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ECON 600 > Exam 3 > Flashcards

Exam 3 Flashcards

1
Q

What is price elasticity?

A

It is how responsive people are to a change in price.

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2
Q

What is first-degree price discrimination?

A

It is charging each consumer the maximum price he is willing to pay for each unit of the good purchased.

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3
Q

What are examples of first-degree price discrimination?

A

car dealerships, flea markets, college tuition

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4
Q

What is second-degree price discrimination?

A

It is posting discrete schedule of declining prices for different range of quantity.

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5
Q

What type of price discrimination is easy to gain information so easy to adopt?

A

Second-degree price discrimination

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6
Q

What are examples of second-degree price discrimination?

A

BOGO deals, bus pass, aquarium pass, electric usage

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7
Q

What is third-degree price discrimination?

A

It is charging different groups of consumers different prices for the same product.

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8
Q

What are examples of third-degree price discrimination?

A

senior discount, student discount, children’s discount, newspaper coupons, plane tickets, movie tickets

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9
Q

What is two-part pricing?

A

Pricing strategy where consumers are charged a fixed fee for the right to purchase a product plus a per unit charge for each unit purchased.

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10
Q

What are examples of two-part pricing?

A

Costco, Sam’s club, amusement park tickets, golf club memberships

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11
Q

What is commodity bundling?

A

Pricing strategy where firm bundles several different products together and sells them at a single bundle price.

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12
Q

What is an example of commodity bundling?

A

McDonalds Value Meal, Microsoft Office Suite, clothing items grouped together

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13
Q

What is peak-load pricing?

A

Pricing strategy where higher prices are charges during peak hours

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14
Q

What are examples of peak load pricing?

A

Utilities, hotels, cell phone usage, airlines

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15
Q

What is cross-subsidies?

A

Profits gained from the sale of one product are used to subsidize sales of a related product

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16
Q

What are examples of cross-subsidies?

A

blades and razors, printers and ink, filters and water bottles, Swiffer mop and Swiffer pads, movie tickets and concessions

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17
Q

What is price matching?

A

A firm advertises a price and a promise to match any lower price offered by a competitor

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18
Q

What are examples of price matching?

A

Wal-Mart, Best Buy

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19
Q

What signal does a price matching strategy send to consumers?

A

Signals customer that the store has the best price

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20
Q

What is randomized pricing?

A

A firm intentionally varies its price in an attempt to “hide” price information from consumers and rivals.

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21
Q

What is the theory behind randomized pricing?

A

If consumers know when prices will change, they will wait to get lower price. If competitors know your pricing decisions, they will match your prices.

22
Q

What is block pricing?

A

Pricing strategy where identical products are packaged together in order to enhance profit by forcing consumers to make an all-or-none decision to purchase.

23
Q

What are examples of block pricing?

A

batteries, potatoes, socks

24
Q

What are the three types of risk preference?

A

risk averse, risk loving, risk neutral

25
Q

What does a risk averse person prefer?

A

a sure amount of $$$ over a riskier proposal with a much higher expected $$$.

26
Q

What does a risking loving person prefer?

A

a risky prospect with high expected $$$ over a sure lower amount

27
Q

What des a risk neutral person prefer?

A

no preference between risky prospect or sure thing

28
Q

What is a typical managers risk preference?

A

risk averse

29
Q

What is a typical shareholders risk preference?

A

risk neutral

30
Q

What is adverse selection?

A

individuals have hidden characteristics in which a selection process results in a pool of individuals with undesirable characteristics.

31
Q

What is moral hazard?

A

one party to a contract takes a hidden action that benefits him at the expense of another party.

32
Q

What is an example of adverse selection?

A

insurance companies do not have all the information that the insured have therefore insured has hidden characteristics.

33
Q

What is an example of moral hazard?

A

individuals with health insurance tend to go to the dr more often and choose more expensive treatment options

34
Q

What is an English auction?

A

an ascending sequential bid auction in which bidders observe the bids of others and decide whether or not to bid. auction ends when single bidders remains and he pays amount.

35
Q

What is the optimal bidding strategy in an English auction?

A

Remain active until price exceeds own valuation of good

36
Q

What is a first-price sealed-bid auction?

A

a simultaneous move auction in which bidders submit bids and the auctioneer awards the item to the high bidder who pays the amount of the bid

37
Q

What is the dominant strategy for a first-price sealed-bid auction?

A

bid slightly lower than own valuation

38
Q

What is a second-price sealed-bid auction?

A

a simultaneous move auction in which bidders submit bids and the auctioneer awards the item to the high bidder who pays the amount of the bid by the second-highest bidder

39
Q

What is the dominant strategy for a second-price sealed-bid auction?

A

bid your true valuation because you won’t bear cost of own bid

40
Q

What is the decision rule on employment level?

A

marginal revenue product = marginal expense

41
Q

What is the calculation for marginal revenue product?

A

MRP = MP X P, where MP=marginal product and P = price

42
Q

What is the calculation for dominant strategy in the first-price, sealed-bid auction?

A

b=V-(V-L)/n, where V=own valuation, L=lowest offer, and n=number of bidders

43
Q

What is the calculation for the prcing rul in a market with monopoly and monopolistic competition?

A

P=[Ef/(1+Ef)]*MC, where Ef=elasticity, MC=marginal cost

44
Q

What is probation wage?

A

The firm does not know worker productivity when hiring. The firm learns productivity of workers after period 1. In 2nd period, firm fires low productivity workers and gives raise to higher productivity workers.

45
Q

What is the probation wage in the first period?

A

First period, you should pay W1 <= WL

46
Q

What is the probation wage in the second period?

A

Second period, you should pay W2 >= WH + WH - WL

47
Q

Why is the probation wage model used?

A

to deter bad workers from applying for the job

48
Q

What is the signaling model?

A

Pay a higher wage to any worker who gets S years of schooling. Pay a lower wage to any worker who gets less than S years of schooling

49
Q

What is the goal of the signaling model?

A

differentiate between high ability workers and low ability workers based on the decisions they have made

50
Q

What are the assumptions of the signaling model?

A

two ability types (high and low), asymmetric information, more able workers have lower cost of schooling

51
Q

Before the breakup of AT&T, the firm charged a price for local telephone services that was roughly one-half its cost of providing services. What type of pricing strategy is this? Why do you think AT&T adopted this pricing strategy?

A

This is cross subsidies. By charging a low price for local services, more people purchase local phone service. This led to an increase in the usage of long-distance service. Thus, by cross subsidizing local services with long distance services, AT&T was able to earn a higher profit.

52
Q

A used car that is only six months old and has been driven only 5,000 miles typically sells for 20% less than a new car with the same options. Is this a result of adverse selection or moral hazard?

A

This is a result of adverse selection. A relatively “new” used car is usually sold at a price much less than a new car with the same options because buyers fear that the car is not in good condition and therefore only cars in less than excellent conditions will be offered in the market.

ECON 600 (3 decks)

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