3_Demand and Pricing

Question 1

What are the assumptions of demand?

Answer 1

• Market is competitive
• One good being traded
• Large number of sellers and buyers
• Goods are identical
• Everyone has perfect info about market

Question 2

___ claims that consumers plan their purchases, timing of purchases, borrow vs savings to maximize the satisfaction of the household with experience from the consumption to the G, S, and R.

Answer 2

Theory of the Consumer

Question 3

___ states that humans do behave rationally with a limited range of options.

Answer 3

Theory of a bounded rationality

Question 4

What are the 4 key determinants of demand?

Answer 4

1. Price
2. Advertising expenditure
3. Competition
4. Income

Question 5

___ estimated the consumption quantity for specific values.

Answer 5

Demand function

Question 6

___ is when a business finds itself with an excess of unused capacity or unable to serve the demand that follows; idle resources have an opportunity cost, but do not contribute to sales or revenue, especially when they spoil and cannot be used at a later time.

Answer 6

Excess capability

Question 7

___ occurs when assessing the elasticity of demand relative to change in the price of a good or service being consumed.

Answer 7

Own-price elasticity

Question 8

Cyclic goods are ___.

Answer 8

Elastic (luxury); >1

Question 9

Noncyclic goods are ___.

Answer 9

Unit-elastic; zero

Question 10

Countercyclic goods are ___.

Answer 10

Inelastic (necessity); <1

Question 11

___is an elasticity measuring the effect of an increase or decrease in advertising on a market; more or less effective at increasing sales.

Answer 11

Advertising elasticity

Question 12

___ is an attempt by a seller to leave the price unannounced in advance and charge each customer the highest price they would be willing to pay for the purchase. Typically, buyers and sellers negotiate a price.
I.e., when buying a new car or biding at an auction.

Answer 12

1st degree price discrimination

Question 13

___ occurs when businesses create an alternating pricing method that distinguishes high-volume buyers from low-volume buyers. Also two-part pricing.
I.e., coupons, buy 2 get 1 free or free wifi at a coffee shop when you buy a latte.

Answer 13

2nd degree price discrimination

Question 14

\_\_ is differential pricing to different groups of customers who are willing and able to pay a certain rate for a service.
I.e., business class vs economy

Answer 14

3rd degree price discrimination

Question 15

___ is the measurement of satisfaction.

Answer 15

Utility

Question 16

___ is the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

Answer 16

Law of Diminishing Marginal Utility

Question 17

___ is a rule that is used to maximize utility.

Answer 17

Rule for Utility Maximization

Question 18

___ shows that when prices go down, a consumer buys more of that good and still maximizes his utility; this leads to the law of demand; analyzed by substitution effect and income effect.

Answer 18

Utility Maximization

Question 19

___ is a curve that shows the combinations of consumption bundles that give the consumer the same utility.

Answer 19

Indifference curve

Question 20

What are the 5 properties of indifference curves?

Answer 20

1. Downward sloping
2. Higher ICs = higher utility
3. ICs never cross
4. ICs are bowed inward (down)
5. Marginal rate of substitution

Question 21

___ is the rate at which a consumer is willing to trade one good for another.

Answer 21

Marginal Rate of Substitution

Question 22

___ is the amount of income a consumer has available to spend on goods and services.

Answer 22

Budget Constraint

Question 23

___ measures by how much Qd for a product changes whenever income changes.

Answer 23

Income Elasticity of Demand

Question 24

___ is a firm’s method of pricing it’s product based on market characteristics.

Answer 24

Price Strategy

Question 25

___ refers to the practice of charging different prices to different customers for the same product.

Answer 25

Price discrimination

Question 26

Firms can only price discriminate when ___ and ___.

Answer 26

They have market power

Prevent resale and arbitrage

Question 27

___ is the practice of reselling a product at a price higher than it’s original selling price.

Answer 27

Arbitrage

Question 28

Requirements of ___ Price Discrimination: The firm must have market power and can prevent resale, customers have different demand curves, and the firm has complete information about every customer and can identify each one’s level of demand before purchase.
I.e., highest bidder at an auction

Answer 28

First degree (perfect)

Question 29

Requirements of ___ Price Discrimination: The firm has market power and can prevent resale, customers have different demand curves, and firms do not have complete information about every customer.
I.e., plane tickets and employee discounts

Answer 29

Third degree (segmented)

Question 30

Requirements of ___ Price Discrimination: Firms do not have perfect information on everyone and they cannot distinguish between various consumers.
I.e., coupons, buy 5 get one free (quantity discounts)

Answer 30

Second degree (indirect/Differential pricing)

Question 31

___ is the practice of charging lower per-unit price to customers who buy larger quantities.

Answer 31

Quantity discounts

Question 32

___ is when an incentive is consistent and best for all participants.

Answer 32

Incentive compatibility

Question 33

\_\_\_ is a pricing strategy in which a firm offers different product options designed to attract different types of consumers.
I.e., business class and economy class plane tickets

Answer 33

Versioning

Question 34

___ is a pricing strategy in which a firm sells two or more products together in a single price; used when firm has market power and can prevent resale.
I.e., cable and internet bundle

Answer 34

Bundling

Question 35

If an increase in income leads to a decrease in the demand for popcorn, then popcorn is

a. a normal good.
b. an inferior good.
c. a neutral good.
d. a necessity.

Answer 35

b. an inferior good.

Question 36

Tomas increased his consumption of potato chips when the price of pistachios increased. For Tomas, potato chips and pistachios are

a. both luxury goods.
b. substitutes in consumption.
c. both inferior goods.
d. complements in consumption.

Answer 36

b. substitutes in consumption.

Question 37

The price elasticity of demand for Stork ice cream is -4. Suppose you’re told that following a price increase, quantity demanded fell by 10 percent. What was the percentage change in price that brought about this change in quantity demanded?

a. 40 percent
b. 2.5 percent
c. 25 percent
d. 0.4 percent

Answer 37

b. 2.5 percent

.10/(4) = 0.025 = 2.5

Question 38

Consider the following pairs of items:

a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and pork
e. air-travel and weed killer

Which of the pairs listed will have a negative cross-price elasticity?

a. e only
b. a, b, and c only
c. c and d only
d. a and b only

Answer 38

d. a and b only

Negative price elasticity of demand = complements
Positive price elasticity of demand = substitutes

Question 39

If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for airline travel, then airline travel is

a. an inferior good.
b. a necessity.
c. a substitute for another good.
d. a luxury.

Answer 39

d. a luxury.

10/5 = 2 = elastic = luxury

Question 40

The demand for gasoline in the short run is

a. elastic because people can easily switch to public transportation.
b. perfectly inelastic because people have no choice but to buy gasoline.
c. inelastic because there are no good substitutes for gasoline.
d. unit-elastic because people tend to consume a stable amount of gasoline per period.

Answer 40

c. inelastic because there are no good substitutes for gasoline.

Inelastic = necessity
Elastic = luxury

Question 41

For a price discriminating airline, if the demand for business travelers were to expand, a proactive price discriminator would expand the number of seat assignments to business travelers and likely raise business traveler ticket prices.

a. True
b. It could be true or false
c. False
d. It is neither false nor true

Answer 41

a. True

Question 42

A restaurant in an isolated spot on the coast of Maine sells only complete meals at a fixed price (called prix fixe), with the opportunity to select à la carte choices. Which type of price discrimination is being practiced?

a. two part tariffs
b. first-degree price discrimination
c. universal access
d. bundling

Answer 42

d. bundling

Question 43

Selling tickets in the orchestra region of the Metropolitan Opera for $55 and selling tickets in the upper balcony for $28 to listen to Luciano Pavoratti describes which type of price discrimination?

a. third-degree price discrimination
b. This is not necessarily price discrimination
c. bundling
d. first-degree price discrimination

Answer 43

a. third-degree price discrimination

Question 44

If an economist says that firm practices price discrimination, that firm is:

a. Charging different prices for the same good or service.
b. Making great efforts to keep its costs as low as possible.
c. Producing two products, one with decreasing returns to scale and the other with increasing returns
d. Exploiting the poor.

Answer 44

a. Charging different prices for the same good or service.

Question 45

Vacation tours to Europe invariably package visits to disparate regions: cities, mountains, and the seaside. Bundling, a type of second degree price discrimination, is most profitable when:

a. the preference rankings of vacationers travelling together are negatively correlated.
b. a preference for cities is always higher than preferences for mountain vistas.
c. preference for the seaside is always higher than preferences for city excursions
d. preference rankings of vacationers traveling together are positively correlated.

Answer 45

a. the preference rankings of vacationers travelling together are negatively correlated.

WHY?

Question 46

Charging a different price for tickets to movies at twilight than after 6 o’clock is an example of bundling.

a. False
b. It is impossible to determine the validity of the statement based on the given information.
c. True
d. It can be true or false

Answer 46

a. False

2nd degree price discrimination - high-volume buyers from low-volume buyers (??)

Question 47

Suppose a used-car salesman asks you the most you would be able to pay for a car and, unthinkingly, you answer truthfully, $4,800. Suppose, amazingly, that $4,800 is exactly the price for the car that you are presently examining. Then, the used-car salesman has effectively used perfect price discrimination on you.

a. The statement is neither true not false
b. False
c. The validity of the statement cannot be determined based on the given information.
d. True

Answer 47

d. True

1st degree price discrimination

Question 48

A sale on men’s slacks at T.J. Maxx, where if you buy the first pair at full price, you can buy the second pair at half price, is an example of differential pricing.

a. The validity of the statement cannot be determined based on the given information.
b. True
c. False
d. The statement can be either true or false

Answer 48

b. True

2nd degree price discrimination

Question 49

Which of the statements about price discrimination is (are) false?

a. It must be possible to segment the market.
b. It must be difficult to transfer the seller’s product from one market segment to another.
c. Public utilities practice first-degree price discrimination.
d. There must be differences in the elasticity of demand from one segment to another.

Answer 49

c. Public utilities practice first-degree price discrimination.

WHY??

Question 50

Suppose that when the price of strawberries decreases, Simone increases her purchase of whipped cream. To Simone

a. strawberries and whipped cream are complements.
b. strawberries and whipped cream are normal goods.
c. strawberries and whipped cream and substitutes.
d. strawberries are a normal good and whipped cream is an inferior good.

Answer 50

a. strawberries and whipped cream are complements.

Complements have opposite demand; increase in one decreases the other and vice versa

Question 51

What are the two effects that explain the Law of Demand? Briefly explain each effect.

Answer 51

Substitution effect

Income effect

Question 52

For each pair of item below determine which product would have the higher price elasticity of demand (in absolute value): Blood pressure medicine for someone who has high blood pressure and the purchase of Clairol hair coloring product.

Answer 52

Clairol hair coloring product would have a higher price elasticity of demand than blood pressure medicine.

Question 53

For each pair of item below determine which product would have the higher price elasticity of demand (in absolute value): A new Ford Fusion or a tank of gas for your current car.

Answer 53

The new Ford Fusion would have a higher price elasticity of demand than a tank of gas for your current car.

Question 54

For each pair of item below determine which product would have the higher price elasticity of demand (in absolute value): A Seiko watch or watches in general.

Answer 54

A Seiko watch will have a higher price elasticity of demand than watches in general.

Question 55

If the price of music downloads was to decrease, then

Select one:

a. the supply of MP3 players would increase.
b. the quantity demanded of MP3 players would decrease.
c. the demand for MP3 players would decrease.
d. the demand for MP3 players would increase.

Answer 55

d. the demand for MP3 players would increase.

Question 56

A change in all of the following variables will change the market demand for a product except

a. income.
b. tastes.
c. population and demographics.
d. the price of the product.

Answer 56

d. the price of the product.

Demand =/= price

Question 57

An increase in population would be represented by a ___.

Answer 57

Shift to the right

Question 58

If the percentage increase in price is 15 percent and the value of the price elasticity of demand is -3, then quantity demanded

a. will decrease by 5 percent.
b. will increase by 45 percent.
c. will decrease by 45 percent.
d. will increase by 5 percent.

Answer 58

c. will decrease by 45 percent.

.15 x 3- = (0.45)

Question 59

Linesha, a college student working part-time receives a wage increase. An avid movie buff, she increased her purchases of Blu-ray discs and reduced her purchases of DVDs. Based on this information

a. the cross-price elasticity between DVDs and Blu-ray discs is negative.
b. Blu-ray discs are normal goods and DVDs are inferior goods.
c. DVDs and Blu-ray discs are substitutes.
d. DVDs and Blu-ray discs are normal goods.

Answer 59

b. Blu-ray discs are normal goods and DVDs are inferior goods.

Question 60

Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton’s income elasticity of demand for potatoes is

a. positive, so Sefton considers potatoes to be a normal good and a necessity.
b. negative, so Sefton considers potatoes to be an inferior good.
c. negative, so Sefton considers potatoes to be a normal good.
d. positive, so Sefton considers potatoes to be an inferior good.

Answer 60

b. negative, so Sefton considers potatoes to be an inferior good.

WHY?

Question 61

If the price of steel increases drastically, the quantity of steel demanded by the building industry will fall significantly over the long run because

a. buyers of steel are less sensitive to a price change if they have more time to adjust to the price change.
b. profits will fall by a greater amount in the long run than in the short run.
c. buyers of steel are more sensitive to a price change if they have more time to adjust to the price change.
d. sales revenue in the building industry will fall sharply.

Answer 61

c. buyers of steel are more sensitive to a price change if they have more time to adjust to the price change.

Not less time???

Question 62

Some electric utilities offer one rate to commercial users and a different rate to residential users. This is an example of:

a. bundling
b. peak load pricing
c. universal access pricing
d. third degree price discrimination

Answer 62

d. third degree price discrimination

Different groups of customers are willing and able to pay different prices

Question 63

First (Perfect) degree price discrimination means that a firm charge:

a. The maximum amount that buyers are willing to pay for each unit.
b. One single price—the maximum possible—to all of its buyers.
c. Different prices to different groups of buyers.
d. Different prices to people of different racial or ethnic backgrounds.

Answer 63

a. The maximum amount that buyers are willing to pay for each unit.

Question 64

If a firm charges customers $ 200 per unit of the first unit purchased, and $160 per unit for each additional unit purchased in excess of one unit. Then, what is the economic term of this strategy?

a. Third -degree price discrimination
b. First-degree price discrimination
c. Profit maximization pricing
d. Second-degree price discrimination

Answer 64

d. Second-degree price discrimination

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