Deck 12: Pricing Strategy

Question 1

The law of one price holds exactly only if

A) transactions costs are zero.
B) it is impossible for buyers to resell the good.
C) antitrust laws are being enforced.
D) buyers have complete information.

Answer 1

transactions costs are zero.

Question 2

The law of one price states

A) that identical products should sell for the same price everywhere.
B) government statutes that prohibit price discrimination.
C) government regulation of prices for all firms.
D) that all customers should pay the same price.

Answer 2

that identical products should sell for the same price everywhere.

Question 3

Laila buys a Spider -Man 3 poster from Edward for $30 and resells it on eBay for $60. Which of the following statements is false?

A) It is possible that Edward has earned some producer surplus from this transaction.
B) The transaction has made Edward worse off because he undersold the poster.
C) Laila has probably incurred some costs in connection with this sale.
D) Laila has earned some arbitrage profits, assuming that transaction costs are negligible.

Answer 3

The transaction has made Edward worse off because he undersold the poster.

Question 4

Table 12-1 shows the price for the novel, Harry Potter and The Deathly Hallows at four online bookstores.

-Refer to Table 12 -1. Which of the following can one conclude from the data above?

A) The item offered for sale is similar but not identical; the quality of service and delivery time might vary from store to store, which justifies the price differences.
B) The data provides clear evidence of price discrimination in online bookstore market.
C) PleaseBuyFromMe.com and KetabySidaqy.com have deliberately under -priced their product to force the other two big players out of business.
D) Johnnycomelately.com is able to charge a lower price for the item because it is more cost efficient than the other three companies.

Question 5

The Opera Theatre sells play tickets for the same play at different prices: a lower price to those who opt for the seats at the back of the theatre and a higher price for those who purchase seats in the front, around the stage. Which of the following statements is true?

A) This is an example of product differentiation not price discrimination.
B) Since the cost of producing the play does not change with the seating configuration, this is evidence of price discrimination based on market segmentation.
C) Charging two different prices is an effective way to avoid an excess demand for play tickets; the higher price lowers quantity demanded to some extent.
D) The theatre practices first degree price discrimination by setting prices based on willingness to pay.

Question 6

Why is price discrimination legal but not discrimination based on race or gender?

A) because price discrimination involves charging people different prices based on their willingness to pay rather than on the basis of arbitrary characteristics
B) because price discrimination enables firms to increase output and employment but race or gender based discrimination reduces employment
C) because price discrimination reduces deadweight loss but discrimination based on race or gender increases deadweight loss
D) because price discrimination increases profits and therefore tax revenues for the government but discrimination based on race or gender reduces tax revenues

Question 7

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

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

Question 8

Calling long distance is more expensive on weekdays between 8 am and 5 pm than in the evening hours. Why is this the case?

A) Businesses who must call suppliers or customers during business hours have few alternatives and therefore have an inelastic demand during the workday compared to after -work hours.
B) The cost of making long -distance connections is higher during the day than in the evenings.
C) Increasingly, businesses who must call suppliers or customers during business hours resort to the internet, thereby reducing demand for long -distance calls. To make for this fall in demand, telephone companies slap on higher rates.
D) Telephone companies hope to discourage customers from calling long distance during the day to keep their labor costs down.

Question 9

From an economic perspective, price discrimination is desirable because

A) it redistributes wealth from wealthy consumers to highly innovative firms.
B) it enables firms to increase profits with no loss in economic surplus, and in turn, this could provide firms with incentives to engage in beneficial product innovation.
C) the increase in profits is more than offset by the loss in consumer surplus, resulting in a net increase in economic surplus.
D) the increase in profits results in higher corporate tax revenues received by the government which could be used to subsidize consumption for low -income individuals.

Question 10

When colleges use yield management techniques, they

A) rank students on the basis of academic merit and award higher financial aid offers to those at the top of the ranking.
B) they increase financial aid offers to students whose demand for college education is likely to be more price inelastic and reduce financial aid offers to students whose demand for college education is likely to be less price inelastic.
C) rank students on the basis of academic merit and award higher financial aid offers to those at the bottom of the ranking.
D) they increase financial aid offers to students whose demand for college education is likely to be more price elastic and reduce financial aid offers to students whose demand for college education is likely to be less price elastic.

Question 11

Jannah is a marketing consultant. Irene and Dalia are potential customers interested in commissioning Jannah to undertake a market survey and compile the findings in a report. Irene is willing to pay $500 for the service while Dalia is willing to pay $800. Suppose that the opportunity cost of Jannah's time is $1,200. Assume that Irene and Dalia do not know each other. If Jannah charges the same price per copy to both Irene and Dalia,

A) both Irene and Dalia will commission the job and the report will be written.
B) only Dalia will commission the job and the report will be written.
C) no conclusion can be drawn without information on the price.
D) the report will not get written.

Question 12

Jannah is a marketing consultant. Irene and Dalia are potential customers interested in commissioning Jannah to undertake a market survey and compile the findings in a report. Irene is willing to pay $500 for the service while Dalia is willing to pay $800. Suppose that the opportunity cost of Jannah's time is $1,200. Assume that Irene and Dalia do not know each other. If the price is $500 per copy,

A) only Dalia will purchase Jannah's services and Jannah will undertake the job for her.
B) only Irene will purchase Jannah's services and Jannah will undertake the job for her.
C) both Irene and Dalia will purchase Jannah's services and Jannah will undertake the job.
D) both Irene and Dalia will want to purchase Jannah's services but Jannah will not be willing to undertake the job.

Question 13

Jannah is a marketing consultant. Irene and Dalia are potential customers interested in commissioning Jannah to undertake a market survey and compile the findings in a report. Irene is willing to pay $500 for the service while Dalia is willing to pay $800. Suppose that the opportunity cost of Jannah's time is $1,200. Assume that Irene and Dalia do not know each other. If the price is $800 per copy,

A) neither Irene nor Dalia will commission the work.
B) both Irene and Dalia will purchase Jannah's services and Jannah will undertake the job.
C) only Dalia will purchase Jannah's services and Jannah will undertake the job for her.
D) only Dalia will want to purchase Jannah's services but Jannah will not be willing to do the work.

Question 14

Jannah is a marketing consultant. Irene and Dalia are potential customers interested in commissioning Jannah to undertake a market survey and compile the findings in a report. Irene is willing to pay $500 for the service while Dalia is willing to pay $800. Suppose that the opportunity cost of Jannah's time is $1,200. Assume that Irene and Dalia do not know each other Which of the following statements is true?

A) Jannah should charge Irene $500 and Dalia $800; that way economic surplus is maximized.
B) Jannah should charge each customer $600; that way he will earn his opportunity cost and it will be fair to both Irene and Dalia.
C) Jannah should charge Irene $500 and Dalia no more than $700; that way he earns his opportunity cost and there is no loss in economic surplus.
D) Jannah should charge Iris $500 but charging Dalia $800 is unfair because it allows Jannah to earn more than his opportunity cost.

Question 15

In Bahrain, the famous Australian casual restaurant, The Crepe Café, offers a lunch menu that has exactly the same meals as the dinner menu but at much lower prices. The same pricing strategy is applied by Applebees, Steak House, and some Indian restaurants across the Gulf region. Based on the information above, what can you conclude about the price elasticity of demand for going out for dinner?

A) Customers who go out for dinner more often are likely view going out for lunch as a substitute for going out for dinner, so making this group pay less for lunch will have a relatively small impact on demand for going out for dinner .
B) Customers who go out for dinner are likely to have a more elastic demand than customers who go out for lunch.
C) Customers who go out for dinner are likely view this as a complement to having take -aways, so making this group pay less for lunch will have a relatively small impact on demand for going out for dinner .
D) Customers who go for dinner are likely to have less elastic demand compared with those who go for lunch.

Question 16

At The Crepe Café in Bahrain, the regular dinner main course costs on average 3.2 Bahrain dinars (BHD) (US$1 = 0.377), with an additional BHD1.2 for a salad and a soft drink. But if you go to The Crepe Café at lunchtime, between 11 and 3, you will get the same main course, a salad, and a soft drink for only BHD2.9.

A) Crepe Café serves less quantity of food at lunch time.
B) Crepe Café serves lower quality food at lunch time.
C) Customers who are considering eating out for lunch have a high elasticity of demand and therefore need to be offered a lower price to attract them to eat at the Crepe Café.
D) None of the above.

Question 17

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?

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

Question 18

Some Arab countries established governmental agencies that aim at protecting the markets from illegal price discrimination practices because

A) Arab governments aim at protecting the markets from monopolistic practices.
B) Price discrimination may reduce competition in an industry.
C) Arab governments aim at promoting a competitive economic environment, based on the principles of free and fair competition.
D) All the above.

Question 19

Fullah Playhouse, a theatre company in Kuwait city, caters to two groups of customers: students and the non-student population. Figure 12-2 shows the demand curves for the two groups of customers.

-Refer to Figure 12 -2. Suppose Fullah Playhouse price discriminates. Which of the following statements is true?

A) By charging two different prices, the theatre company essentially allows those willing to pay higher prices to subsidize those who are not.
B) By charging two different prices, the theatre company has redistributed some profits from those who can pay higher prices to those who cannot, thereby increasing economic efficiency.
C) By charging two different prices, the theatre company has redistributed some profits from those who can pay higher prices to those who cannot, thereby improving equity.
D) Fullah Playhouse will earn higher profits if it charges a single price - an average of the two prices - instead of charging two different prices to the two different groups of customers.

Question 20

Fullah Playhouse, a theatre company in Kuwait city, caters to two groups of customers: students and the non-student population. Figure 12-2 shows the demand curves for the two groups of customers.

-Refer to Figure 12 -2. Suppose Fullah Playhouse charges a single price of P_d for each performance. Which of the following statements is true?

A) The company is selling less than the profit -maximizing quantity in both markets.
B) The company is selling more than the profit -maximizing quantity in the non -student market and less than the profit -maximizing quantity in the student market.
C) The company is selling less than the profit -maximizing quantity in the non -student market and more than the profit -maximizing quantity in the student market.
D) The company is selling less than the profit -maximizing quantity in both markets but it is maximizing its revenue.

Question 21

Dental services would be an example of a product that is not a good candidate for price discrimination.

Question 22

In first degree price discrimination, each buyer pays according to his ability to pay for the product.

Question 23

The deadweight loss under price discrimination in which markets are segmented is greater than that under first degree price discrimination.

Question 24

Suppose Masqat Cement Company charges the same price per ton of cement to consumers regardless of their location, hence absorbing all transportation costs. This implies that the company is engaging in price discrimination.

Question 25

A pharmaceutical company manufactures an arthritis drug that can be prescribed for humans and for dogs. A month's supply of the drug sells for $150 when prescribed for humans and $48 when prescribed for dogs. One can conclude that demand for human consumption is more price elastic than the demand for pet consumption.

Question 26

Suppose a firm knows that potential customers of its product belong to different groups but cannot identify their membership in a group until after a transaction has taken place. In this situation, it is not possible for the firm to engage in price discrimination.

Question 27

The price elasticity of demand for shampoo for two groups of customers, users and non -users of coupons are as follows: Group I: -1.04 and Group II: -0.84. The information indicates that Group I are the users of coupons.

Question 28

Car rental companies use yield management when they set rental prices based on time of the week (weekday as opposed to weekend) and length of the rental (weeklong versus one day).

Question 29

All of the following are disadvantages of cost -plus pricing except

A) It ignores the price elasticity of demand: for example, it may be possible to increase profits by raising or lowering price.
B) If the industry comprises identical firms (with identical costs), markups could be consistent among firms leading to no one firm having a competitive edge in terms of price.
C) Allocating and apportioning business overheads to individual products could be somewhat arbitrary.
D) The business has less incentive to cut or control costs: if costs increase, then selling prices increase. Consequently, this might further erode a firm's competitiveness.

Question 30

The ability of Dream Park to charge for admission to the park and also to charge for each ride is an example of

A) cost -plus pricing.
B) monopoly pricing.
C) perfect price discrimination.
D) a two -part tariff.

Question 31

A firm using a two -part tariff faces a tradeoff because

A) the smaller the variation between the parts of the price the greater the deadweight loss generated by the pricing scheme.
B) the only way to increase total revenue is to lower per -unit profit.
C) any increase in consumer surplus must be offset by a decrease in producer surplus.
D) the only way to increase the fixed -fee portion of the price is to lower the per -unit portion of the price.

Question 32

Which of the following statements is true about optimal two -part tariff and perfect price discrimination for a given demand curve?

A) The total revenue received under the two pricing schedules is the same.
B) The total revenue received under an optimal two -part tariff could be greater than, less than or equal to that received under perfect price discrimination, depending on the fixed -fee portion of the two -part tariff.
C) The total revenue received under an optimal two -part tariff exceeds that received under perfect price discrimination.
D) The total revenue received under an optimal two -part tariff is less than that received under perfect price discrimination.

Question 33

The Egyptian and Jordanian governments charge a higher electricity and gas fee for energy intensive industries. They can do so because they are the only providers of these services. The Jordanian and Egyptian governments are trying to

A) discourage energy intensive industries.
B) increase competition between energy intensive and less energy intensive industries.
C) apply price discrimination.
D) None of the above.

Question 34

When the Egyptian and Jordanian governments engage in price discrimination against energy intensive industries these industries have no choice but to accept the status quo and pay the high price. This is because

A) the Egyptian and Jordanian governments have a complete natural monopoly in the electricity market.
B) they believe the price discrimination is fair.
C) energy intensive industries have high price elasticity of demand on energy.
D) energy intensive industries realize high profit and are willing to pay the high price.