Question 1

In the real world,
A) all sellers charge one price equal to the marginal cost of production.
B) profitable sellers will set one price based on the average elasticity of demand of buyers.
C) many firms charge different prices based on consumers' willingness to pay.
D) all sellers charge one price set by the government.

Accepted Answer

In the real world, firms often charge different prices based on consumers' willingness to pay. This is known as price discrimination, where firms charge different prices for the same product or service to different customers, based on factors such as their income, age, or location. This allows firms to increase their profits by charging a higher price to customers who are willing to pay more, while still attracting customers who are more price-sensitive with lower prices.

Question 2

Buying at a low price in one market and reselling at a higher price in another market will
A) not generate any profit because of transportation costs.
B) not generate any profit because of transactions costs.
C) eventually eliminate all of the price differences.
D) eventually eliminate most, but not necessarily all, of the price differences.

Accepted Answer

While there may be some transportation and transaction costs involved, buying low in one market and selling high in another can still generate profits. However, as more people engage in this type of arbitrage, it can lead to increased competition and ultimately decrease the price difference between the two markets. Therefore, most of the price differences may be eliminated over time, but not necessarily all of them.

Question 3

For many products, such as fast foods, a variety of prices can be found, but sellers with higher prices can expect to sell their products because
A) consumers are not sensitive to prices.
B) arbitrage will quickly eliminate price differences.
C) firms differentiate products in many ways; for example, higher priced fast food restaurants may offer better service.
D) their demand is perfectly inelastic.

Accepted Answer

Sellers can differentiate their products in many ways, such as offering better quality or service, which can justify higher prices and still attract customers. Therefore, higher priced fast food restaurants may offer better service than their lower-priced counterparts, and still sell their products. Option A is incorrect because consumers are generally sensitive to prices, and will often choose cheaper alternatives if they are available. Option B is incorrect because arbitrage refers to the process of buying a product in a low-price market and selling it in a high-price market, in order to profit from the price difference. This process does not necessarily eliminate price differences completely. Option D is unlikely because demand for fast food is generally elastic, meaning that consumers will be responsive to changes in price.

Question 4

Arbitrage
A) is the act of buying an item at a low price and reselling the item at a higher price.
B) is the act of selling an item on consignment and collecting a huge portion of the proceeds to compensate for the seller's time.
C) is the act of buying an item at a low price, bundling it with another and selling the new package at a much higher price.
D) is any act of buying and selling that results in the seller earning an above normal profit.

Accepted Answer

Arbitrage is a trading strategy that involves buying an asset at a lower price from one market and selling it at a higher price in another market to make a profit from the price difference. It is a risk-free way of making profits because the trader is taking advantage of market inefficiencies.

Question 5

Assuming zero transaction cost, if your local grocer buys oranges at a low price from an orchard and resells them to you at a higher price, then the grocer's revenue minus costs is known as
A) arbitrage profits.
B) transactions profits.
C) pure profits.
D) excess profits.

Accepted Answer

Arbitrage profits are the profits made by buying and selling the same asset in different markets at different prices. In this case, the grocer is buying oranges from an orchard at a low price and reselling them to you at a higher price. The difference between the two prices is the grocer's arbitrage profit.

Question 6

The law of one price holds exactly only if
A) antitrust laws are being enforced.
B) buyers have complete information.
C) transactions costs are zero.
D) it is impossible for buyers to resell the good.

Accepted Answer

The law of one price states that in a perfectly competitive market, identical goods should have the same price. This only holds true if there are no transaction costs, as transaction costs can cause prices to differ between markets. Antitrust laws and complete information are not necessary for the law of one price to hold. The ability to resell the good is also not relevant to the law of one price.

Question 7

Table 16-1
  Table 16-1 shows the price for the hardcover version of the novel Inferno by Dan Brown at four online bookstores.
-Refer to Table 16-1. Which of the following can one conclude from the data above?
A) The data provides clear evidence of price discrimination in online bookstore market.
B) Amazon.com and Walmart.com are able to charge a lower price for the item because they are more cost efficient than the other two companies.
C) The items offered for sale are similar but not identical; the quality of service and delivery time might vary from store to store, which justifies the price differences.
D) Walmart.com and Amazon.com have deliberately underpriced their product to force the other two companies out of business.

Accepted Answer

The price differences can be attributed to variations in service quality and delivery time, which are common factors in online retail.

Question 8

The price of admission to Walt Disney World
A) can vary by your age and address.
B) is the same for everyone.
C) is kept low to attract customers, but Disney earns most of its profits by selling tickets to rides and attractions inside the park.
D) is kept low to attract customers, but prices of rides and attractions inside the park vary by your age, address and other factors.

Accepted Answer

The price of admission to Walt Disney World can vary by your age and address. For example, Florida residents may receive a discount compared to out-of-state visitors. Prices can also vary based on the time of year and whether or not you purchase multiple-day tickets.

Question 9

Lou buys an Iron Man 2 poster from Evan for $30 and resells it on eBay for $60. Which of the following statements is false?
A) Lou has earned some arbitrage profits, assuming that transaction costs are negligible.
B) The transaction has made Evan worse off because he undersold the poster.
C) Lou has probably incurred some costs in connection with this sale.
D) It is possible that Evan has earned some producer surplus from this transaction.

Accepted Answer

Statement B is false. It assumes that Evan had a predetermined value for the poster that was higher than $30. However, it is possible that Evan was willing to sell the poster for $30, so he may not necessarily be worse off. The other statements are all true or possible. Lou may have incurred costs for packaging and shipping the poster, so statement C is likely true. Additionally, it is possible that Evan had a high marginal cost of producing the poster (e.g. he spent a lot of time and effort designing it), so he could have earned some producer surplus even though he sold it for $30. Therefore, statement D is also true or possible. Finally, statement A is true because Lou earned a profit by buying low and selling high.

Question 10

The Athenian Theatre sells play tickets for the same play at different prices: a lower price to those who opt for the seats at the back of the theatre and a higher price for those who purchase seats in the front, around the stage. Which of the following statements is true?
A) This is an example of product differentiation but not price discrimination.
B) The theatre practices first-degree price discrimination by setting prices based on willingness to pay.
C) Since the cost of producing the play does not change with the seating configuration, this is evidence of price discrimination based on market segmentation.
D) Charging two different prices is an effective way to avoid an excess demand for play tickets; the higher price lowers quantity demanded to some extent.

Accepted Answer

The answer of The Athenian Theatre sells play tickets for...

Question 11

When you buy at a low price in one market then sell at a higher price in another market, you are engaging in
A) odd pricing.
B) arbitrage.
C) an antitrust prohibited practice.
D) price discrimination.

Accepted Answer

This scenario describes the practice of arbitrage, which involves buying low in one market and then selling high in another market to make a profit. This is a common practice in financial markets and is legal as long as it is done fairly and with adherence to regulations. Odd pricing involves setting prices just below a whole number (like $1.99 instead of $2.00) to appeal to consumer psychology. Antitrust prohibited practices involve illegal collusion and market manipulation. Price discrimination involves selling the same product at different prices to different customers.

Question 12

Yield management is the practice of
A) determining production functions to minimize production costs.
B) forecasting competitors' responses to price changes.
C) using buyer data to rapidly adjust prices.
D) using information technology to find the best interest rate.

Accepted Answer

Yield management involves using buyer data to make rapid adjustments in pricing in order to maximize revenue. This technique is often used in industries such as airlines, hotels, and car rentals, where the supply of a product is fixed and demand fluctuates based on factors such as seasonality and availability. By using yield management tools and strategies, companies can optimize revenue by charging higher prices during periods of high demand and lowering prices during periods of low demand.

Question 13

Lou buys an Iron Man 2 poster at a garage sale for $30 and resells it on eBay to Kyle for $60. Which of the following statements is true?
A) The transaction has made Lou better off and Kyle worse off.
B) The transaction is economically inefficient.
C) The transaction has made Lou and Kyle better off.
D) It is not possible for Kyle to enjoy any consumer surplus from this transaction.

Accepted Answer

The transaction has made both Lou and Kyle better off as Lou gained a profit of $30 and Kyle was willing to pay $60 for the poster, indicating that he values it more than the price he paid. This creates a mutually beneficial exchange, known as a Pareto improvement, resulting in a net gain in economic welfare.

Question 14

Price discrimination
A) is the practice of charging different prices to different customers based on a seller's personal preferences and prejudices.
B) is the practice of charging different prices to different customers based on the different costs of supplying the product to different customers.
C) is the practice of charging different prices to different customers when the price differences cannot be attributed to variations in cost.
D) is the practice of giving preferential treatment to certain groups of customers based on their long-standing relationship to the producer.

Accepted Answer

Price discrimination is the practice of charging different prices to different customers for the same product or service. However, it is only considered price discrimination when the price differences cannot be attributed to variations in cost. Examples of price discrimination include charging different prices for tickets to the same event based on the time of purchase, offering different prices for online purchases vs in-store purchases, or charging different prices based on a customer's willingness to pay. Choice A is incorrect because price discrimination is not based on a seller's personal preferences and prejudices. Choice B is partially correct in that some price discrimination may be based on the different costs of supplying the product to different customers, but not always. Choice D is incorrect because it is not related to price discrimination but rather to customer relationship management.

Question 15

The expenses you encounter when you buy in one market and sell in a distant market are known as
A) production costs.
B) fixed costs.
C) transactions costs.
D) sunk costs.

Accepted Answer

The expenses incurred when buying in one market and selling in a distant market are transaction costs. These costs include brokerage fees, transportation costs, taxes, and other expenses related to the exchange of goods or assets. Production costs refer to the expenses incurred in the process of creating goods or services, while fixed costs are expenses that do not vary with changes in production or sales levels. Sunk costs are costs that have already been incurred and cannot be recovered.

Question 16

If firms differentiate their products in different ways and charge different price because of these differentiation factors, then
A) the law of one price is not violated.
B) transaction costs are being ignored.
C) the firm must not be maximizing profit.
D) demand must be perfectly elastic.

Accepted Answer

The law of one price is not violated because the different prices are charged based on the differentiating factors of the products. In other words, these differences in prices are not due to market imperfections or discrimination, but rather reflect the different costs involved in producing and marketing them. Therefore, consumers have a choice to buy the product that best fits their preferences and budget, and firms can still compete on the basis of quality, innovation, and service.

Question 17

The law of one price states
A) federal and state statutes that prohibit price discrimination.
B) that all customers should pay the same price.
C) that identical products should sell for the same price everywhere.
D) government regulation of prices for all firms.

Accepted Answer

The law of one price states that identical products should sell for the same price everywhere, regardless of location or currency. This principle is important in international trade and can affect arbitrage opportunities.

Question 18

According to a New York Times article, shoppers from New York City have played a game of "retail arbitrage" by shopping at malls in Northern New Jersey, a state where there is no tax on clothing and shoes. Even after accounting for transaction costs, shoppers could still save money on their clothing and footwear purchases. Source: Ken Belson and Nate Schweber, "Sales Tax Cut in City May Dim Allure of Stores Across Hudson," New York Times, January 18, 2007.
Is the term "arbitrage" correctly used here?
A) Yes, because shoppers were able to purchase items at lower prices even after deducting their transaction costs.
B) No, "arbitrage" means buying at a low price and reselling at a higher price, but no resale takes place here.
C) Yes, arbitrage applies even if no resale takes place; in this case the profits are pocketed by the customers themselves.
D) No, "arbitrage" does not apply to markets that are not in the same geographic area.

Accepted Answer

The term "arbitrage" typically involves buying and reselling to profit from price differences, which is not the case here as there is no resale involved.

Question 19

In the 1950s, Walt Disney began to plan the development of a theme park that would eventually become Disneyland. Disney hired an economist to help determine whether the park would be a financial success. This economist surveyed managers of existing amusement parks for advice. Many of these managers
A) believed that a theme park would be very successful because the Disney name created a market among children and parents who had watched Disney cartoons and movies such as Snow White.
B) recommended that the theme park be located in California because population in the state would increase greatly in the future. Disney followed this advice.
C) recommended that Disney not build the park and leave the amusement park business to those who knew what they were doing.
D) recommended that Disney first build an audience for his park by offering the ABC television network a weekly program that would feature Disney movies, cartoons and original programming. Walt Disney followed this advice. Both the television program and Disneyland were financial successes.

Accepted Answer

Many managers of existing amusement parks advised Disney against building the park, suggesting he should leave the amusement park business to those with experience.

Question 20

A firm's efforts to increase profit by price discrimination can be undermined by
A) arbitrage by buyers.
B) consumer ignorance.
C) differences in elasticity of demand.
D) seller market power.

Accepted Answer

If a firm engages in price discrimination, it means they are charging different prices for the same product to different groups of consumers based on their willingness to pay. However, this strategy can be undermined by arbitrage by buyers, where buyers who are able to purchase the product at a lower price may then resell it to others at a higher price, thus equalizing prices across all groups of consumers. This would eliminate the price discrimination strategy and reduce the firm's profit. The other options (B, C, D) are not necessarily factors that would undermine a firm's price discrimination strategy.

Quiz 16: Pricing Strategy

In the real world,

Buying at a low price in one market and reselling at a higher price in another market will

For many products, such as fast foods, a variety of prices can be found, but sellers with higher prices can expect to sell their products because

Arbitrage

Assuming zero transaction cost, if your local grocer buys oranges at a low price from an orchard and resells them to you at a higher price, then the grocer's revenue minus costs is known as

The law of one price holds exactly only if

Table 16-1 Table 16-1 shows the price for the hardcover version of the novel Inferno by Dan Brown at four online bookstores. -Refer to Table 16-1. Which of the following can one conclude from the data above?

The price of admission to Walt Disney World

Lou buys an Iron Man 2 poster from Evan for $30 and resells it on eBay for $60. Which of the following statements is false?

The Athenian Theatre sells play tickets for the same play at different prices: a lower price to those who opt for the seats at the back of the theatre and a higher price for those who purchase seats in the front, around the stage. Which of the following statements is true?

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

Yield management is the practice of

Lou buys an Iron Man 2 poster at a garage sale for $30 and resells it on eBay to Kyle for $60. Which of the following statements is true?

Price discrimination

The expenses you encounter when you buy in one market and sell in a distant market are known as

If firms differentiate their products in different ways and charge different price because of these differentiation factors, then

The law of one price states

In the 1950s, Walt Disney began to plan the development of a theme park that would eventually become Disneyland. Disney hired an economist to help determine whether the park would be a financial success. This economist surveyed managers of existing amusement parks for advice. Many of these managers

A firm's efforts to increase profit by price discrimination can be undermined by