Ch. 12 continued

Question 1

Products like cruise ships, parking lots, hotels, and stadiums have several characteristics that affect their pricing.

Answer 1

cost of building capacity are fixed or sunk

capacity constraints

increase insurance output only up to capacity but no further

Question 2

extent decision for industries like hotels, cruises, and parking lots

Answer 2

use marginal analysis

as long as long run marginal revenue is greater > than long run marginal cost.

LRMR > LRMC

stop building when LRMR = LRMC

Question 3

The relevant costs and benefits of setting price are

Answer 3

the short-run marginal revenue (MR) and short-run marginal cost (MC).

Question 4

If MR > MC at capacity,

Answer 4

then price to fill available capacity.

Question 5

if demand is known

Answer 5

setting price is relatively easy to do

Question 6

to determine optimal price then

Answer 6

balance costs of overpricing against cost of underpricing

Question 7

If the lost profit from these two pricing errors is symmetric, then the firm should

Answer 7

price so that expected (predicted) demand is just equal to capacity.

This is the target price

Question 8

if the lost profit from overpricing is less than the lost profit from underpricing, then the firm should

Answer 8

overprice or price above target price

Question 9

If the cost of overpricing (unused capacity) is smaller than the cost of underpricing (lower margins), then

Answer 9

price higher than would fill capacity on average, and vice versa.

Question 10

pricing depends on

Answer 10

probability of error

Question 11

Long-run marginal cost

a. is the cost of building, maintaining, and using an additional unit of capacity.	
b. is likely to be greater than short-run marginal cost.	
c. is useful for determining how much capacity to build, but is not useful for setting price.	
d. All of the above

Answer 11

all of the above

Question 12

different types of promotional expenditures

Answer 12

affect demand in different ways

Question 13

For pricing, it is most important to know whether

Answer 13

promotional expenditures make demand more or less price elastic

Question 14

If promotional expenditures make demand more price elastic, then you should

Answer 14

reduce price when you promote the product.

Question 15

If promotional expenditures make demand less price elastic, then you should

Answer 15

increase price when you promote the product.

Question 16

promotional campaigns are trying to reduce the customer’s sensitivity to price.

Answer 16

In this case, it makes sense to increase price.

for ex: celebrities using products

Question 17

Advertising that conveys an image of high product quality makes demand ___________ and should be accompanied with a ____________.

a. more elastic ; price increase	
b. more elastic ; price decrease	
c. less elastic ; price increase	
d. less elastic ; price decrease

Answer 17

c. less elastic ; price increase

Question 18

To go along with its new advertising campaign, a company reduced its prices. The advertising likely featured

a. a celebrity endorsement.	
b. a favourable price comparison to a rival product.	
c. an attempt to reduce customers' price sensitivity.	
d. All of the above.

Answer 18

b. a favourable price comparison to a rival product.

Question 19

reference price is simply

Answer 19

how much we expect something to cost, given the environment.

Question 20

Managing price expectations is

Answer 20

as important as managing price.

Question 21

Prospect theory implies that consumers are motivated not by the actual price level, but rather by

Answer 21

comparison of the price level to the reference price.

Question 22

retailers should focus

Answer 22

on “cash discounts” rather than “credit card surcharges” and airlines on “discounts for not checking bags” rather than “checked bag fees.”

Question 23

losses and gains are

Answer 23

superadditive

Question 24

Integrate losses but

Answer 24

separate gains

Question 25

Which of the following is likely to be a profitable adjustment to pricing strategy?

a. A firm decreases consumers' expectations of the price that they will pay.	
b. A pizza restaurant changes from charging a "delivery charge" to offering an "in-store discount."	
c. A utility replaces its "processing fees" line-item on its bill with an itemized list of each of the constituent fees.	
d. None of these is likely to be a profitable adjustment.

Answer 25

b. A pizza restaurant changes from charging a “delivery charge” to offering an “in-store discount.”

Question 26

Cannibalization refers to

a. customers switching from one company's product to a rival company's substitute product.	
b. customers switching from one company's product to a rival company's complementary product.	
c. customers switching from one company's product to the same company's substitute product.	
d. customers switching from one company's product to the same company's complementary product.

Answer 26

c. customers switching from one company’s product to the same company’s substitute product.

Question 27

When two firms, each producing one product, merge, the new entity should _____ prices if the products are complements and ______ prices if the products are substitutes.

a. lower; lower	
b. lower; raise	
c. raise; lower	
d. raise; raise

Answer 27

b. lower; raise

Question 28

An airline estimates that the potential cost of underpricing is less than the potential lost profit of unfilled seats. The airline should

a. set a price equal to the "target price" so that expected demand is equal to each plane's capacity.	
b. set a price above the "target price" so that expected demand is, on average, below capacity.	
c. set a price below the "target price" so that expected demand is, on average, above capacity.	
d. always set a price where MR=MC.

Answer 28

c. set a price below the “target price” so that expected demand is, on average, above capacity.

Question 29

Which of the following is true about advertising?

a. A company should always accompany advertising campaigns with price reductions.	
b. Advertising campaigns use celebrity endorsements to make demand more elastic.	
c. Advertising generally reduces customers' sensitivity to price.	
d. Advertising can increase or decrease demand elasticity depending on the type of promotion.

Answer 29

d. Advertising can increase or decrease demand elasticity depending on the type of promotion.

Question 30

A consumer in an electronics store expects that an inexpensive computer and an office printer should each cost about $500. However, the store owner is willing to sell both the computer and printer for $1100. According to prospect theory, which of the following combinations of prices totaling $1100 is likely to generate the greatest satisfaction for the consumer.

a. $600 for the computer, $500 for the printer.	
b. $550 for the computer, $550 for the printer.	
c. $599 for the computer, $501 for the printer.	
d. All of the above are likely to generate the same satisfaction since the total is identical in all cases.

Answer 30

a. $600 for the computer, $500 for the printer.

Question 31

After massive promotion of Rihanna’s latest music album, the producers reacted by raising prices for her albums. This implies that promotion expenditures made the album demand

more elastic.

unitary elastic.

change due to psychological pricing.

less elastic.

Answer 31

more elastic.

Question 32

All of the following choices are examples of promoting a firm’s product, except

celebrity endorsements.

pricing.

discount coupons.

end-of-aisle displays.

Answer 32

pricing

Question 33

A firm that acquires a substitute product can reduce cannibalization by

doing nothing.

repositioning a product so that it does not directly compete with the substitute.

setting the same price on both products.

lowering prices on the low-margin products.

Answer 33

repositioning a product so that it does not directly compete with the substitute.

Question 34

A shoe-producing firm decides to acquire a firm that produces shoe laces. This implies that the firm’s aggregate demand (shoes + laces) will be

less elastic than the individual demands.

more elastic than the individual demands.

equally elastic as the individual demands.

none of the above.

Answer 34

more elastic than the individual demands.

Question 35

After firm A producing one good acquired another firm B producing another good, it lowered the prices for both goods. One can conclude that the goods were

substitutes.

complements.

not related.

none of the above

Answer 35

complements

Question 36

Firms tend to raise the price of their goods after acquiring a firm that sells a substitute good because

they lose market power.

there is an increase in the overall demand for their products.

the aggregate demand for both goods is more elastic than the demand for the individual goods.

the aggregate demand for both goods is less elastic than the demand for the individual goods.

Answer 36

the aggregate demand for both goods is less elastic than the demand for the individual goods.

Question 37

For products like parking lots and hotels, costs of building capacity are mostly fixed or sunk and firms in this industry typically face capacity constraints. Therefore,

if MR > MC at capacity, then the firms should price to fill capacity.

if MR < MC at capacity, then the firms should price to fill capacity.

if LRMR > LRMC at capacity, then the firms should price to fill capacity.

if LRMR < LRMC at capacity, then the firms should price to fill capacity.

Answer 37

if MR > MC at capacity, then the firms should price to fill capacity.

Question 38

A firm started advertising its product and this changed the product’s elasticity from −2 to −1.5. If, prior to advertising, the firm charged $10, the firm should

raise price from $10 to $15.00.

reduce price from $10 to $6.67.

raise price from $10 to $13.33.

reduce price from $10 to $7.50.

Answer 38

raise price from $10 to $15.00.

MC = 10 (1 - 1/e)
MC= 10 (1 - 1/2)
MC= 5

Question 39

After running a promotional campaign, the owners of a local hardware store decided to decrease the prices for the advertised products sold in their store. One can infer that

the promotional expenditures made the demand for the advertised products more elastic.

the promotional expenditures made the demand for the advertised products less elastic.

the promotional expenditures had no effect on the demand elasticity.

the owners got it wrong. To cover the promotional expenses, they should have raised the prices.

Answer 39

the promotional expenditures made the demand for the advertised products more elastic.

Question 40

On average, if demand is unknown and costs of underpricing are _______ than the costs of overpricing, then _______ .

smaller; overprice

smaller; underprice

larger; underprice

none of the above

Answer 40

smaller; underprice