Question 1

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.

Question 2

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.

Question 3

If a firm knew every consumer's willingness to pay and could prevent arbitrage, it could charge every consumer a different price. This practice is known as

Accepted Answer

A)  first-degree exploitation, or perfect price discrimination. 
B)  maximization of producer surplus, or perfect price discrimination. 
C)  first-degree price discrimination, or perfect price discrimination. 
D)  first-degree transfer of consumer surplus, or perfect price discrimination.

Question 4

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

Accepted Answer

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

Question 5

Which of the following is not a requirement for a successful price discrimination strategy?

Accepted Answer

A)  A firm must have the ability to charge a price greater than marginal cost. 
B)  Some consumers must have a greater willingness to pay for the product than other consumers, and the firm must be able to know what prices consumers are willing to pay. 
C)  The firm must be able to prevent arbitrage. 
D)  Transactions costs must be the same for all consumers.

Question 6

Some firms require consumers to pay an initial fee for the right to buy their product and an additional fee for each unit of the product they purchase. This practice is referred to as

Accepted Answer

A)  odd pricing. 
B)  dual pricing. 
C)  a two-part tariff. 
D)  intertemporal pricing.

Question 7

Insurance companies typically charge women lower prices than men for automobile insurance. Is this an example of price discrimination?

Accepted Answer

A)  No, because, on average, women have better driving records than men and the costs of insuring men are greater than the costs of insuring women. 
B)  Yes, because the costs of selling insurance to men and women are the same. 
C)  Yes, because insurance companies can prevent arbitrage; that is, women cannot transfer their insurance coverage to men. 
D)  No, because there are too many insurance companies for any one company to have market power. A firm must possess market power in order to practice price discrimination.

Question 8

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?

Accepted Answer

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 9

Figure 16-1 
-Refer to Figure 16-1. What is the consumer surplus received under perfect price discrimination?

Accepted Answer

A)  the area under the demand curve above P1 
B)  the area under the demand curve above P3 
C)  the area under the demand curve above P4 
D)  zero

Question 10

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?

Accepted Answer

The answer of What is meant by the "law of...

Question 11

When a firm charges $4.95 instead of $5.00, what do economists call this pricing strategy?

Accepted Answer

A)  cost-plus pricing 
B)  indirect pricing 
C)  odd pricing 
D)  unusual pricing

Question 12

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 per hour. What is her marginal revenue?

Accepted Answer

A)  It is $7 for the first hour and starts declining thereafter. 
B)  It is $7 for the first hour and starts increasing thereafter. 
C)  It is constant at $7. 
D)  It coincides with the figures in the table; $12 for the first hour, $10 for the second, $9 for the third, and $8 for the fourth.

Question 13

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 method gives the firm the highest profit?

Accepted Answer

A)  optimal two-part tariff pricing 
B)  perfect price discrimination 
C)  single-price monopoly pricing 
D)  The profit is the same under optimal two-part tariff pricing and perfect price discrimination and the profit is higher than under single-price monopoly pricing.

Question 14

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

Accepted Answer

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

Question 15

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

Accepted Answer

The answer of Your text refers to airlines as "The...

Question 16

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.

Question 17

Some firms practice odd pricing because

Accepted Answer

A)  they believe that customers will buy a larger quantity with an odd price. 
B)  it is a way to price discriminate. 
C)  it is too difficult for sellers to reeducate buyers into accepting even prices. 
D)  it lowers transactions costs.

Question 18

The Walt Disney Company uses cost-plus pricing to determine the prices it charges for admission and rides at Disneyland and Walt Disney World.

Accepted Answer

A) True 
 B)False

Question 19

Book publishers use price discrimination routinely, but the form of price discrimination they use is different from the form used by airlines and other industries. Explain.

Accepted Answer

The answer of Book publishers use price discrimination routinely, but...

Question 20

Book publishers often use a cost-plus pricing strategy. One reason for this is

Accepted Answer

A)  most publishers do not hire economists who can determine the number of books they must sell to equate marginal cost and marginal revenue. 
B)  publishers do not want to incur the expense of determining the profit-maximizing strategy. They prefer cost-plus pricing because of its lower cost. 
C)  much of the cost of publishing textbooks is difficult to assign to any particular book. 
D)  bookstores, not publishers, ultimately determine how many books will be produced.

Exam 16: Pricing Strategy