B) until the marginal revenue from the last product introduced is equal to zero.
C) until 100 percent of unused plant capacity is employed.
D) None of the above is correct.

Question 25

The optimal output of joint products that are produced in fixed proportions is found where

A) the vertical sum of the marginal revenue from each product is equal to marginal cost.
B) the horizontal sum of the marginal revenue from each product is equal to marginal cost.
C) the marginal revenue from each product is equal to the marginal cost of producing each product.
D) the marginal cost is equal to the corresponding price of each product.

Question 26

The optimal combination of joint products that are produced in variable proportions is found where

A) the marginal revenue from each product is equal to the marginal cost of producing each product.
B) the isorevenue line is tangent to the product transformation curve.
C) the isorevenue line is tangent to the relevant total cost curve.
D) None of the above is correct.

Question 27

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

A) It costs more to make a long-distance phone call during the day than it does late at night.
B) A ticket to the zoo costs less for a child than it does for an adult.
C) Regular gasoline costs less than premium gasoline.
D) All of the above are examples of price discrimination.

Question 28

A firm will realize the highest level of profit if it is able to engage in

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) The answer cannot be determined without additional information.

Question 29

A grocery store that offers one can of soup for $0.35 and three cans for $1.00 is engaging in

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) The answer cannot be determined without additional information.

Question 30

A movie theater that charges a lower price for matinees than for evening showings is engaging in

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) The answer cannot be determined without additional information.

Question 31

A firm that is engaging in price discrimination will

A) charge a higher price to consumers with a higher price elasticity of demand.
B) charge a higher price to consumers with a lower price elasticity of demand.
C) earn lower profits than a similar firm that does not engage in price discrimination.
D) generally be a perfectly competitive firm.

Question 32

Persistent dumping refers to the practice of

A) international price discrimination.
B) charging a lower price on foreign markets where demand is more price elastic.
C) taking advantage of the segmentation of markets that results from domestic restrictions on imports.
D) All of the above are correct.

Question 33

A firm that is selling a product at or below cost on foreign markets in order to drive foreign producers out of business is engaging in

A) international price discrimination.
B) persistent dumping.
C) predatory dumping.
D) sporadic dumping.

Question 34

If there is no external market for an intermediate product, then the transfer price should be set equal to

A) the marginal cost of producing the optimal quantity of the intermediate product.
B) the marginal cost of producing the final product.
C) the selling price of the final product.
D) None of the above is correct.

Question 35

If the external market for an intermediate product is perfectly competitive, then the transfer price should be set equal to

A) the market price of the final product.
B) the competitive market price of the intermediate product.
C) the marginal cost of the final product.
D) None of the above is correct.

Question 36

If the external market for an intermediate product is imperfectly competitive, then the transfer price should be set equal to

A) the market price of the intermediate product.
B) the marginal cost of producing the optimal quantity of the intermediate product.
C) the market price of the final product.
D) None of the above is correct.

Question 37

A firm charges $14 for a product. If the markup is 40 percent, then the fully allocated average cost is

A) $19.60.
B) $10.00.
C) $8.40.
D) None of the above is correct.

Question 38

A firm produces a product with a fully allocated average cost equal to $20. If the price elasticity of demand for the product is -5, then the product price should be set at

A) $25.
B) $24.
C) $23.
D) $22.

Question 39

Developing a product to sell at a predetermined price is called

A) value pricing.
B) skimming.
C) price lining.
D) prestige pricing.

Question 40

Consider a firm that operates with a fixed marginal cost of $10 and faces a demand governed by the following relationship: Q = 100 - 5 P
What should the profit maximizing level of output be?

A) 15
B) 20
C) 25
D) 30

Question 41

A firm produces two products (A and B) jointly. Every time a unit of A is produced, a unit of B is also produced as a byproduct. At the current level of output, the marginal revenue from sales of A is $25 and from sales of B is $12. The marginal cost of producing a unit of A is $30, so the firm should

A) continue producing the current level of output.
B) increase its rate of production.
C) reduce its rate of production.
D) This question cannot be answered without additional information.

Question 42

Which one of the following is a condition required for the practice of price discrimination?

A) The firm must be a perfect competitor.
B) The price elasticity of demand for the product must be the same under all circumstances.
C) The market must be segmented.
D) None of the above are conditions required for the practice of price discrimination.

Question 43

Price discrimination refers to

A) charging different prices for different quantities and markets due to varying cost.
B) charging foreigners exclusively higher prices.
C) charging local minorities higher prices without cost justification.
D) charging of different prices for different quantities, markets or times.

Question 44

Which of the following are examples of price discrimination?

A) Entertainment companies charging lower prices for afternoon than for evening performances of movies
B) Legal professionals charging lower fees to low-income than to high-income people
C) Power companies charging lower prices to commercial than to residential users
D) All of the above are examples of price discrimination.

Question 45

Which of the price discrimination degrees are least practical or likely to be practiced?

A) First-degree price discrimination
B) Second-degree price discrimination
C) Third-degree price discrimination
D) Fourth-degree price discrimination

Question 46

A firm charges one price in the United States and a different price in Europe. Selling goods and services at different prices to two different markets not arising from higher costs is known as

A) First-degree price discrimination
B) Second-degree price discrimination
C) Third-degree price discrimination
D) Fourth-degree price discrimination

Question 47

Charging of lower price abroad than at home for the same commodity because of greater elasticity of demand in the foreign market is known as

A) price discrimination.
B) dumping.
C) transfer pricing.
D) transfer discrimination.

Question 48

The pricing of the intermediate goods sold between the two subdivisions of the same company is knows as

A) price discrimination.
B) dumping.
C) transfer pricing.
D) transfer discrimination.

Question 49

Transfer pricing helps the multinational firms to

A) allocate resources between divisions.
B) produce the optimum amount of intermediate goods.
C) create incentives for subdivisions of firms to increase profitability.
D) All of the above

Question 50

Multinational corporations are often accused that transfer pricing is used for

A) profit optimization.
B) tax and tariff avoidance.
C) creating unnecessary tension between divisions.
D) social responsibility.

Question 51

The method of adding a markup cost on top of the fully allocated average cost is known as

A) transfer pricing.
B) cost-plus pricing.
C) predatory pricing.
D) dumping.

Question 52

Markup equals

A) the difference between price and fully allocated average cost divided by the fully allocated average cost.
B) the difference between price and marginal cost divided by the marginal cost.
C) the difference between price and average variable cost divided by the average variable cost.
D) the difference between price and average fixed cost divided by the average fixed cost.

Question 53

Incremental analysis refers to the fact that firms should only make decisions based on how a change will affect

A) marginal revenue and average fixed cost.
B) average revenue and average variable cost.
C) marginal revenue and marginal cost.
D) average revenue and average cost.

Question 54

Charging of higher price for a good or a service during the times with the highest demand is know as

A) peak-load pricing.
B) cost-plus pricing.
C) transfer pricing.
D) predatory pricing.

Question 55

Deliberately setting high prices to attract high-end customers is known as

A) price lining.
B) prestige pricing.
C) skimming.
D) value pricing.

Question 56

Setting of a price target by a firm and then developing a product that would allow the firm to maximize profits at that price is known as

A) price lining.
B) prestige pricing.
C) skimming.
D) value pricing.

Question 57

What price should the firm charge for its new electric toothbrush if the fully allocated average cost is $15 and the firm wants to apply a 25 percent markup cost?

A) $15
B) $18.75
C) $19.25
D) $20

Question 58

What is the firm's markup cost if the price it is charging is $50 and the fully allocated average cost is $40?

A) 10 percent
B) 15 percent
C) 20 percent
D) 25 percent

Question 59

A European firm produces cars at a marginal cost of $25,000 and sells the product in two markets (the US and EU). The demand in the US is while the demand in the EU is . What price should the firm charge in the European Union?

A) 35,000
B) 37,500
C) 42,500
D) 45,000

Question 60

A European firm produces cars at a marginal cost of $25,000 and sells the product in two markets (the US and EU). The demand in the US is while the demand in the EU is . What price should the firm charge in the US?

A) 35,000
B) 37,500
C) 42,500
D) 45,000

Question 61

If two goods produced by a single firm are substitutes in consumption, then an increase in the price of one will cause a decrease in demand for the other.

Question 62

If two goods produced by a single firm are complements in consumption, then a decrease in the price of one will cause an increase in demand for the other.

Question 63

If two goods (A and B) produced by a single firm are substitutes in consumption, then the change in total revenue from the sale of B divided by the corresponding change in the quantity of A will be positive.

Question 64

If two goods (A and B) produced by a single firm are complements in consumption, then the change in total revenue from the sale of B divided by the corresponding change in the quantity of A will be positive.

Question 65

If a firm has idle plant capacity, then it should produce additional products even if the marginal cost of doing so exceeds marginal revenue.

Question 66

A single-plant firm that produces more than one product will charge the same price for every product that it produces.

Question 67

A single-plant multiproduct firm will produce a quantity of each product such that the marginal cost of each product is the same.

Question 68

An example of joint production with fixed proportions is petroleum refining.

Question 69

Joint production is the result of production interdependence.

Question 70

The optimal level of output where products are jointly produced in variable proportions occurs where the marginal cost of production is equal to the vertical summation of the marginal revenues of the individual products.

Question 71

Products that are produced jointly in fixed proportions are substitutes in production.

Question 72

If products are produced jointly in fixed proportions, then their product transformation curves are right angles.

Question 73

If the product transformation curves for two goods produced jointly are straight lines, then the two goods are perfect substitutes in production.

Question 74

Price discrimination refers to charging different prices for a product when price differences are not justified by differences in cost.

Question 75

A letter mailed to New York from Los Angeles costs less if it is sent first class than if it is sent by overnight mail, which proves that the U.S. Postal Service is engaging in price discrimination.

Question 76

First-degree price discrimination would allow a firm to charge the maximum possible price for every unit sold.

Question 77

If a firm that does not price discriminate begins to practice first-degree price discrimination, its profit will increase by an amount equal to consumers' surplus.

Question 78

A firm that is engaging in third-degree price discrimination will charge a lower price to buyers with less elastic demand curves.

Question 79

Perfectly competitive firms can engage in second-degree price discrimination.

Question 80

Price discrimination is most effective if all consumers have the same price elasticity of demand.