Question 1

If, at the firm's projected sales level, the marginal cost is $40, the average cost is $50 and the markup is 30 percent, then its selling price is

Accepted Answer

A)  $40. 
B)  $50. 
C)  $52. 
D)  $65. 
A)  $40. 
B)  $50. 
C)  $52. 
D)  $65.

Question 2

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

Accepted Answer

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 
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 3

Price discrimination is a rational strategy for a profit-maximizing firm when

Accepted Answer

A)  it is possible to engage in arbitrage across market segments. 
B)  it is not possible to segment consumers into identifiable markets. 
C)  there is no opportunity for arbitrage across market segments. 
D)  firms want to increase the amount of consumer surplus received by its customers. 
A)  it is possible to engage in arbitrage across market segments. 
B)  it is not possible to segment consumers into identifiable markets. 
C)  there is no opportunity for arbitrage across market segments. 
D)  firms want to increase the amount of consumer surplus received by its customers.

Question 4

Which of the following pricing strategies allows a firm to earn economic profit?

Accepted Answer

A)  price discrimination 
B)  charging a price equal to marginal cost 
C)  charging a price equal to the average total cost of production 
D)  charging a price equal to the average variable cost of production 
A)  price discrimination 
B)  charging a price equal to marginal cost 
C)  charging a price equal to the average total cost of production 
D)  charging a price equal to the average variable cost of production

Question 5

If the selling price of a firm's product is $500 and the estimated average cost of producing this product is $400, what is the firm's markup?

Accepted Answer

A)  15 percent 
B)  20 percent 
C)  25 percent 
D)  40 percent 
A)  15 percent 
B)  20 percent 
C)  25 percent 
D)  40 percent

Question 6

The Walt Disney Company is in a position to use a two-part tariff by charging for admission and also charging for rides inside its two theme parks, Disneyland and Disney World. Which of the following statements regarding Disney's pricing strategy is true?

Accepted Answer

A)  At one time, admission fees were charged at both parks but all rides were free. Disney has since changed its pricing policy; it earns higher profits by charging for both admission and rides. 
B)  At one time, customers had to pay for admission and rides at Disneyland and Disney World. Disney has since changed its pricing policy; it earns higher profits by charging for admission but not for rides. 
C)  At one time, customers had to pay for admission and rides at Disneyland and Disney World. Disney has since changed its pricing policy; it earns higher profits by charging for rides but not for admission. 
D)  At one time, fees for admission and rides at both parks were set at their profit-maximizing levels. Disney has since changed its pricing policy; it uses a cost-plus pricing strategy for admission and does not charge for rides. 
A)  At one time, admission fees were charged at both parks but all rides were free. Disney has since changed its pricing policy; it earns higher profits by charging for both admission and rides. 
B)  At one time, customers had to pay for admission and rides at Disneyland and Disney World. Disney has since changed its pricing policy; it earns higher profits by charging for admission but not for rides. 
C)  At one time, customers had to pay for admission and rides at Disneyland and Disney World. Disney has since changed its pricing policy; it earns higher profits by charging for rides but not for admission. 
D)  At one time, fees for admission and rides at both parks were set at their profit-maximizing levels. Disney has since changed its pricing policy; it uses a cost-plus pricing strategy for admission and does not charge for rides.

Question 7

Table 16-3
   Julie plans to start a pet-sitting service. She surveyed her neighborhood to determine the demand for this service. Assume that each person surveyed demands only one hour of pet sitting services per period. Table 16-3 above shows a portion of her survey results.
-Refer to Table 16-3. Suppose Julie's marginal cost of providing this service is constant at $7 and she charges $7. What is the value of the consumer surplus enjoyed by her customers?

Accepted Answer

A)  $39 
B)  $28 
C)  $11 
D)  $0 
A)  $39 
B)  $28 
C)  $11 
D)  $0

Question 8

Figure 16-6   Watanabe Sensei operates the only martial arts school in Hartfield. For simplicity, assume that consumers have identical demand curves and that Sensei knows what this demand curve is. Figure 16-6 shows this demand curve.
-Refer to Figure 16-6. If Sensei acts as a single-price monopolist and charges the profit-maximizing price, what is the consumer surplus received by his customers?

Accepted Answer

A)  the area A + B + C + D 
B)  the area A + B + C + D + E 
C)  the area A + B 
D)  the area A + C + H 
A)  the area A + B + C + D 
B)  the area A + B + C + D + E 
C)  the area A + B 
D)  the area A + C + H

Question 9

What is odd pricing? Why do some merchants use odd pricing?

Accepted Answer

Odd pricing is the practice of charging

Question 10

Which of the following products allows the seller to identify different groups of consumers (segment the market) and practice price discrimination?

Accepted Answer

A)  clothing items sold through Macy's Department Store 
B)  a hamburger sold at Burger King 
C)  a cafe latte sold at Starbucks 
D)  tickets to matinee shows at a movie theatre 
A)  clothing items sold through Macy's Department Store 
B)  a hamburger sold at Burger King 
C)  a cafe latte sold at Starbucks 
D)  tickets to matinee shows at a movie theatre

Question 11

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

Accepted Answer

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. 
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 12

Figure 16-6   Watanabe Sensei operates the only martial arts school in Hartfield. For simplicity, assume that consumers have identical demand curves and that Sensei knows what this demand curve is. Figure 16-6 shows this demand curve.
-Refer to Figure 16-6. If Sensei charges the competitive price for his classes, what is the maximum amount of admission fee that he can collect from his customers?

Accepted Answer

A)  the area A + B 
B)  the area A + B + C + D 
C)  the area A + B + C + D + E 
D)  the area A + C + D + G + H 
A)  the area A + B 
B)  the area A + B + C + D 
C)  the area A + B + C + D + E 
D)  the area A + C + D + G + H

Question 13

Figure 16-5  
-Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the monopoly price. (This is also called a two-part tariff.) What is the revenue collected from the fixed fee portion of the price?

Accepted Answer

A)  $10,240 
B)  $7,870 
C)  $2,560 
D)  $1,440 
A)  $10,240 
B)  $7,870 
C)  $2,560 
D)  $1,440

Question 14

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

Accepted Answer

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. 
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 15

Most supermarkets charge the same price for the majority of goods sold. This suggest that

Accepted Answer

A)  the government regulates prices of most products sold in supermarkets. 
B)  supermarkets have colluded to fix prices on most of the goods sold. 
C)  mark-ups reflect the degree of competition in the supermarket industry. 
D)  the large supermarket chains are price leaders and smaller grocers take these prices as given. 
A)  the government regulates prices of most products sold in supermarkets. 
B)  supermarkets have colluded to fix prices on most of the goods sold. 
C)  mark-ups reflect the degree of competition in the supermarket industry. 
D)  the large supermarket chains are price leaders and smaller grocers take these prices as given.

Question 16

Figure 16-5  
-Refer to Figure 16-5. Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the competitive price. (This is also called an optimal two-part tariff.) What is the total revenue it can expect to collect from the fixed fee portion of the price?

Accepted Answer

A)  $2,560 
B)  $5,760 
C)  $7,870 
D)  $10,240 
A)  $2,560 
B)  $5,760 
C)  $7,870 
D)  $10,240

Question 17

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?

Accepted Answer

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

Question 18

Transactions costs refer to

Accepted Answer

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. 
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 19

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

Accepted Answer

A) True 
 B)False

Question 20

Figure 16-5  
-Refer to Figure 16-5. Suppose the firm represented in the diagram decides to practice perfect price discrimination. What is the total revenue collected by the firm?

Accepted Answer

A)  $6,720 
B)  $7,680 
C)  $10,240 
D)  $13,440 
A)  $6,720 
B)  $7,680 
C)  $10,240 
D)  $13,440

Exam 16: Pricing Strategy

If, at the firm's projected sales level, the marginal cost is $40, the average cost is $50 and the markup is 30 percent, then its selling price is

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

Price discrimination is a rational strategy for a profit-maximizing firm when

Which of the following pricing strategies allows a firm to earn economic profit?

If the selling price of a firm's product is $500 and the estimated average cost of producing this product is $400, what is the firm's markup?

The Walt Disney Company is in a position to use a two-part tariff by charging for admission and also charging for rides inside its two theme parks, Disneyland and Disney World. Which of the following statements regarding Disney's pricing strategy is true?

What is odd pricing? Why do some merchants use odd pricing?

Which of the following products allows the seller to identify different groups of consumers (segment the market) and practice price discrimination?

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

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

Most supermarkets charge the same price for the majority of goods sold. This suggest that

Transactions costs refer to

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

Figure 16-5 -Refer to Figure 16-5. Suppose the firm represented in the diagram decides to practice perfect price discrimination. What is the total revenue collected by the firm?

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

Filters