Question 1

Cost-plus pricing is a reasonable way to determine the optimal price when

Accepted Answer

A) marginal cost and average cost are roughly equal. 
B) fixed cost and variable costs are roughly equal. 
C) fixed costs vary. 
D) fixed costs are high. 
A) marginal cost and average cost are roughly equal. 
B) fixed cost and variable costs are roughly equal. 
C) fixed costs vary. 
D) fixed costs are high.

Question 2

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 decides to charge each customer according to his or her willingness to pay.What is the value of consumer surplus by her customers?

Accepted Answer

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

Question 3

Your text refers to airlines as "The Kings of Price Discrimination." Why is price discrimination common in the airline industry?

Accepted Answer

When airlines fly with empty seats, they

Question 4

If marginal cost is zero, with an optimal two-part tariff

Accepted Answer

A) total revenue is maximized. 
B) consumers maximize their surplus 
C) the firm does not have to charge a fixed-fee portion. 
D) firms may not maximize profit. 
A) total revenue is maximized. 
B) consumers maximize their surplus 
C) the firm does not have to charge a fixed-fee portion. 
D) firms may not maximize profit.

Question 5

The law of one price states

Accepted Answer

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. 
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.

Question 6

Figure 16-2
   
Plato Playhouse, a theatre company in the university town of Wegg, caters to two groups of customers:
students and the non-student population.
Figure 16-2 shows the demand curves for the two groups of customers.
-Refer to Figure 16-2.Suppose Plato Playhouse price discriminates.Which of the following statements is true?

Accepted Answer

A) 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. 
B) By charging two different prices, the theatre company essentially allows those willing to pay higher prices to subsidize those who are not. 
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) Plato 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. 
A) 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. 
B) By charging two different prices, the theatre company essentially allows those willing to pay higher prices to subsidize those who are not. 
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) Plato 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 7

Economists believe that cost-plus pricing may be the best way for a firm to determine its optimal product price when the firm's marginal cost and average cost are about the same and when it is difficult to estimate the product's demand curve.

Accepted Answer

A) True 
 B)False

Question 8

Movie theaters often charge different people different prices for admission.Why don't theaters charge different prices for popcorn and other food items?

Accepted Answer

A) Although the elasticity of demand for admission differs among customers, most people have the same the elasticity of demand for food items. 
B) Concession stand personnel are too busy to ensure that different people pay different prices for food items. 
C) Once people are in the theater, concession stands have monopoly power and can charge everyone the same high prices for food. 
D) It is difficult to limit the resale of food items from those who pay low prices to those who would have to pay high prices from the concession stand. 
A) Although the elasticity of demand for admission differs among customers, most people have the same the elasticity of demand for food items. 
B) Concession stand personnel are too busy to ensure that different people pay different prices for food items. 
C) Once people are in the theater, concession stands have monopoly power and can charge everyone the same high prices for food. 
D) It is difficult to limit the resale of food items from those who pay low prices to those who would have to pay high prices from the concession stand.

Question 9

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.

Accepted Answer

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

Question 10

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 decides to charge each customer according to his or her willingness to pay.What is Julie's total revenue and how many hours of service will be purchased?

Accepted Answer

A) 4 hours and her total revenue = $39 
B) 4 hours and her total revenue = $28 
C) 1 hour and her total revenue = $7 
D) 5 hours and her total revenue = $35 
A) 4 hours and her total revenue = $39 
B) 4 hours and her total revenue = $28 
C) 1 hour and her total revenue = $7 
D) 5 hours and her total revenue = $35

Question 11

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?

Accepted Answer

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. 
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 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 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 13

Though large firms have the knowledge and resources to utilize a better pricing strategy, many choose to use cost-plus pricing.One reason for this is that

Accepted Answer

A) large firms do not have to maximize their profits because they face little competition from other firms. 
B) there is less risk of violating antitrust laws if a cost-plus pricing strategy is used rather than a profit-maximizing pricing strategy. 
C) the additional revenue that would result from a profit-maximizing pricing strategy is an insignificant fraction of the firms' revenues. 
D) firms often adjust the markup they charge to reflect current demand. 
A) large firms do not have to maximize their profits because they face little competition from other firms. 
B) there is less risk of violating antitrust laws if a cost-plus pricing strategy is used rather than a profit-maximizing pricing strategy. 
C) the additional revenue that would result from a profit-maximizing pricing strategy is an insignificant fraction of the firms' revenues. 
D) firms often adjust the markup they charge to reflect current demand.

Question 14

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 value of the consumer surplus from this pricing strategy?

Accepted Answer

A) $2,560 
B) $5,760 
C) $7,870 
D) 0 
A) $2,560 
B) $5,760 
C) $7,870 
D) 0

Question 15

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

Accepted Answer

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 
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 16

Figure 16-1
  
-Refer to Figure 16-1.What is the price charged under perfect price discrimination?

Accepted Answer

A) P₃ 
B) P₄ 
C) a range of prices corresponding to the demand curve from P₃ and above 
D) a range of prices corresponding to the demand curve from P₄ and above 
A) P₃ 
B) P₄ 
C) a range of prices corresponding to the demand curve from P₃ and above 
D) a range of prices corresponding to the demand curve from P₄ and above

Question 17

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

Accepted Answer

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

Question 18

Figure 16-1
  
-Refer to Figure 16-1.What is the economically efficient output level?

Accepted Answer

A) Q₁ units 
B) Q₂ units 
C) Q₃ units 
D) Q₄ units 
A) Q₁ units 
B) Q₂ units 
C) Q₃ units 
D) Q₄ units

Question 19

According to the law of one price,

Accepted Answer

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. 
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 20

Arbitrage

Accepted Answer

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. 
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.

Cost-plus pricing is a reasonable way to determine the optimal price when

Your text refers to airlines as "The Kings of Price Discrimination." Why is price discrimination common in the airline industry?

If marginal cost is zero, with an optimal two-part tariff

The law of one price states

Economists believe that cost-plus pricing may be the best way for a firm to determine its optimal product price when the firm's marginal cost and average cost are about the same and when it is difficult to estimate the product's demand curve.

Movie theaters often charge different people different prices for admission.Why don't theaters charge different prices for popcorn and other food items?

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.

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?

Though large firms have the knowledge and resources to utilize a better pricing strategy, many choose to use cost-plus pricing.One reason for this is that

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

Figure 16-1 -Refer to Figure 16-1.What is the price charged under perfect price discrimination?

Figure 16-1 -Refer to Figure 16-1.What is the economically efficient output level?

According to the law of one price,

Arbitrage

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

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

Filters

Exam 16: Pricing Strategy

Cost-plus pricing is a reasonable way to determine the optimal price when

Your text refers to airlines as "The Kings of Price Discrimination." Why is price discrimination common in the airline industry?

If marginal cost is zero, with an optimal two-part tariff

The law of one price states

Economists believe that cost-plus pricing may be the best way for a firm to determine its optimal product price when the firm's marginal cost and average cost are about the same and when it is difficult to estimate the product's demand curve.

Movie theaters often charge different people different prices for admission.Why don't theaters charge different prices for popcorn and other food items?

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.

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?

Though large firms have the knowledge and resources to utilize a better pricing strategy, many choose to use cost-plus pricing.One reason for this is that

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

Figure 16-1 -Refer to Figure 16-1.What is the price charged under perfect price discrimination?

Figure 16-1 -Refer to Figure 16-1.What is the economically efficient output level?

According to the law of one price,

Arbitrage

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

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

Filters