Microeconomics - Testbank 1 (Hubbard/O'Brien)
Chapter 15 Pricing Strategy
1) If a firm charges different consumers different prices for the same good or service, it is
engaging in:
A) odd pricing.
B) cost-plus pricing.
C) price discrimination.
D) markup pricing.
2) If a firm charges a membership fee to gain admission to a store and then charges members for
every item they buy, it is engaging in:
A) odd pricing.
B) cost-plus pricing.
C) price discrimination.
D) a two-part tariff.
3) The development of information technology over the last twenty years has enabled firms to:
A) gather information on customers' preferences.
B) estimate buyers' elasticity of demand.
C) rapidly adjust prices to increase profits.
D) all of the above.
4) A limit to firms charging different prices to different customers is:
A) federal antitrust laws which prohibit excessive price discrimination.
B) customer resentment about being taken in by price discrimination.
C) low price buyers reselling the good to high price buyers.
D) low price buyers switching to substitutes.
5) The law of one price is:
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.
6) 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.
7) If your local national food store buys oranges at a low price in Florida and resells them to you
at a higher price, then the food store's revenue minus costs is known as:
A) arbitrage profits.
B) transactions profits.
C) pure profits.
D) excess profits.
8) 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 all, of the price differences.
9) 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.
10) 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.
11) A necessary condition for successful price discrimination is:
A) no transactions costs.
B) differences in the elasticities of demand for the product by different customer groups.
C) selling in a perfectly competitive market.
D) buyer ignorance.
12) A necessary condition for successful price discrimination is:
A) the firm must possess market power.
B) buyers are allowed to resell the product.
C) zero transactions costs.
D) identical inelastic demand by all buyers.
13) A necessary condition for successful price discrimination is:
A) perfect competition.
B) a market that can be segmented into different buyer groups.
C) customers being able to resell the product.
D) perfectly elastic demand.
14) A type of market structure that price discrimination is NOT found in is:
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
15) The necessary condition for successful price discrimination that can be the most difficult one
to fulfill is:
A) the firm having market power.
B) stopping resale of the product from one buyer segment to another.
C) buyers having different elasticities of demand for the product.
D) seller being able to segment the total market.
16) Among the types of firms who are able to practice price discrimination are:
A) movie theaters.
B) airlines.
C) land-line telephone companies.
D) all of the above.
17) The type of firms that are able to practice price discrimination are:
A) only perfectly competitive firms.
B) firms that cannot accurately determine their customers' elasticity of demand for the
product.
C) firms that can keep consumers from reselling a product.
D) firms with perfectly elastic demands.
18) A firm that can effectively price discriminate, will charge a higher price from the:
A) customers who have the relatively elastic demand for the product.
B) customers who have the relatively inelastic demand for the product.
C) buyers who belong to the largest market segment.
D) buyers that are members of the smallest market segment.
19) For a firm that can effectively price discriminate, who will be charged the 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
20) Airlines that have used computer economic models to determine a price each day for each
seat are using:
A) profit maximization.
B) odd pricing.
C) two-part tariff.
D) yield management.
21) Yield management and price discrimination have enabled many 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) increase total surplus.
22) 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.
23) With perfect price discrimination there is:
A) no deadweight loss.
B) no producer surplus.
C) one single price.
D) an increase in consumer surplus.
24) Among the results of price discrimination is:
A) larger profits
B) smaller consumer surplus
C) a larger output.
D) all of the above.
25) Some high technology products like DVD players, electronic calculators, digital cameras, are
introduced at a very high price but soon the market price starts falling because:
A) production costs rises as output rises.
B) early buyers of a new product have a very inelastic demand while later buyers have a
more elastic demand.
C) demand for high-tech products is very irratic.
D) of sunk costs.
26) Odd pricing would be:
A) selling gasoline for $1.359 a gallon rather than $1.36 a gallon.
B) when the price of a good ends with something other than zero.
C) setting a price just below $50 like $49.95.
D) all of the above.
27) Odd pricing in the United States resulted from:
A) converting British goods from pounds to dollars.
B) guarding against employee theft.
C) odd priced goods being associated with high quality goods.
D) all of the above.
28) Odd pricing continues today because:
A) sellers 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.
29) Firms use cost-plus because:
A) it leads to profit maximization.
B) the percentage markup is intended to cover all costs including those in a multi-product
firm that are difficult to allocate to a particular good.
C) it is necessary for price discrimination.
D) all of the above.
30) Cost-plus pricing is an ok way to determine the optimal price:
A) when marginal and average cost are roughly equal.
B) when fixed costs are high.
C) when fixed costs vary.
D) when marginal costs are very different from average costs.
31) If demand is taken into account, firms that use cost-plus pricing can adjust price by:
A) lowering markups on price elastic goods and raising markups on price inelastic goods.
B) letting sales fall but hold the markup constant, if demand falls.
C) raising markups on price elastic goods and lowering markups on price inelastic goods.
D) letting sales rise but hold the markup constant, if demand rises.
32) Evidence that competition and demand affect firms that use cost-plus pricing includes:
A) when competition is strong, auto makers will offer rebates.
B) supermarkets use lower markups on price elastic goods.
C) supermarkets use higher markups on price inelastic goods.
D) all of the above.
33) A two-part tariff is:
A) when a firm charges only two different prices for the same good.
B) when an importer has to pay a tax at the nation's borders, then a sales tax when the
good is sold.
C) when a buyer pays an initial price for entrance to the market and an additional fee for
each unit of the product purchased.
D) when a buyer must pay a down payment and monthly payments to buy a product like a
car.
34) Compared to monopoly pricing, an optimal two-part tariff:
A) reduces economic efficiency.
B) eliminates the deadweight loss.
C) equates marginal revenue and average revenue.
D) increases consumer surplus.
35) A firm using a two-part tariff faces a tradeoff because:
A) the only way to increase the first part price is to lower the second part price.
B) profits decrease when this pricing scheme is used.
C) consumer surplus increases while producer surplus decreases.
D) buyers may shun the firm's products because they do not understand the pricing.
36) With an optimal two-part tariff:
A) consumer surplus equals producer surplus.
B) all consumer surplus is transformed into profit.
C) the firm earns a breakeven level of revenue.
D) the firm earns a profit.
37) Price discrimination:
A) turns some consumer surplus into producer surplus.
B) is a method to increase profits.
C) leads to a larger level of output than a one price monopoly would produce.
D) all of the above.
Refer to Figure 15.1 for the questions below.
Figure 15.1
38) In figure 15.1 with perfect price discrimination, the firm will charge:
A) P1.
B) P2.
C) P3.
D) all of the above.
39) In figure 15.1 with perfect price discrimination, consumer surplus is:
A) the entire area under the demand curve.
B) the area between the demand curve and the marginal cost curve.
C) the area under the average total cost curve.
D) zero.
40) A firm's efforts to increase profit by price discrimination can be undermined by:
A) arbitrage by buyers.
B) consumer ignorance.
C) differences in elasticity of demand.
D) seller market power.
41) If, at the firm's projected sales level, marginal cost is $40, average cost is $50 and the markup
is 30 percent, then it's selling price is:
A) $40.
B) $65.
C) $50.
D) $52.
42) If the firm's selling price is $200 and the projected sales amount of average cost is $150, then
the firm's markup is:
A) 75 percent.
B) 33.33 percent.
C) 25 percent.
D) impossible to determine with the information given.