Question 1

The situation in which a firm charges different prices for different blocks of output is referred to as:
A)first-degree price discrimination.
B)second-degree price discrimination.
C)third-degree price discrimination.
D)fourth-degree price discrimination.

Accepted Answer

Second-degree price discrimination involves charging different prices for different quantities of output. It is also known as quantity discrimination. First-degree price discrimination involves charging different prices for each unit sold, while third-degree price discrimination involves charging different prices to different customer groups based on factors such as age, income, or location. Fourth-degree price discrimination is not a commonly used term in economics.

Question 2

Which of the following statements is correct?
A)The markup pricing rule that is derived from the rule for profit maximization can be used as a substitute for determining the profit-maximizing level of output by equating marginal revenue and marginal cost.
B)It is reasonable to assume that a profit-maximizing firm will never operate in the inelastic portion of its demand curve.
C)The ability of a profit-maximizing firm to mark up price above average cost is unaffected by the price elasticity of demand for the firm's output.
D)The markup factor and the price elasticity of demand are positively related, i.e., as the price elasticity of demand increases, the markup factor that the profit-maximizing firm can apply to its marginal cost in setting price increases as well.

Accepted Answer

B) It is generally accepted in economic theory that a profit-maximizing firm will avoid operating in the inelastic portion of its demand curve because doing so would mean that the firm could increase its total revenue (and potentially its profits) by reducing its output and increasing its price. This is because, in the inelastic portion of the demand curve, the percentage decrease in quantity demanded is less than the percentage increase in price, leading to an increase in total revenue.

Question 3

By and large,the price of each item on a restaurant menu is:
A)an accurate reflection of the item's marginal cost.
B)based strictly on consumer demand.
C)a function of cost and the price elasticity of demand for the item.
D)a fixed multiple of the item's total cost.

Accepted Answer

The price of each item on a restaurant menu is not solely based on its marginal cost or consumer demand. It is a combination of both cost (including labor, ingredients, overhead, etc.) and the price elasticity of demand for the item. Price elasticity refers to how much demand for the item will increase or decrease in response to a change in price. For example, a highly popular item with low price elasticity might have a higher price than a less popular item with high price elasticity, even if their marginal costs are similar. Therefore, multiple factors are considered to set the price of each item on a restaurant menu.

Question 4

Assume there is a decrease in the number of substitutes for a good produced by a profit-maximizing price-setting firm.All else constant,this would cause the firm's ability to markup price above average cost to:
A)decrease.
B)stay the same.
C)increase.
D)cannot be determined with the information given.

Accepted Answer

With fewer substitutes available, the demand for the firm's product becomes less elastic because consumers have fewer alternatives. This increases the firm's market power, allowing it to raise prices above average cost more than before.

Question 5

Third-degree price discrimination refers to situation in which:
A)a firm charges different prices for different blocks of output.
B)a firm separates markets according to the price elasticity of demand.
C)a firm is able to charge the maximum price consumers are willing to pay for each unit of output.
D)a firm divides a market into thirds and charges each segment a different price.

Accepted Answer

Third-degree price discrimination involves separating markets according to their price elasticity of demand, allowing the firm to charge different prices to different groups of consumers. Option A describes second-degree price discrimination, option C describes first-degree price discrimination, and option D is not a common practice in price discrimination.

Question 6

Which of the following statements is correct?
A)To maximize profit, a firm should apply a uniform markup to each product it sells.
B)The profit-maximizing firm's ability to mark up price over average cost is limited by the price elasticity of demand for the product in question.
C)It is not possible to maximize profits by using a markup pricing strategy.
D)Using markup pricing is more complicated than simply setting price equal to marginal cost.

Accepted Answer

The profit-maximizing firm should set the price where marginal revenue equals marginal cost. The ability to mark up the price over average cost depends on the price elasticity of demand. If demand is elastic, then the firm cannot mark up prices significantly without losing sales and profits. Using a uniform markup on all products may not be profitable as it does not take into consideration the different price elasticities of demand of each product. Markup pricing can be a useful strategy in some cases, but it is not always the best option, and it can be more complicated than simply setting prices equal to marginal cost.

Question 7

It is frequently observed that when a city is located next to a major highway,gas stations located close to the highway charge higher prices than gas stations located farther away.This is an example of:
A)first-degree price discrimination.
B)second-degree price discrimination.
C)third-degree price discrimination.
D)illegal price discrimination.

Accepted Answer

This is an example of third-degree price discrimination where different prices are charged to different groups of customers based on their location. In this case, those who are located near the highway are charged higher prices because of their convenience and ease of access to the gas station.

Question 8

Assume the price elasticity of demand for a product is -4.In this case,the firm's optimal markup is (approximately):
A)400 percent.
B)100 percent.
C)33 percent.
D)25 percent.

Accepted Answer

The answer of Assume the price elasticity of demand for...

Question 9

The practice of charging different prices to various groups of customers that are not based on differences in the costs of production is referred to as:
A)predatory pricing.
B)markup pricing.
C)discretionary pricing.
D)price discrimination.

Accepted Answer

Price discrimination is when businesses charge different prices to different customers for the same product or service, and it can be used to increase profits by capturing the maximum amount of revenue possible from each customer. This practice may not always be legal or ethical, but it is used in various industries, such as airlines, hotels, and movie theatres. Predatory pricing refers to artificially low prices intended to drive competitors out of business, markup pricing focuses on adding a percentage to the cost of production, and discretionary pricing involves setting prices based on the business's goals and objectives.

Question 10

When demand is elastic,the marginal revenue resulting from a decrease in price is:
A)positive.
B)zero.
C)negative.
D)cannot be determined without more information.

Accepted Answer

When demand is elastic, a decrease in price leads to a proportionally larger increase in quantity demanded, which increases total revenue. Therefore, the marginal revenue, which is the additional revenue from selling one more unit, is positive.

Question 11

At the profit-maximizing level of output,the amount by which the firm can mark up price is:
A)inversely related to the price elasticity of demand for item in question.
B)directly related to the price elasticity of demand for item in question.
C)totally unrelated to the price elasticity of demand for item in question.
D)equal to the ratio of the marginal and average costs of production.

Accepted Answer

At the profit-maximizing level of output, the firm sets marginal cost equal to marginal revenue, which is also equal to the price. The amount by which the firm can mark up price depends on the price elasticity of demand. If demand is elastic (i.e., consumers are sensitive to price changes), the firm can't mark up price much without losing a lot of customers, whereas if demand is inelastic (i.e., consumers are not very sensitive to price changes), the firm can mark up price more without losing many customers. Thus, the firm can mark up price more when demand is inelastic and less when demand is elastic. Therefore, the correct answer is A.

Question 12

The difference between the total willingness to pay for a good and the amount actually spent measures:
A)the total benefits from consuming the good.
B)the net gain from the production and consumption of the good.
C)the amount by which producers are better off, i.e., producers' surplus.
D)the amount by which consumers are better off, i.e., consumers' surplus.

Accepted Answer

The difference between the total willingness to pay for a good and the amount actually spent is the measure of consumers' surplus. It represents the additional benefit that consumers receive from purchasing a good beyond what they paid for it. In other words, it is the difference between what consumers are willing to pay and what they actually have to pay for a good, and it is a measure of their satisfaction gained from the purchase.

Question 13

Assume the inverse demand function for a good can be written as: P = 30 - 2Q.Assuming P = $10,the resulting consumer surplus would be equal to:
A)$50.
B)$100.
C)$200.
D)$225.

Accepted Answer

When P = $10, we can substitute this into the demand function to find the corresponding quantity:

$10 = 30 - 2Q

Solving for Q, we get Q = 10.

To find the consumer surplus at this price, we need to calculate the area under the demand curve above the price ($10) and up to the quantity (10):

Consumer Surplus = 0.5 * ($30 - $10) * 10

Consumer Surplus = $100

Therefore, the consumer surplus at a price of $10 is $100. The correct answer is option B.

Question 14

Assume a change in price causes the price elasticity of demand for a good (in absolute value)and marginal revenue to decrease.In this case we can conclude that the price of the good was:
A)increased.
B)held constant.
C)decreased.
D)cannot be determined.

Accepted Answer

The answer of Assume a change in price causes the...

Question 15

Which of the following is considered a necessary condition for successful price discrimination?
A)A firm's customers must all have the same price elasticity of demand.
B)Firms are able to prevent resale among different groups of customers.
C)Firms must be able to determine each customer's maximum willingness to pay for the product in question.
D)Firms must operate in a perfectly competitive market.

Accepted Answer

For successful price discrimination, firms must be able to prevent resale among different groups of customers. This ensures that higher-priced goods sold to one group cannot be resold to another group at a lower price, undermining the price discrimination strategy.

Question 16

The practice of setting price by increasing the average costs of production by some percentage is referred to as:
A)average cost pricing.
B)percentage pricing.
C)rate-of-return pricing.
D)markup pricing.

Accepted Answer

Markup pricing involves adding a percentage to the average cost of production to determine the selling price.

Question 17

Assuming the demand curve is downward sloping,as price increases,the price elasticity of demand for a good (in absolute value)and marginal revenue:
A)increase.
B)stay the same.
C)decrease.
D)cannot be determined.

Accepted Answer

The answer of Assuming the demand curve is downward sloping,as...

Question 18

The situation in which a firm is able to charge the maximum price consumers are willing to pay for each unit of output the firm sells is referred to as:
A)first-degree price discrimination.
B)second-degree price discrimination.
C)third-degree price discrimination.
D)fourth-degree price discrimination.

Accepted Answer

First-degree price discrimination, also known as perfect price discrimination, occurs when a firm is able to charge the exact maximum price each individual consumer is willing to pay for each unit of output. This means that the firm is able to extract all consumer surplus and capture all economic profit. However, first-degree price discrimination is difficult to implement in practice as it requires detailed information about each consumer's willingness to pay.

Question 19

The suggestion that a seller will try to set price based on "what the market will bear" is explicit recognition of the constraint imposed by:
A)the firm's marginal cost of production.
B)the price elasticity of demand for that item.
C)the firm's competitors.
D)the need for most firms to earn positive economic profits over time if they are to remain in business.

Accepted Answer

The concept of "what the market will bear" implies that the seller is trying to set the highest possible price that the customers are willing to pay. This depends on the price elasticity of demand for the item, which measures how much the quantity demanded responds to changes in price. If demand is elastic, meaning that customers are very sensitive to price changes, the seller will have to set a lower price to sell a reasonable quantity. If demand is inelastic, meaning that customers are not very sensitive to price changes, the seller can set a higher price and still sell a decent amount. Therefore, the seller's pricing decision is constrained by the price elasticity of demand.

Question 20

When the marginal revenue resulting from a decrease in price is negative,demand for the product is:
A)elastic.
B)unit elastic.
C)inelastic.
D)cannot be determined without more information.

Accepted Answer

When the marginal revenue resulting from a decrease in price is negative, it means that the total revenue decreases as a result of a price cut. This implies that the demand for the product is inelastic, as consumers are not very responsive to changes in price.

Quiz 10: Pricing Strategies for the Firm

The situation in which a firm charges different prices for different blocks of output is referred to as:

Which of the following statements is correct?

By and large,the price of each item on a restaurant menu is:

Assume there is a decrease in the number of substitutes for a good produced by a profit-maximizing price-setting firm.All else constant,this would cause the firm's ability to markup price above average cost to:

Third-degree price discrimination refers to situation in which:

Which of the following statements is correct?

It is frequently observed that when a city is located next to a major highway,gas stations located close to the highway charge higher prices than gas stations located farther away.This is an example of:

Assume the price elasticity of demand for a product is -4.In this case,the firm's optimal markup is (approximately) :

The practice of charging different prices to various groups of customers that are not based on differences in the costs of production is referred to as:

When demand is elastic,the marginal revenue resulting from a decrease in price is:

At the profit-maximizing level of output,the amount by which the firm can mark up price is:

The difference between the total willingness to pay for a good and the amount actually spent measures:

Assume the inverse demand function for a good can be written as: P = 30 - 2Q.Assuming P = $10,the resulting consumer surplus would be equal to:

Assume a change in price causes the price elasticity of demand for a good (in absolute value) and marginal revenue to decrease.In this case we can conclude that the price of the good was:

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

The practice of setting price by increasing the average costs of production by some percentage is referred to as:

Assuming the demand curve is downward sloping,as price increases,the price elasticity of demand for a good (in absolute value) and marginal revenue:

The situation in which a firm is able to charge the maximum price consumers are willing to pay for each unit of output the firm sells is referred to as:

The suggestion that a seller will try to set price based on "what the market will bear" is explicit recognition of the constraint imposed by:

When the marginal revenue resulting from a decrease in price is negative,demand for the product is: