Deck 17: Pricing Strategy

Question 1

A price that is commonly used in an industry is called

A) an average cost.
B) a cost- plus price.
C) a common price.
D) a benchmark price.

Answer 1

a benchmark price.

Question 2

The situation where the best strategy for a firm depends on the choice of strategy by other firms is called

A) oligopoly.
B) monopolistic competition.
C) perfect competition.
D) monopoly.

Answer 2

oligopoly.

Question 3

If a firm engages in limit pricing, its

A) price and output will be below that of a profit- maximiser.
B) output and profits will be below that of a profit- maximiser.
C) price and profits will be below that of a profit- maximiser.
D) price and marginal cost will be below that of a profit- maximiser.

Answer 3

price and profits will be below that of a profit- maximiser.

Question 4

Average cost pricing is the term used to describe the situation when a firm

A) follows the prices of the average firm in the industry.
B) adds a percentage mark- up to the average cost of production.
C) follows the prices of the dominant firm in the industry.
D) charges customers according to average cost rather than marginal cost.

Question 5

For a firm that uses mark- up pricing and aims to achieve a particular level of total profit, its supply curve will be

A) parallel to its average (total) cost curve.
B) impossible to determine as long as the firm has market power.
C) parallel to its demand curve.
D) above its average (total) cost curve, but getting closer to it as output increases.
E) parallel to its average variable cost curve.

Question 6

If a firm is using a mark- up pricing policy, price will equal

A) AVC + profit mark- up
B) AFC + AVC + profit mark- up
C) AFC + MVC + profit mark- up
D) MFC + MVC + profit mark- up

Question 7

Cost- based pricing uses the idea that

A) P = TFC + TVC + profit mark- up
B) P = AFC + AVC + profit mark- up
C) P = TFC + TVC
D) P = AFC + AVC

Question 8

What must a firm know before it can set its output and profit mark- up levels to avoid shortages and surpluses?

A) Its marginal cost curve
B) Its marginal revenue curve
C) Its demand curve
D) Its supply curve
E) Its average costs

Question 9

When is the size of the mark- up likely to be largest?

A) When the firm has monopoly or oligopoly power
B) When the firm is operating under perfect competition
C) When the market is contracting
D) When demand is constant but costs are rising

Question 10

If a firm charges each customer the maximum price they are willing to pay for each unit, this is called_________degree price discrimination.

A) third
B) first
C) fourth
D) second

Question 11

In which market structure could price discrimination not occur?

A) Monopoly
B) Oligopoly
C) Perfect competition
D) Monopolistic

Question 12

When a firm sets its prices below average cost in order to drive out competitors, this is called

A) first degree price discrimination.
B) second degree price discrimination.
C) third degree price discrimination.
D) predatory pricing.

Question 13

When a firm charges a consumer the full price for ten units of product X and then half the price of every other unit of product X bought, this is called

A) first degree price discrimination.
B) second degree price discrimination.
C) third degree price discrimination.
D) predatory pricing.

Question 14

Price discrimination increases profits because

A) some or all consumer surplus is transferred to producers.
B) some or all producer surplus is transferred to consumers.
C) costs are lower than otherwise.
D) the firm can make the best possible use of its tax shield.

Question 15

Which of the following is not a necessary condition for a firm to be able to price discriminate?

A) Unit costs are not constant.
B) There is the ability to segment markets.
C) The firm is a price- maker.
D) The firm has market power.

Question 16

Which of the following is not a type of price discrimination?

A) Running a two- part tariff
B) Limit pricing
C) Inter- temporal pricing
D) Peak- load pricing

Question 17

If a firm charges everyone a different price, it is likely that they are engaging in

A) predatory pricing.
B) third degree price discrimination.
C) second degree price discrimination.
D) first degree price discrimination.

Question 18

Which of the following is not an advantage of practising price discrimination?

A) Higher total revenue
B) Helps to drive competitors out of business
C) Less advertising
D) Price discrimination is only advantageous

Question 19

One of the reasons that firms use inter- temporal and peak- load pricing is that it enables them to exploit

A) vulnerable customers.
B) the product life cycle.
C) economies of scope.
D) different elasticities of demand in different segments of the market.

Question 20

What is a two part- tariff?

A) Being charged a different price depending on who you are (e.g. age of customer)
B) An access and a separate usage price
C) Being charged a high price for the first few units and a lower price for additional units
D) Charging for products in two (or more) installments

Question 21

Prices can be influenced by

A) the aims of the firm.
B) the level of competition that the firm faces.
C) the life cycle of the product.
D) all of the above

Question 22

If a supermarket engaged in full- range pricing, it would

A) assess the price of its goods collectively/as a whole rather than individually.
B) assess the price of its goods individually rather than collectively/as a whole.
C) price each item at the point where marginal cost equals marginal revenue.
D) engage in mark- up pricing.

Question 23

Which of the following defines a loss leader?

A) A firm that aims to minimise costs as opposed to maximising profits.
B) A product whose price is cut by the business in order to attract customers
C) When goods are assessed collectively when pricing them, rather than individually
D) A firm that specialises in the production of by- products

Question 24

What is the most common form of inter- related production?

A) Full- range products
B) Joint products
C) By- products
D) Distinct products

Question 25

The ideal product for a loss leader would have

A) highly inelastic demand.
B) a marginal revenue of zero.
C) highly elastic demand.
D) highly elastic supply.

Question 26

Transfer pricing may create problems for a business as

A) departments may use their internal power to raise their profit levels at the expense of other departments.
B) it can be difficult to determine the correct transfer price.
C) it reduces market segmentation, which then makes price discrimination less effective.
D) A and B

Question 27

In which stage of the product life cycle would a firm be most likely to have a monopoly?

A) Launch
B) Maturity
C) Growth
D) Decline

Question 28

In which stage of the product life cycle is competition most likely to be intense?

A) Maturity
B) Growth
C) Decline
D) Launch

Question 29

Limit pricing is when a firm keeps prices low in order to deter rivals from entering its market.

Question 30

Mark- up pricing is when a firm calculates prices by adding a percentage to its average costs.

Question 31

Predatory pricing involves pricing below average cost. However, it is illegal under UK and European competition law.

Question 32

A perfect price- discriminating monopolist would produce as much as a competitive industry would.

Question 33

There is no consumer surplus if a monopolist practises perfect price discrimination.

Question 34

When a firm charges each customer the most they are willing to pay, this is called third degree price discrimination.

Question 35

When a firm sets its prices below average cost in order to drive out competitors, this is called second degree price discrimination.

Question 36

Under inter- related production, if a firm is aiming to maximise profits, it should add the marginal costs from both products to get an MC curve for the 'combined' product.

Question 37

With transfer pricing, there may be conflicts between divisions. The best way to solve this is for divisions to base their pricing of intermediate products on average costs.

Question 38

During the growth stage of a product life cycle, a producer is likely to have higher monopoly power and faces a more inelastic demand curve than at the end of a product's life cycle.

Question 39

During the growth stage of a product life cycle, new firms are likely to enter the industry.

Question 40

Competition usually decreases as the product life cycle progresses.

Question 41

What is predatory pricing?

Question 42

Explain the idea of limit pricing. Why might a firm choose to adopt it as a pricing policy?

Question 43

What is imperfect competition?

Question 44

Explain how a firm would change its mark- up in response to changing market conditions.

Question 45

What specific forms of discriminatory pricing are practised by:
a) UK train companies
b) international airlines
c) theatres?

Question 46

What conditions must hold for price discrimination to be possible?

Question 47

What is a loss leader?

Question 48

Explain the idea of transfer pricing.

Question 49

What are some of the difficulties and problems of transfer pricing?

Question 50

What are the four main stages of the product life cycle concept?