Deck 16: Pricing Strategy

Question 1

The law of one price states

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

Answer 1

that identical products should sell for the same price everywhere.

Question 2

In the real world,

A)all sellers charge one price equal to the marginal cost of production.
B)profitable sellers will set one price based on the average elasticity of demand of buyers.
C)many firms charge different prices based on consumers' willingness to pay.
D)all sellers charge one price set by the government.

Answer 2

many firms charge different prices based on consumers' willingness to pay.

Question 3

Assuming zero transactions costs, if your local grocer buys oranges at a low price from an orchard and resells them to you at a higher price, then the grocer's revenue minus costs is known as

A)arbitrage profits.
B)transactions profits.
C)pure profits.
D)excess profits.

Answer 3

arbitrage profits.

Question 4

The Athenian Theatre sells 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 but not price discrimination.
B)The theatre practices first-degree price discrimination by setting prices based on willingness to pay.
C)Since the cost of producing the play does not change with the seating configuration, this is evidence of price discrimination based on market segmentation.
D)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.

Question 5

According to a New York Times article, shoppers from New York City have played a game of "retail arbitrage" by shopping at malls in Northern New Jersey, a state where there is no tax on clothing and shoes.Even after accounting for transactions costs, shoppers could still save money on their clothing and footwear purchases.
Source: Ken Belson and Nate Schweber, "Sales Tax Cut in City May Dim Allure of Stores Across Hudson," New York Times, January 18, 2007.
Is the term "arbitrage" correctly used here?

A)Yes, because shoppers were able to purchase items at lower prices even after deducting their transactions costs.
B)No, "arbitrage" means buying at a low price and reselling at a higher price but no resale takes place here.
C)Yes, arbitrage applies even if no resale takes place; in this case the profits are pocketed by the customers themselves.
D)No, "arbitrage" does not apply to markets that are not in the same geographic area.

Question 6

For many products, such as fast foods, a variety of prices can be found, but sellers with higher prices can expect to sell their products because

A)consumers are not sensitive to prices.
B)arbitrage will quickly eliminate price differences.
C)firms differentiate products in many ways, for example, higher-priced fast food restaurants may offer better service.
D)their demand is perfectly inelastic.

Question 7

The price of admission to Walt Disney World

A)can vary by your age and address.
B)is the same for everyone.
C)is determined by the weather on the day of admission.
D)is kept low to attract customers, but prices of food and souvenirs inside the park vary by your age, address and other factors.

Question 8

Arbitrage

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

Question 9

Table 16-1

Table 16-1 shows the price for the hardcover version of the novel Into the Water by Paula Hawkins at four online bookstores.
Refer to Table 16-1.Which of the following can one conclude from the data above?

A)The data provides clear evidence of price discrimination in the online bookstore market.
B)Amazon.com and BarnesandNoble.com are able to charge a lower price for the item because they are more cost efficient than the other two companies.
C)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.
D)BarnesandNoble.com and Amazon.com have deliberately under-priced their product to force the other two companies out of business.

Question 10

Price discrimination

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

Question 11

The law of one price holds exactly only if

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

Question 12

Lou buys a Star Wars: The Force Awakens poster from Evan for $30 and resells it on eBay for $60.Which of the following statements is false?

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

Question 13

When you buy at a low price in one market then sell at a higher price in another market you are engaging in

A)odd pricing.
B)arbitrage.
C)an antitrust prohibited practice.
D)price discrimination.

Question 14

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

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

Question 15

The network of devices directly communicating data to a computer without a person having to enter the data is known as

A)Big Data.
B)Artificial Intelligence.
C)the Internet of Things.
D)Synergistic Communications.

Question 16

Lou buys a Star Wars: The Force Awakens poster at a garage sale for $30 and resells it on eBay to Kyle for $60.Which of the following statements is true?

A)The transaction has made Lou better off and Kyle worse off.
B)The transaction is economically inefficient.
C)The transaction has made Lou and Kyle better off.
D)It is not possible for Kyle to enjoy any consumer surplus from this transaction.

Question 17

Buying at a low price in one market and reselling at a higher price in another market will

A)not generate any profit because of transportation costs.
B)not generate any profit because of transactions costs.
C)eventually eliminate all of the price differences.
D)eventually eliminate most, but not necessarily all, of the price differences.

Question 18

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

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

Question 19

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

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

Question 20

Yield management is the practice of

A)determining production functions to minimize production costs.
B)forecasting competitors' responses to price changes.
C)using buyer data to rapidly adjust prices.
D)using information technology to find the best interest rate.

Question 21

According to the law of one price,

A)if transaction costs are zero, identical goods should sell for the same price everywhere.
B)if transactions costs are zero, firms must sell a product at a price equal to its marginal cost.
C)if transactions costs are zero, all firms must earn the same profit margin.
D)there must be no differences in the cost of producing identical goods by different producers.

Question 22

What is meant by the "law of one price"?

A)Identical products should sell for the same price everywhere.
B)A law was passed in 1913 that made it illegal to sell the same good or service to different people for different prices.
C)This is a section of the Sherman Act that forced trusts (for example, the Standard Oil Company)to charge the same price for the same good or service in different states.
D)Foreign companies should not be allowed to sell a product in the United States for prices different from prices these companies charge in other countries.

Question 23

Harry attended a baseball card show in New York City where he bought a number of rookie cards of Pittsburgh Pirates baseball players from the 1950s and 1960s.Harry then sold the cards in Pittsburgh, Harry's hometown, where he knew the cards sold for higher prices.The profits Harry earned from these transactions are called

A)arbitrage profits.
B)normal profits.
C)accounting profits.
D)implicit profits.

Question 24

The process of rapidly adjusting prices based on information gathered on consumers' preferences and their responsiveness to changes in price is called

A)yield management.
B)elasticity management.
C)brand management.
D)marketing.

Question 25

Harvey Morris bought dishes and pitchers made of blue glass during the Great Depression at a flea market.He later resold these items on eBay.The profits Harvey earned from these sales are

A)subject to a retail profits tax.
B)not economic profits because Harvey did not add value to the items but took advantage of the buyers who were not aware of how much Harvey paid for the items.
C)the result of arbitrage.
D)accounting profits but not economic profits.

Question 26

According to the law of one price, identical products should sell for the same price everywhere if

A)consumers have knowledge of the prices charged for products in different markets.
B)transactions costs are zero.
C)firms can prevent consumers from engaging in arbitrage.
D)there are no tariffs or other restrictions on imports or exports.

Question 27

Transactions costs refer to

A)the implicit costs of production.
B)the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.
C)the raw material cost of production.
D)the cost of transporting goods from one destination to another.

Question 28

Arbitrage refers to the act of

A)resolving a dispute in front of an arbitrator instead of a court of law.
B)buying a product in one market at a low price and reselling in another market at a higher price.
C)trading in the foreign exchange market.
D)suing a producer for illegal business practices.

Question 29

Which of the following will prevent firms from engaging in price discrimination?

A)yield management
B)arbitrage
C)transactions costs
D)odd pricing

Question 30

The law of one price states that identical products should sell for the same price everywhere as long as transactions costs are zero.

Question 31

The law of one price

A)states that consumers can only buy one good or service at a time.
B)is a law passed by Congress that prohibits firms from selling a product at two different prices in the same market at the same time.
C)states that consumers will pay any price for a product that has a perfectly inelastic demand curve.
D)states that identical products should sell for the same price everywhere.

Question 32

Many people sell goods through eBay at prices that are higher than the prices they paid for these goods.Economists consider these transactions as

A)examples of zero-sum games, since the value of the goods sold is exactly equal to the prices paid for them.
B)unproductive since the goods sold have been produced in the past.
C)examples of exploitation of buyers of the goods by the sellers.
D)examples of arbitrage.

Question 33

In a perfectly competitive market, in the long run, arbitrage profits will be bid away.

Question 34

The collection and analysis of massive amounts of data, with the goal of measuring aspects of people's behavior is referred to as

A)marginal utility.
B)big data.
C)mega processing.
D)the Internet of Things.

Question 35

Today, Walt Disney World charges different customers different prices for admission, even though the differences in prices are not due to differences in costs.This pricing strategy is called

A)arbitrage.
B)odd pricing.
C)cost-price pricing.
D)price discrimination.

Question 36

The act of buying a product at a low price in one market and reselling the product at a higher price in another market is called arbitrage.

Question 37

The law of one price holds exactly only if there are transactions costs associated with buying a product in one location and selling it in another location.

Question 38

Differentiating products to suit customers' tastes is a form of price discrimination.

Question 39

Many firms use technology to gather information on the preferences of consumers and their responses to changes in prices.This information is then used to adjust prices of the firms' goods and services.This practice is called

A)price discovery.
B)empirical research.
C)yield management.
D)econometrics.

Question 40

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services are called

A)exchange costs.
B)implicit costs.
C)transactions costs.
D)selling costs.

Question 41

Consider the following actions undertaken by a firm:
A.charging a higher price for products of higher quality
B.charging different prices to different consumers for the same product when the variation cannot be explained by cost differences
C.charging different prices for products of different qualities
D.charging a lower price to match a competitor's price
Which of the above will be considered price discrimination?

A)a, b, c, and d
B)a, b, and d only
C)b and d only
D)b only

Question 42

Entrepreneurs who earn arbitrage profits are able to do so by extracting the total consumer surplus from buyers.

Question 43

The following table contains the actual prices charged by four Web sites for the PlayStation 4 game Horizon Zero Dawn in October 2017.

Explain whether the information in this table contradicts the law of one price.

Question 44

Successful price discrimination cannot take place if

A)the market is perfectly competitive.
B)the market can be segmented into different buyer groups.
C)customers are not able to resell the product.
D)the demand curve facing the firm is downward sloping.

Question 45

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

A)Toot Sweets engages in price discrimination; a higher price for those who cannot wait and a lower price for those willing to wait until 4 pm.
B)Toot Sweets is trying to prevent the opportunity to make arbitrage profit.
C)Toot Sweets is not engaging in price discrimination because the product could be resold by customers.
D)Toot Sweets has underestimated the demand for its muffins.

Question 46

Which of the following products allows the seller to identify different groups of consumers (segment the market)at virtually no cost?

A)early bird dinner specials
B)books sold online
C)a pair of Bose speakers
D)iPhones

Question 47

Which of the following are necessary conditions for successful price discrimination?
A.zero transactions costs
B.a perfectly competitive market structure
C.an imperfectly competitive market structure
D.at least two different markets with different price elasticities of demand
E.at least two different markets with different price elasticities of supply

A)a, b, and d only
B)c and d only
C)a, c, d, and e only
D)a and c only

Question 48

Most movie theatres charge different prices to different groups of customers for movie admission but not on movie popcorn.Which of the following is a reason for this?

A)because the markup on movie popcorn is very high and movie theatres do not want to forgo this source of revenue
B)because the demand for popcorn is very high relative to the demand for movie admissions
C)because it is easier to limit resale in movie admissions but not in popcorn
D)because the cost of operating a concession stand in a movie theatre is very high compared to the cost of showing a movie

Question 49

Under what circumstances will the law of one price hold, and when might it not hold?

Question 50

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

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

Question 51

Are sellers who practice arbitrage taking advantage of buyers?

Question 52

The following table contains the actual prices charged by four Web sites for the 5-disc set of Finding Nemo in October 2017.

Explain whether the information in this table contradicts the law of one price.

Question 53

Which of the following is not a way by which price-discriminating firms can segment a market?

A)on the basis of time of purchase, for example long-distance calling
B)by requiring an advance purchase, for example airline tickets
C)on basis of the buyer's location, for example requiring out-of-state students to pay higher tuition
D)on the basis of the supplier's marginal cost of production, for example requiring customers to pay a premium for customizing options

Question 54

If a firm charges different consumers different prices for the same product and the difference cannot be attributed to cost variations, then it is engaging in

A)odd pricing.
B)cost-plus pricing.
C)price discrimination.
D)markup pricing.

Question 55

Dell Computers allows potential consumers to customize personal computers to their desires.Dell's strategy is successful because offering bundles that more exactly meet a consumer's preference allows Dell to extract more consumer surplus.

Question 56

Charging different prices to different consumers for the same product when the price differences are not due to differences in cost is called arbitrage.

Question 57

What is meant by the "law of one price"? In discussing the law of demand, Hubbard and O'Brien claim there has been only one example found of an exception to the law (that is, evidence of an upward-sloping demand curve).Are there exceptions to the law of one price?

Question 58

Firms price discriminate

A)to reduce the quantity sold so as to reduce production costs.
B)to increase profits.
C)to take advantage of customers.
D)to increase total economic surplus.

Question 59

"Buy low and sell high is advice given to people who want to make a profit by buying and selling shares of stock.Arbitrage is defined as buying a product in one market at a low price and reselling it in another market at a high price.Therefore, when stock brokers buy and sell stocks to earn a profit they are engaging in arbitrage." Evaluate this statement; state whether it is true or false and explain your answer.

Question 60

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

A)The seller must possess market power.
B)The buyer must possess market power.
C)Transactions costs must be zero.
D)Buyers must have identical inelastic demands.

Question 61

An article on how hotel prices rose during the solar eclipse on August 21, 2017 noted that in Hopkinsville, Kentucky: "At the local La Quinta Inn & Suites, prices are $425 a night, up from a $93 average on Google for the weekend before."
Source: David Gernon, "Once-in-a-lifetime solar eclipse is a bonanza for hotels, airlines," cnbc.com, July 27, 2017.
Which of the following statements is true?

A)The La Quinta Inn & Suites is practicing first-degree price discrimination by charging what the market will bear.
B)This is evidence of third-degree price discrimination because hotel accommodation on a particular day is not a product that can be resold later.
C)There is no evidence of price discrimination; the La Quinta Inn & Suites is responding to increased demand for hotel rooms in the face of constant supply.
D)The La Quinta Inn & Suites has adopted this pricing strategy to capitalize on arbitrage profits.

Question 62

A firm that can effectively price discriminate will charge a higher price to

A)customers who have the more elastic demand for the product.
B)customers who have the more inelastic demand for the product.
C)buyers who belong to the largest market segment.
D)buyers who are members of the smallest market segment.

Question 63

For a firm that can effectively price discriminate, who will be charged a lower price?

A)customers who have an elastic demand for the product
B)customers who have an inelastic demand for the product
C)buyers that are members of the largest market segment
D)buyers that are members of the smallest market segment

Question 64

If a firm could practice perfect price discrimination, it would

A)allow resale of its product.
B)charge every buyer a different price.
C)charge a price based on the quantity of a product bought.
D)use odd pricing.

Question 65

From an economic perspective, price discrimination is desirable because

A)the increase in profits is more than offset by the loss in consumer surplus, resulting in a net increase in economic surplus.
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 results in higher corporate tax revenues received by the government which could be used to subsidize consumption for low-income individuals.
D)it redistributes wealth from wealthy consumers to highly innovative firms.

Question 66

Movie theaters often charge higher ticket prices for evening showings than for afternoon showings.Why is this the case?

A)Movie theaters hope to discourage customers from seeing movies during the afternoon to keep their labor costs down.
B)The cost of showing movies is higher during the afternoon than in the evening.
C)Movie theaters know that many people are willing to pay more to see a movie in the evening than during the afternoon.
D)Movie theaters have more physical space to show movies during the afternoon than they do during the evening, so the excess supply of available theaters dictates that prices be lower.

Question 67

Which of the following is a reason why airline yield management is an effective method to increase revenue?

A)because airlines have invested heavily in developing computer models that identify optimal pricing strategies in the various market segments
B)because airlines have successfully induced customers to reveal their resources and preferences by offering them different versions of the product such as business class and coach plane tickets
C)because a ticket is a contract to transport a specific person, and is not transferable
D)because airlines have a monopoly in long-distance carriage

Question 68

The Bay Area subway system, BART, offers senior citizens discounted fares for BART rides.This suggests that BART authorities believe that senior citizens have a ________ demand for subway rides.

A)more income elastic
B)less income elastic
C)more price elastic
D)less price elastic

Question 69

Table 16-2

Neem Products sells its Ayurvedic Neem toothpaste in two completely isolated markets with demand schedules as shown in Table 16-2. The average cost of production is constant at $2 per tube.
Refer to Table 16-2.Which of the following statements is true about the two markets?

A)The demand in Middle Fall is more price elastic than the demand in West Fall.
B)The demand in Middle Fall is less price elastic than the demand in West Fall.
C)The demand in Middle Fall is more income elastic than the demand in West Fall.
D)The demand in Middle Fall is less income elastic than the demand in West Fall.

Question 70

Which of the following firms is not able to practice price discrimination?

A)movie theaters
B)commercial airlines
C)land-line telephone companies
D)the largest wheat farmer in Nebraska

Question 71

Table 16-2

Neem Products sells its Ayurvedic Neem toothpaste in two completely isolated markets with demand schedules as shown in Table 16-2. The average cost of production is constant at $2 per tube.
Refer to Table 16-2.How many tubes of toothpaste will Neem sell in Middle Fall and at what price?

A)Q = 2 units; P = $7
B)Q = 3 units; P = $6
C)Q = 4 units; P = $5
D)Q = 5 units; P = $4

Question 72

Table 16-2

Neem Products sells its Ayurvedic Neem toothpaste in two completely isolated markets with demand schedules as shown in Table 16-2. The average cost of production is constant at $2 per tube.
Refer to Table 16-2.What are the total profits from both markets combined?

A)$50
B)$48
C)$18
D)$15

Question 73

Which of the following does not arise from price discrimination?

A)an increase in producer surplus
B)an increase in consumer surplus
C)an increase in quantity sold
D)an increase in profits

Question 74

Table 16-2

Neem Products sells its Ayurvedic Neem toothpaste in two completely isolated markets with demand schedules as shown in Table 16-2. The average cost of production is constant at $2 per tube.
Refer to Table 16-2.What is the total revenue received from both markets combined?

A)$30
B)$34
C)$68
D)$70

Question 75

When firms use big data to determine how responsive different groups of customers are to changes in prices, the firms are engaging in price discrimination.This pricing strategy is also called all of the following except

A)arbitrage pricing.
B)price optimization.
C)dynamic pricing.
D)yield management.

Question 76

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

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

Question 77

With perfect price discrimination there is

A)no deadweight loss.
B)no producer surplus.
C)one single price.
D)an increase in consumer surplus.

Question 78

Table 16-2

Neem Products sells its Ayurvedic Neem toothpaste in two completely isolated markets with demand schedules as shown in Table 16-2. The average cost of production is constant at $2 per tube.
Refer to Table 16-2.How many tubes of toothpaste will Neem sell in West Fall and at what price?

A)Q = 2 units; P = $4.50
B)Q = 3 units; P = $4
C)Q = 4 units; P = $3.50
D)Q = 5 units; P = $3

Question 79

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

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

Question 80

Price discrimination is possible in which of the following market structures?
A.perfect competition
B.monopoly
C.oligopoly
D.monopolistic competition

A)a, b, c, and d
B)c and d only
C)b and c only
D)b, c, and d only