Question 1

Harry attended a baseball card show in New York City where he bought a number of rookie cards of Pittsburgh Pirates baseball players from the 1950s and 1960s. Harry then sold the cards in Pittsburgh, Harry's hometown, where he knew the cards sold for higher prices. The profits Harry earned from these transactions are called
A) arbitrage profits.
B) normal profits.
C) accounting profits.
D) implicit profits.

Accepted Answer

Harry engaged in arbitrage by buying the cards in New York City where they were priced lower and selling them in Pittsburgh where they were priced higher, thus earning a profit. These profits are called arbitrage profits.

Question 2

Arbitrage refers to the act of
A) resolving a dispute in front of an arbitrator instead of a court of law.
B) buying a product in one market at a low price and reselling in another market at a higher price.
C) trading in the foreign exchange market.
D) suing a producer for illegal business practices.

Accepted Answer

Arbitrage refers to the act of buying a product in one market at a low price and reselling it in another market at a higher price to take advantage of the price difference. This is often done in financial markets, such as buying stocks in one market and selling them in another at a higher price. It is a way to make a profit without taking on any risk.

Question 3

In a perfectly competitive market, in the long run, arbitrage profits will be bid away.

Accepted Answer

In a perfectly competitive market, any temporary differences in prices or opportunity for arbitrage will eventually be eliminated as more and more market participants enter and bid prices up or down to their equilibrium levels. Therefore, in the long run, there will be no sustainable arbitrage profits.

Question 4

The act of buying a product at a low price in one market and reselling the product at a higher price in another market is called arbitrage.

Accepted Answer

This is the definition of arbitrage.

Question 5

The law of one price
A) states that consumers can only buy one good or service at a time.
B) is a law passed by Congress that prohibits firms from selling a product at two different prices in the same market at the same time.
C) states that consumers will pay any price for a product that has a perfectly inelastic demand curve.
D) states that identical products should sell for the same price everywhere.

Accepted Answer

The law of one price states that identical products should sell for the same price everywhere. This principle is based on the idea that if a product is sold at a lower price in one market than in another, consumers will buy the product in the lower-priced market and resell it in the higher-priced market, thereby equalizing the price across markets.

Question 6

Transactions costs refer to
A) the implicit costs of production.
B) the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.
C) the raw material cost of production.
D) the cost of transporting goods from one destination to another.

Accepted Answer

Transactions costs refer to the costs involved in making an exchange, such as negotiating the terms of the exchange, drawing up contracts, and monitoring and enforcing the agreement. These costs can include the time, effort, and money spent in finding and evaluating potential exchange partners, as well as the costs of communicating, bargaining, and enforcing contracts.

Question 7

According to the law of one price,
A) if transaction costs are zero, identical goods should sell for the same price everywhere.
B) if transactions costs are zero, firms must sell a product at a price equal to its marginal cost.
C) if transactions costs are zero, all firms must earn the same profit margin.
D) there must be no differences in the cost of producing identical goods by different producers.

Accepted Answer

The law of one price states that if transaction costs are zero, identical goods should sell for the same price everywhere. This means that in a perfectly competitive market with no barriers to entry or exit, and no information asymmetry or market power, the price of a good should be the same regardless of where it is bought or sold. This is because buyers and sellers have access to the same information and can easily buy or sell the good at the same price, eliminating any arbitrage opportunities.

Question 8

Harvey Morris bought dishes and pitchers made of blue glass during the Great Depression at a flea market. He later resold these items on eBay. The profits Harvey earned from these sales are
A) subject to a retail profits tax.
B) are not economic profits because Harvey did not add value to the items but took advantage of the buyers who were not aware of how much Harvey paid for the items.
C) the result of arbitrage.
D) accounting profits but not economic profits.

Accepted Answer

The profits Harvey earned from reselling the blue glass items on eBay are the result of arbitrage, which is the act of buying an asset at a low price in one market and selling it at a higher price in another market. Although Harvey did not add value to the items, he was able to take advantage of the price discrepancy between the flea market and the online marketplace. The profits may be subject to taxes and may represent accounting profits, but it cannot be determined whether they are economic profits without additional information.

Question 9

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services are called
A) exchange costs.
B) implicit costs.
C) transactions costs.
D) selling costs.

Accepted Answer

Transactions costs refer to the costs incurred by parties in the process of agreeing to and carrying out an exchange of goods or services. These costs can include searching for information, negotiating prices and terms, and enforcing contracts. It is important to minimize transactions costs in order to make exchanges more efficient and mutually beneficial.

Question 10

Which of the following will prevent firms from engaging in price discrimination?
A) yield management
B) arbitrage
C) transactions costs
D) odd pricing

Accepted Answer

Arbitrage is the process of buying a good or service in a market where the price is lower and reselling it in a market where the price is higher. This prevents firms from engaging in price discrimination because if they charge different prices to different customers in different markets, arbitrageurs will buy from the low-priced market and sell in the high-priced market, eroding the price difference. Yield management, transactions costs, and odd pricing do not prevent firms from engaging in price discrimination.

Question 11

When Disneyland opened in 1955, what prices were charged for admission and rides?
A) Admission was free; customers paid for rides.
B) All customers paid the same price for admission; rides were free.
C) Admission prices varied by your age, home address and occupation; rides were free.
D) All customers paid the same low price for admission; customers were also charged prices for rides.

Accepted Answer

When Disneyland opened in 1955, all customers paid the same low price of $1 for admission. They were also charged prices for individual rides, ranging from 10 to 35 cents per ride.

Question 12

Walt Disney began planning for Disneyland in the early 1950s. When he began to consider how the amusement park would be funded
A) he decided to use the profits earned from his company's cartoons and motion pictures.
B) he had trouble raising the required funds. Eventually, he convinced a television network to fund the amusement park in exchange for providing a weekly television program.
C) he decided to borrow money from Hollywood banks. The banks quickly agreed to loan Disney the money because of Disney's reputation and previous success.
D) he had trouble raising the required funds from banks, so he decided to issue "Disney bonds." He had no trouble paying the interest and principal on the bonds with profits from Disneyland.

Accepted Answer

Walt Disney had difficulty raising funds for Disneyland and eventually convinced a television network to fund the park in exchange for a weekly television program.

Question 13

What is meant by the "law of one price"?
A) Identical products should sell for the same price everywhere.
B) A law was passed in 1913 that made it illegal to sell the same good or service to different people for different prices.
C) This is a section of the Sherman Act that forced trusts (for example, the Standard Oil Company) to charge the same price for the same good or service in different states.
D) Foreign companies should not be allowed to sell a product in the United States for prices different from prices these companies charge in other countries.

Accepted Answer

The law of one price states that in an efficient market, identical goods or assets will have the same price everywhere.

Question 14

Many firms use technology to gather information on the preferences of consumers and their responses to changes in prices. This information is then used to adjust prices of the firms' goods and services. This practice is called
A) price discovery.
B) empirical research.
C) yield management.
D) econometrics.

Accepted Answer

The practice described is called yield management, which involves using technology and data to adjust prices of goods and services based on consumer preferences and responses to price changes. Price discovery refers to the process of determining the market price for a good or service. Empirical research and econometrics are related to the analysis and modeling of economic data, but do not specifically relate to the practice of adjusting prices based on consumer behavior.

Question 15

The process of rapidly adjusting prices based on information gathered on consumers' preferences and their responsiveness to changes in price is called
A) yield management.
B) elasticity management.
C) brand management.
D) marketing.

Accepted Answer

The process described fits the definition of yield management, which involves managing pricing and inventory to maximize revenue based on customer demand and behavior. Elasticity management is similar to this concept but specifically refers to adjusting prices based on how responsive consumers are to price changes. Brand management and marketing are broader terms that encompass a variety of activities beyond just pricing.

Question 16

Differentiating products to suit customers' tastes is a form of price discrimination.

Accepted Answer

The answer of Differentiating products to suit customers' tastes is...

Question 17

Many people sell goods through eBay at prices that are higher than the prices they paid for these goods. Economists consider these transactions as
A) examples of zero sum games, since the value of the goods sold is exactly equal to the prices paid for them.
B) unproductive since the goods sold have been produced in the past.
C) examples of exploitation of buyers of the goods by the sellers.
D) examples of arbitrage.

Accepted Answer

This is an example of arbitrage, as the sellers are able to take advantage of price differences between the price they paid for the goods and the price buyers are willing to pay for them on eBay. This is a common practice in many markets and is part of the process of market efficiency.

Question 18

Today, Walt Disney World charges different customers different prices for admission. This pricing strategy is called
A) arbitrage.
B) odd pricing.
C) cost-price pricing.
D) price discrimination.

Accepted Answer

Walt Disney World charges different customers different prices for admission based on demographics, geography, and historical purchasing data. This is known as price discrimination, where companies try to maximize revenue by charging different prices to different customers based on their willingness to pay. This strategy helps companies to capture a larger portion of consumer surplus and increase their profits.

Question 19

According to the law of one price, identical products should sell for the same price everywhere if
A) consumers have knowledge of the prices charged for products in different markets.
B) transactions costs are zero.
C) firms can prevent consumers from engaging in arbitrage.
D) there are no tariffs or other restrictions on imports or exports.

Accepted Answer

The answer of According to the law of one price,...

Question 20

The law of one price states that identical products should sell for the same price everywhere as long as transactions costs are zero.

Accepted Answer

The law of one price is based on the idea of efficient markets and states that identical goods should have the same price in different markets when transactions costs are zero, because any differences would be eliminated through arbitrage. However, in reality, various factors such as tariffs, transportation costs, and market power can result in pricing differences even for identical products.

Quiz 16: Pricing Strategy

Arbitrage refers to the act of

In a perfectly competitive market, in the long run, arbitrage profits will be bid away.

The act of buying a product at a low price in one market and reselling the product at a higher price in another market is called arbitrage.

The law of one price

Transactions costs refer to

According to the law of one price,

Harvey Morris bought dishes and pitchers made of blue glass during the Great Depression at a flea market. He later resold these items on eBay. The profits Harvey earned from these sales are

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services are called

Which of the following will prevent firms from engaging in price discrimination?

When Disneyland opened in 1955, what prices were charged for admission and rides?

Walt Disney began planning for Disneyland in the early 1950s. When he began to consider how the amusement park would be funded

What is meant by the "law of one price"?

Many firms use technology to gather information on the preferences of consumers and their responses to changes in prices. This information is then used to adjust prices of the firms' goods and services. This practice is called

The process of rapidly adjusting prices based on information gathered on consumers' preferences and their responsiveness to changes in price is called

Differentiating products to suit customers' tastes is a form of price discrimination.

Many people sell goods through eBay at prices that are higher than the prices they paid for these goods. Economists consider these transactions as

Today, Walt Disney World charges different customers different prices for admission. This pricing strategy is called

According to the law of one price, identical products should sell for the same price everywhere if

The law of one price states that identical products should sell for the same price everywhere as long as transactions costs are zero.