Deck 10: Special Pricing Practices

Question 1

Prices under an ideal cartel situation will be equal to

A)monopoly prices.
B)competitive prices.
C)prices under monopolistic competition.
D)marginal cost.

Answer 1

A

Question 2

Barometric price leadership can occur when oligopolistic firms

A)compete on the basis of differentiated products.
B)want to avoid price competition and violating antitrust laws.
C)try to enforce cartel agreements.
D)All of the above

Answer 2

B

Question 3

In the Baumol model,a change in fixed costs will

A)increase total quantity sold.
B)have no effect on total quantity sold.
C)decrease total quantity sold.
D)have an effect on total quantity sold.

Answer 3

D

Question 4

Barometric price leadership exists when

A)one firm in the industry initiates a price change and the others may or may not follow.
B)one firm imposes its best price on the rest of the industry.
C)when all firms agree to change prices simultaneously.
D)when one company forms a price umbrella for all others.

Question 5

The following are possible examples of price discrimination except

A)prices in export markets are lower than for identical products in the domestic market.
B)senior citizens pay lower fares on public transportation than younger people at the same time.
C)a product sells at a higher price at location A than at location B,because transportation costs are higher from the factory to A.
D)subscription prices for a professional journal are higher when bought by a library than when bought by an individual.

Question 6

A cartel is defined to be

A)any oligopolistic industry with fewer than 4 firms.
B)a form of oligopoly in which firms agree to sell at different prices like in monopolistic competition.
C)a form of oligopoly in which firms formally agree to establish a common strategy,often a common price,in effect acting like a monopoly.
D)a form of oligopoly in which firms agree to compete with each other on an equal basis.

Question 7

The result for the seller of being able to practice price discrimination will be

A)higher profits.
B)lower demand elasticity.
C)lower quantity sold.
D)cost minimization.

Question 8

A successful and stable cartel can be established if there are

A)many firms producing a storable product.
B)many firms producing a perishable product.
C)a few firms producing a storable product.
D)a few firms producing a perishable product.

Question 9

When state universities charge higher tuition fees to out-of-state students than to local students,the universities are practicing

A)first-degree discrimination.
B)second-degree discrimination.
C)third-degree discrimination.
D)fourth-degree discrimination.

Question 10

The practice by a monopolist of charging each buyer the highest price he/she is willing to pay is called

A)first-degree discrimination.
B)second-degree discrimination.
C)third-degree discrimination.
D)fourth-degree discrimination.

Question 11

Under conditions of first-degree price discrimination

A)production will equal that which would exist under perfect competition.
B)production will exceed that which would prevail under perfect competition.
C)prices will be lower than under perfect competition.
D)production will always be lower than under perfect competition.

Question 12

A cartel price will be established at the quantity where

A)total cost equals the industry total revenue.
B)average cost equals the industry revenue.
C)the sum of the members' marginal costs equals industry marginal revenue.
D)marginal cost equals industry price.

Question 13

Dominant price leadership exists when

A)one firm drives the others out of the market.
B)the dominant firm decides how much each of its competitors can sell.
C)the dominant firm establishes the price at the quantity where its MR = MC,and permits all other firms to sell all they want to sell at that price.
D)the dominant firm charges the lowest price in the industry.

Question 14

In order for price discrimination to exist

A)markets must be capable of being separated.
B)markets must be interdependent.
C)different demand price elasticities must exist in different markets.
D)demand price elasticities must be identical in all markets.
E)Both A and C

Question 15

The position of a cartel will become weaker if there is ________ excess-capacity among the firms belonging to the cartel.

A)minimum
B)no
C)zero
D)high

Question 16

In the Baumol model,the total quantity sold will usually be larger than

A)if perfect competition prevailed.
B)if total costs were minimized.
C)if profit were maximized.
D)if companies were interdependent.

Question 17

Cartel agreements tend to break down

A)during economic downturns.
B)because of price "chiseling" by one or more members.
C)when there is overcapacity in the industry.
D)All of the above

Question 18

The oligopolistic situation in which a company's objective is to maximize revenue subject to a minimum profit requirement is usually referred to as

A)the aggregate model.
B)the Baumol model.
C)the aggressive model.
D)the Marshall model.

Question 19

Second-degree price discrimination occurs when

A)different prices are charged for different blocks of services.
B)different groups of buyers are charged different prices based on their price elasticities of demand.
C)a different price is charged for each amount of a product purchased.
D)None of the above

Question 20

All of the following are conditions which are favorable to the formation of cartels except

A)the existence of a small number of firms.
B)geographic proximity of firms.
C)homogeneity of the product.
D)easy entry into the industry.

Question 21

The pricing of a product at each stage of production as the product moves through several stages is called

A)transfer pricing.
B)cost plus pricing.
C)penetration pricing.
D)monopolistic pricing.

Question 22

Transfer pricing is a method used to

A)determine whether a firm should make or buy a component product.
B)determine the correct value of a product as it moves from one stage of production to another.
C)minimize a multinational firm's tax liabilities.
D)All of the above

Question 23

Assume that a multinational company produces components in country A and ships them to a subsidiary in country B.In order to increase its profits

A)the company should charge a high transfer price for the components if income taxes in country B are higher than in country A.
B)the company should charge a low transfer price for the components if income taxes in country B are higher than in country A.
C)the company should charge a high transfer price for the components if income taxes in country A are higher than in country B.
D)None of the above

Question 24

Why does each of the following facilitate the creation and stability of a cartel?
a.High barriers to entry
b.An identical product
c.Similar costs

Question 25

A firm uses ________ for goods which the consumer takes pride in owning.

A)price skimming
B)prestige pricing
C)penetration pricing
D)predatory pricing

Question 26

If a monopolist sets a low price to discourage potential competitors from entering the market,it is referred as

A)price skimming.
B)predatory pricing.
C)penetration pricing.
D)limit pricing.

Question 27

The correct expression for cost plus pricing is

A)Price = Cost (1 + profit margin).
B)Price = Cost + profit margin.
C)Price = Cost (1 + mark-up).
D)Price = Cost + (1 + mark-up).

Question 28

If a product which costs $8 is sold at $10,the profit margin is

A)$2.
B)25%.
C)20%.
D)None of the above

Question 29

Revenue maximization occurs when a firm sells at a price

A)that is equal to its minimum average variable cost.
B)where its marginal revenue is equal to its marginal cost.
C)where its marginal revenue is zero.
D)None of the above

Question 30

"Tying" is a form of price discrimination which involves a buyer

A)agreeing to purchase a product at a fixed price regardless of the amount purchased.
B)paying different prices based on the amounts of a product purchased.
C)required to buy one product in order to purchase some other product.
D)All of the above

Question 31

When a firm prices its goods below the marginal cost to drive away competitors,it is referred as

A)price skimming.
B)limit pricing.
C)penetration pricing.
D)predatory pricing.

Question 32

Gasoline and heating oil are examples of products which are

A)joint products in fixed proportions.
B)joint products in variable proportions.
C)joint products that are complements.
D)unrelated to each other.

Question 33

Industry demand is given by:
QD = 1000 - P
All firms in the industry have identical and constant marginal and average costs of $50/unit.
a.If the industry is perfectly competitive,what will industry output be? What will be the equilibrium price? What profit will each firm earn?
b.Now suppose that there are five firms in the industry,and that they collude to set price.What price will they set? What will be the output of each firm? What will be the profit of each firm?

Question 34

A company which charges a lower price than may be indicated by economic analysis to gain a foothold in the market is practicing

A)price skimming.
B)psychological pricing.
C)penetration pricing.
D)prestige pricing.

Question 35

When a firm sets a price relatively low in order to increase the market share,it is referred as

A)price skimming.
B)limit pricing.
C)penetration pricing.
D)predatory pricing.

Question 36

Third-degree price discrimination exists when

A)the seller knows exactly how much each potential customer is willing to pay and will charge accordingly.
B)different prices are charged by blocks of services.
C)when the seller can separate markets by geography,income,age,etc.,and charge different prices to these different groups.
D)when the seller will bargain with buyers in each of the markets to obtain the best possible price.

Question 37

If the demand elasticity for a product is -2,and a profit-maximizing firm sells the product for $10,its marginal cost must be

A)$5.
B)$10.
C)$15.
D)$8.

Question 38

When mark-up equals 50% and AC = MC,then demand elasticity will be

A)-1.
B)-1.5.
C)-2.
D)-3.

Question 39

If a product which costs $8 is sold at $10,the mark-up is

A)$2.
B)25%.
C)20%.
D)None of the above

Question 40

By far,the most frequently encountered price discrimination is the

A)first-degree price discrimination.
B)second-degree price discrimination.
C)third-degree price discrimination.
D)fourth-degree price discrimination.

Question 41

In the Sunday newspaper,there are usually coupons that you can clip and take to the store to save money on products.Anyone can buy a newspaper,and the value of the coupons easily exceeds the price of the newspaper for most consumers.Is this an example of price discrimination? Explain.

Question 42

Some charge that third-degree price discrimination is unfair or that it reduces social welfare.Why does charging one group a lower price hurt anyone?

Question 43

Explain the reasons firms might follow the Baumol model of maximizing revenue subject to achieving a minimum level of profits.

Question 44

Describe the circumstances under which a producer of joint products in fixed proportions might not sell all of one of the available joint products at the profit-maximizing level of operations.

Question 45

Why do cartels tend to break up?

Question 46

Superstar actors typically get contracts that specify that they get a percentage of "the gross," the total revenues that the movie brings in.Why might actors want contracts structured that way? Why might producers be willing to agree to that,and how does this make the goals of actors and producers different?

Question 47

Firms that make game systems like Playstation and Nintendo typically charge a price close to average cost on the game system itself,and do not change that price even when the systems are scarce or demand increases.Why might this be a profit-maximizing strategy?

Question 48

A firm in an oligopolistic industry has the following demand and total cost equations:
P = 600 - 20Q and TC = 700 + 160Q + 15Q2
Calculate:
a.quantity at which profit is maximized
b.maximum profit
c.quantity at which revenue is maximized
d.maximum revenue
e.maximum quantity at which profit will be at least $580
f.maximum revenue at which profit will be at least $580

Question 49

Would it ever make sense for a firm to charge a price at or below the cost of the product?

Question 50

A monopolistic firm operates in two separate markets.No trade is possible between market A and market B.The firm has calculated the demand functions for each market as follows:
Market A p = 15 - Q; Market B p = 11 - Q
The company estimates its total cost function to be TC = 4Q.Calculate:
a.quantity,total revenue and profit when the company maximizes its profit and charges the same price in both markets
b.quantity,total revenue and profit when the company charges different prices in each market and maximizes its total profit

Question 51

A monopolist sells to two consumer groups,students and non-students.
Demand for students: Q = 500 - 1/2P
Demand for non-students: Q = 750 - 2P
MC = 20
Find the profit-maximizing price/quantity combination in each market if the groups can be separated.

Question 52

McDonald's charges a higher price for a Big Mac in New York City than it does in a small town in Iowa.Is this an example of third-degree price discrimination? Explain.

Question 53

Briefly describe the conditions under which cartels will be formed.