3_Demand and Pricing Flashcards
Study MBA 511 Module 2: Demand Module 4: Demand, Supply and Equilibrium Module 5: Elasticity
What are the assumptions of demand?
- Market is competitive
- One good being traded
- Large number of sellers and buyers
- Goods are identical
- Everyone has perfect info about market
___ 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.
Theory of the Consumer
___ states that humans do behave rationally with a limited range of options.
Theory of a bounded rationality
What are the 4 key determinants of demand?
- Price
- Advertising expenditure
- Competition
- Income
___ estimated the consumption quantity for specific values.
Demand function
___ 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.
Excess capability
___ occurs when assessing the elasticity of demand relative to change in the price of a good or service being consumed.
Own-price elasticity
Cyclic goods are ___.
Elastic (luxury); >1
Noncyclic goods are ___.
Unit-elastic; zero
Countercyclic goods are ___.
Inelastic (necessity); <1
___is an elasticity measuring the effect of an increase or decrease in advertising on a market; more or less effective at increasing sales.
Advertising elasticity
___ 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.
1st degree price discrimination
___ 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.
2nd degree price discrimination
\_\_ 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
3rd degree price discrimination
___ is the measurement of satisfaction.
Utility
___ is the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.
Law of Diminishing Marginal Utility
___ is a rule that is used to maximize utility.
Rule for Utility Maximization
___ 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.
Utility Maximization
___ is a curve that shows the combinations of consumption bundles that give the consumer the same utility.
Indifference curve
What are the 5 properties of indifference curves?
- Downward sloping
- Higher ICs = higher utility
- ICs never cross
- ICs are bowed inward (down)
- Marginal rate of substitution
___ is the rate at which a consumer is willing to trade one good for another.
Marginal Rate of Substitution
___ is the amount of income a consumer has available to spend on goods and services.
Budget Constraint
___ measures by how much Qd for a product changes whenever income changes.
Income Elasticity of Demand
___ is a firm’s method of pricing it’s product based on market characteristics.
Price Strategy
___ refers to the practice of charging different prices to different customers for the same product.
Price discrimination
Firms can only price discriminate when ___ and ___.
They have market power
Prevent resale and arbitrage
___ is the practice of reselling a product at a price higher than it’s original selling price.
Arbitrage
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
First degree (perfect)
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
Third degree (segmented)
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)
Second degree (indirect/Differential pricing)
___ is the practice of charging lower per-unit price to customers who buy larger quantities.
Quantity discounts
___ is when an incentive is consistent and best for all participants.
Incentive compatibility
\_\_\_ 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
Versioning
___ 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
Bundling
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.
b. an inferior good.
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.
b. substitutes in consumption.
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
b. 2.5 percent
.10/(4) = 0.025 = 2.5
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
d. a and b only
Negative price elasticity of demand = complements
Positive price elasticity of demand = substitutes
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.
d. a luxury.
10/5 = 2 = elastic = luxury
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.
c. inelastic because there are no good substitutes for gasoline.
Inelastic = necessity Elastic = luxury
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
a. True
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
d. bundling
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
a. third-degree price discrimination
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.
a. Charging different prices for the same good or service.
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.
a. the preference rankings of vacationers travelling together are negatively correlated.
WHY?
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
a. False
2nd degree price discrimination - high-volume buyers from low-volume buyers (??)
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
d. True
1st degree price discrimination
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
b. True
2nd degree price discrimination
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.
c. Public utilities practice first-degree price discrimination.
WHY??
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.
a. strawberries and whipped cream are complements.
Complements have opposite demand; increase in one decreases the other and vice versa
What are the two effects that explain the Law of Demand? Briefly explain each effect.
Substitution effect
Income effect
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.
Clairol hair coloring product would have a higher price elasticity of demand than blood pressure medicine.
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.
The new Ford Fusion would have a higher price elasticity of demand than a tank of gas for your current car.
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.
A Seiko watch will have a higher price elasticity of demand than watches in general.
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.
d. the demand for MP3 players would increase.
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.
d. the price of the product.
Demand =/= price
An increase in population would be represented by a ___.
Shift to the right
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.
c. will decrease by 45 percent.
.15 x 3- = (0.45)
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.
b. Blu-ray discs are normal goods and DVDs are inferior goods.
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.
b. negative, so Sefton considers potatoes to be an inferior good.
WHY?
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.
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???
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
d. third degree price discrimination
Different groups of customers are willing and able to pay different prices
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.
a. The maximum amount that buyers are willing to pay for each unit.
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
d. Second-degree price discrimination
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