Question 1

Which of the following best describes first-degree price discrimination?

Accepted Answer

Charging each consumer their reservation price for a good.

Question 2

A movie distributor has two theaters with reservation prices for two films as follows: Theater A ($12,000 for Film 1, $3,000 for Film 2), Theater B ($10,000 for Film 1, $4,000 for Film 2). If the distributor bundles the films, what is the maximum total revenue they can earn?

Accepted Answer

$28,000

Question 3

Suppose a firm faces two consumer groups with demand elasticities $E_1 = -0.5$ and $E_2 = -2$. According to the formula $\$\frac{P_1}{P_2} = \frac{1 + 1/E_2}{1 + 1/E_1}\$\$, which group will be charged the higher price under third-degree price discrimination?

Accepted Answer

Group 1, because their demand is less elastic.

Question 4

Which of the following is a key condition for successful price discrimination?

Accepted Answer

The firm must be able to prevent resale among consumers.

Question 5

A cellular phone company offers a monthly access fee plus a per-minute charge for additional usage. This pricing strategy is best described as:

Accepted Answer

Two-part tariff

Question 6

Why is bundling more profitable than selling goods separately when consumer reservation prices are negatively correlated?

Accepted Answer

Because the firm can extract all consumer surplus by matching the bundle price to the sum of reservation prices.

Question 7

Peak-load pricing is most appropriate when:

Accepted Answer

Demand and marginal cost are both higher during peak periods.

Question 8

A firm wants to maximize profit by advertising. According to the rule of thumb, the optimal advertising-to-sales ratio is given by $\$\frac{A}{PQ} = \frac{E_A}{|E_P|}\$\$, where $E_A$ is the advertising elasticity of demand and $E_P$ is the price elasticity of demand. If $E_A = 0.2$ and $E_P = -2$, what is the optimal ratio?

Accepted Answer

$0.1$

Question 9

Which of the following is NOT a form of price discrimination?

Accepted Answer

Charging a single price to all consumers regardless of their willingness to pay

Question 10

Suppose a vertically integrated firm operates in two countries with different tax rates. To maximize after-tax profits, the firm should:

Accepted Answer

Set a higher transfer price for the division in the country with the lower tax rate.

Question 11

A publisher releases a hardcover edition of a book at $25 and a paperback at $10 several months later. This is an example of:

Accepted Answer

Intertemporal price discrimination

Question 12

In the context of transfer pricing, when there is a competitive outside market for an intermediate good, the optimal transfer price is:

Accepted Answer

Equal to the market price in the outside market.

Question 13

Which of the following statements about tying is correct?

Accepted Answer

Tying allows a firm to meter demand and practice price discrimination more effectively.

Question 14

Suppose a firm faces the following demand for its product: $\$Q = 100 - P\$\$. If the firm can only charge a single price, what is the profit-maximizing price if marginal cost is $20?

Accepted Answer

$60$

Question 15

Which of the following is true about second-degree price discrimination?

Accepted Answer

It involves charging different prices for different quantities or blocks of a good.

Question 16

A firm divides consumers into two groups: business travelers and vacationers. Business travelers have less elastic demand. Under third-degree price discrimination, which group is likely to pay a higher price?

Accepted Answer

Business travelers, because their demand is less elastic.

Question 17

If a firm uses a two-part tariff for many consumers, the total profit is:

Accepted Answer

The sum of the profit from the entry fee and the profit from sales.

Question 18

Which of the following is a potential benefit of vertical integration for firms with market power?

Accepted Answer

It can eliminate double marginalization and increase total profit.

Question 19

A firm is considering advertising to increase sales. If the advertising elasticity of demand is low, what does this imply about the effectiveness of advertising?

Accepted Answer

Advertising will have a small impact on quantity demanded.

Chapter 11: Pricing with Market Power – Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards