Price Strategy

Question 1

Price discrimination is the practice of

Answer 1

is the practice of charging different prices to different customers when the price differences cannot be attributed to variations in cost.

Question 2

The practice of charging different prices to different customers when the price differences cannot be attributed to variations in cost is called

Answer 2

Price discrimination

Question 3

When you buy at a low price in one market then sell at a higher price in another market you are engaging in

Answer 3

arbitrage

Question 4

arbitrage:

Answer 4

buy low sell high

Question 5

The law of one price states that

Answer 5

identical products should sell for the same price everywhere.

Question 6

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services are called

Answer 6

transactions costs.

Question 7

transactions costs are :

Answer 7

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services are called

Question 8

Toot Sweets Bakery sells freshly baked muffins from 6:30 am at $1.20 per muffins. By 4 pm, the remaining muffins are marked down to $0.60 each.

What is Toot Sweets doing?

Answer 8

Toot Sweets engages in price discrimination; a higher price for those who cannot wait and a lower price for those willing to wait until 4 pm.

Question 9

Successful price discrimination cannot take place if the market is perfectly ________________.

Answer 9

the market is perfectly competitive.

Question 10

Which of the following undermines a firm’s ability to engage in price discrimination?

1. buyers having different elasticities of demand for the product
2. the seller’s market power
3. the inability to prevent resale of the product from one market segment to another
4. the seller’s ability to segment the total market

Answer 10

the inability to prevent resale of the product from one market segment to another

Question 11

A firm that can effectively price discriminate will charge a higher price to customers who have the more ________________ for the product.

Answer 11

elastic demand

Question 12

The Bay Area subway system, BART, offers senior citizens discounted fares for BART rides. This suggests that BART authorities believe that senior citizens have a ________ demand for subway rides.

Answer 12

less price elastic

Question 13

If a firm could practice perfect price discrimination, it would charge every buyer__________________.

Answer 13

charge every buyer a different price.

Question 14

Some consumer electronic products such as plasma TVs, DVD players and digital cameras, are introduced at very high prices but over time, their prices start falling (beyond what could be attributed to falling costs as companies take advantage of economies of scale and cheaper technologies). Which of the following is the best explanation for this observation?

• After satisfying the demand for early adopters, firms lower price to attract the more price sensitive consumers.
• More firms are likely to enter the consumer electronic market over time, forcing market prices down.
• Early adopters are more quality conscious and are willing to pay higher prices for the initial production of these goods.
• Early adopters of these new products typically have a higher demand and higher income compared to those who are willing to wait.

Answer 14

After satisfying the demand for early adopters, firms lower price to attract the more price sensitive consumers.

Question 15

With perfect price discrimination, the marginal revenue curve is equal to the __________________.

Answer 15

Demand Curve

Question 16

What is the price charged in the two markets?

Answer 16

price in the student market = Pc; price in the non-student market = Pe

Question 17

Which of the following is a reason why a firm would not engage in price discrimination?

• Some firms are not able to segment the market for the products they sell.
• Price discrimination is illegal in some western states and the owners of firms in these states face civil or criminal prosecution if they engage in price discrimination.
• Some firms do not want to violate the law of one price.
• The transactions costs associated with selling the product exceed the price of the product.

Answer 17

Some firms are not able to segment the market for the products they sell.

Question 18

A price-discriminating firm charges the highest price to the group with the most ________________.

Answer 18

elastic demand.

Question 19

Erin and Deidre, two residents in Ithaca, New York, are planning a trip to Boston. Erin, the sales manager for a large retailer, has to attend a business meeting. Deidre, a college student on vacation, is planning a leisurely trip to visit friends and relatives. Whose demand curve for air travel is likely to be more elastic?

Answer 19

Deidre

Question 20

Which of the following products allows the seller to identify different groups of consumers (segment the market) and practice price discrimination?

• clothing items sold through Macy’s Department Store
• a cafe latte sold at Starbucks
• tickets to matinee shows at a movie theatre
• a hamburger sold at Burger King

Answer 20

tickets to matinee shows at a movie theatre

Question 21

Suppose Chantal charges all her customers a uniform price of $10 for a haircut. Chantal is selling _______________ the profit-maximizing quantity of haircuts in market B.

Answer 21

Chantal is selling more than the profit-maximizing quantity of haircuts in market B.

Question 22

If a monopolist practices perfect price discrimination consumer surplus will be ________________________.

Answer 22

consumer surplus will be zero.

Question 23

Publishers practice ____________________when they sell books at high prices to early adopters.

Answer 23

price discrimination