Question 1

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?

Accepted Answer

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. B

Question 2

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

Question 3

Which of the following is not an advantage of cost-plus pricing?

Accepted Answer

A)   It is easy to calculate.
B)   It requires little information.
C)   If a firm is selling multiple products, it ensures that the firm's prices will cover costs that are difficult to assign to one product.
D)   It ensures that the firm will maximize its profits. D

Question 4

Figure 16-7  The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-Refer to Figure 16-7. The owners of the Lizard Lounge are considering the following four pricing options: 
a. A single price scheme where the cocktail price equals the monopoly price.
b. A single price scheme where the cocktail price equals the competitive price.
c. A two-part tariff: a monopoly cocktail price and a cover charge that will generate total revenue equal to the area X.
d. A two-part tariff: a competitive cocktail price and whatever cover charge that will generate a total revenue equivalent to the area X + Y + Z.
Which pricing scheme(s) achieve the economically efficient outcome?

Accepted Answer

A)   schemes a and c
B)   scheme b
C)   schemes b and d
D)   scheme d only

Question 5

Perfect price discrimination will lead a firm to produce up to the point where price equals marginal cost, the efficient level of output.

Accepted Answer

A) True 
 B)False

Question 6

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.

Question 7

Firms price discriminate

Accepted Answer

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 8

Why is it necessary for a firm that practices price discrimination be a price maker rather than a price taker?

Accepted Answer

The answer of Why is it necessary for a firm...

Question 9

Suppose Dublin Electronics charges regular customers $60 for a Blu-ray player but allows senior citizens to purchase the same item for $45. Is this likely to be a successful price discriminating strategy?

Accepted Answer

A)   Yes, firms price discriminate to maximize profits.
B)   No, price discrimination will not be effective because the store cannot prevent senior citizens from buying large quantities of Blu-ray players and reselling them for a profit.
C)   Yes, because senior citizens are likely to have a more elastic demand and therefore will be willing to pay a lower price compared to regular customers.
D)   No, because there are many different brands of Blu-ray players and consumers will shop around.

Question 10

Consider three pricing strategies that the firm can pursue: 
a. optimal two-part tariff pricing
b. perfect price discrimination
c. single-price monopoly pricing
Of these three strategies, which is most beneficial to society as a whole?

Accepted Answer

A)   Both perfect price discrimination and a two-part tariff pricing are equally beneficial in that the marginal benefit of the last unit sold equals the marginal cost of producing that unit.
B)   only perfect price discrimination because this pricing method eliminates deadweight loss
C)   single-price monopoly pricing because consumers enjoy at least some consumer surplus
D)   only two-part tariff pricing because the per-unit portion of the price is set equal to marginal cost

Question 11

Which of the following statements about perfect price discrimination is false?

Accepted Answer

A)   There is no consumer surplus if a firm engages in perfect price discrimination.
B)   Perfect price discrimination occurs when the seller charges the highest price each consumer would be willing to pay for the product.
C)   A condition for perfect price discrimination is that it must be costlier to service some customers than others.
D)   For the price-discriminating firm, its marginal revenue curve coincides with its demand curve.

Question 12

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 quantity it should produce?

Accepted Answer

A)   240 units
B)   320 units
C)   480 units
D)   560 units

Question 13

Are sellers who practice arbitrage taking advantage of buyers?

Accepted Answer

The answer of Are sellers who practice arbitrage taking advantage...

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

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

Question 16

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

Accepted Answer

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 17

What is perfect price discrimination and why do economists believe that no firm is able to practice perfect price discrimination?

Accepted Answer

The answer of What is perfect price discrimination and why...

Question 18

The law of one price holds exactly only if

Accepted Answer

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 19

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

Question 20

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

Accepted Answer

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

Exam 16: Pricing Strategy