Question 1

The following table contains the actual prices charged by four Web sites for a Blu-ray disc of the movie The Twilight Saga: Breaking Dawn - Part 2 in October 2013.
  Explain whether the information in this table contradicts the law of one price.

Accepted Answer

The answer of The following table contains the actual prices...

Question 2

Successful price discrimination cannot take place if
A) the market is perfectly competitive.
B) the market can be segmented into different buyer groups.
C) customers are not able to resell the product.
D) the demand curve facing the firm is downward sloping.

Accepted Answer

Price discrimination relies on the ability to charge different prices to different groups of customers based on their willingness to pay. In a perfectly competitive market, all customers have the same willingness to pay and there is no way to charge different prices without losing customers to competitors.

Question 3

The law of one price holds exactly only if there are transactions costs associated with buying a product in one location and selling it in another location.

Accepted Answer

The law of one price holds exactly when there are no transaction costs associated with buying a product in one location and selling it in another location.

Question 4

Which of the following are necessary condition(s) for successful price discrimination? a. zero transaction cost
B. a perfectly competitive market structure
C. an imperfectly competitive market structure
D. at least two different markets with different price elasticities of demand
E. at least two different markets with different price elasticities of supply
A) a, b, and d only
B) c and d only
C) a, c, d and, e only
D) a and c only

Accepted Answer

Price discrimination requires an imperfectly competitive market structure (C) and the ability to segment markets with different price elasticities of demand (D).

Question 5

Most movie theatres charge different prices to different groups of customers for movie admission but not on movie popcorn. Which of the following is a reason for this?
A) because the markup on movie popcorn is very high and movie theatres do not want to forego this source of revenue
B) because the demand for popcorn is very high relative to the demand for movie admissions
C) because it is easier to limit resale in movie admissions but not in popcorn
D) because the cost of operating a concession stand in a movie theatre is very high compared to the cost of showing a movie

Accepted Answer

Movie theatres can easily limit resale of movie tickets as they are generally purchased for a specific time and date, whereas popcorn can be easily resold or shared among multiple people. Therefore, to prevent losses due to resale, theatres charge different prices for movie tickets for different groups of customers but keep the price of popcorn constant. The other options, such as high markup on popcorn or high demand for popcorn, may also be contributing factors, but the limitation on resale is the primary reason.

Question 6

Which of the following products allows the seller to identify different groups of consumers (segment the market) at virtually no cost?
A) early bird dinner specials
B) books sold online
C) a pair of Bose speakers
D) iPhones

Accepted Answer

The answer of Which of the following products allows the...

Question 7

Entrepreneurs who earn arbitrage profit are able to do so by extracting the total consumer surplus from buyers.

Accepted Answer

Arbitrage profit is earned by taking advantage of price discrepancies in different markets, buying low in one market and selling high in another. It does not necessarily involve extracting the total consumer surplus from buyers.

Question 8

Toot Sweets Bakery sells freshly baked muffins from 6.30 am at $1.20 per muffins. By 4 pm, the remaining muffins are marked down to $0.60 each. Which of the following statements is true?
A) Toot Sweets engages in price discrimination; a higher price for those who cannot wait and a lower price for those willing to wait until 4 pm.
B) Toot Sweets is trying to prevent the opportunity to make arbitrage profit.
C) Toot Sweets is trying to minimize its loss.
D) Toot Sweets has underestimated the demand for its muffins.

Accepted Answer

Toot Sweets is trying to minimize its loss by selling the remaining muffins at a lower price at the end of the day.

Question 9

What is meant by the "law of one price"? In discussing the law of demand, Hubbard and O'Brien claim there has been no evidence of an exception to the law (that is, no evidence of an upward-sloping demand curve). Are there exceptions to the law of one price?

Accepted Answer

The answer of What is meant by the "law of...

Question 10

Which of the following is not a way by which price discriminating firms can segment a market?
A) on the basis of time of purchase, for example long-distance calling
B) by requiring an advance purchase, for example air tickets
C) on basis of the buyer's location, for example requiring out-of-state students to pay higher tuition
D) on the basis of the supplier's marginal cost of production, for example requiring customers to pay a premium for customizing options

Accepted Answer

Price discriminating firms can segment a market on the basis of time of purchase, requiring an advance purchase, or location of the buyer. However, segmenting the market on the basis of the supplier's marginal cost of production is not a method of market segmentation.

Question 11

Charging different prices to different consumers for the same product when the price differences are not due to differences in cost is called arbitrage.

Accepted Answer

The answer of Charging different prices to different consumers for...

Question 12

Which of the following is a necessary condition for successful price discrimination?
A) The seller must possess market power.
B) The buyer must possess market power.
C) Transaction costs must be zero.
D) Buyers must have identical inelastic demands.

Accepted Answer

Price discrimination can only be successfully implemented by a seller that possesses market power, as it allows the seller to charge different prices to different consumers based on their willingness to pay. Without market power, competition would limit the seller’s ability to charge different prices. The other options are not necessary for successful price discrimination – buyers do not need market power, transaction costs do not need to be zero, and demands do not need to be identical and inelastic, although the last point can make price discrimination easier to implement.

Question 13

Under what circumstances will the law of one price hold, and when might it not hold?

Accepted Answer

The answer of Under what circumstances will the law of...

Question 14

Firms price discriminate
A) to reduce the quantity sold so as to reduce production costs.
B) to increase profits.
C) to take advantage of customers.
D) to increase total economic surplus.

Accepted Answer

Firms price discriminate in order to increase profits by charging different prices to different customers based on their willingness to pay. This allows the firm to capture more of the consumer surplus and extract more revenue from those who are willing to pay more, while still making sales to those who are less willing to pay.

Question 15

Are sellers who practice arbitrage taking advantage of buyers?

Accepted Answer

The answer of Are sellers who practice arbitrage taking advantage...

Question 16

The following table contains the actual prices charged by four Websites for the PlayStation 3 game The Last of Us in October 2013.
  Explain whether the information in this table contradicts the law of one price.

Accepted Answer

The answer of The following table contains the actual prices...

Question 17

Why is price discrimination legal but not discrimination based on race or gender?
A) because price discrimination increases profits and therefore tax revenues for the government, but discrimination based on race or gender reduces tax revenues
B) because price discrimination reduces deadweight loss, but discrimination based on race or gender increases deadweight loss
C) because price discrimination involves charging people different prices based on their willingness to pay rather than on the basis of arbitrary characteristics
D) because price discrimination enables firms to increase output and employment, but race or gender based discrimination reduces employment

Accepted Answer

Price discrimination is legal because it involves charging people different prices based on their willingness to pay rather than on the basis of arbitrary characteristics like race or gender. In price discrimination, the seller is attempting to capture different levels of consumer surplus and maximize profits. This is different from discrimination based on characteristics that have no relation to the product being sold. Discrimination based on race or gender is illegal and unethical because it unfairly denies people equal opportunities and rights based purely on factors beyond their control.

Question 18

Dell Computers allows potential consumers to customize personal computers to their desires. Dell's strategy is successful because offering bundles that more exactly meets a consumer's preference allows Dell to extract more consumer surplus.

Accepted Answer

The answer of Dell Computers allows potential consumers to customize...

Question 19

"Buy low and sell high is advice given to people who want to make a profit by buying and selling shares of stock. Arbitrage is defined as buying a product in one market at a low price and reselling it in another market at a high price. Therefore, when stock brokers buy and sell stocks to earn a profit they are engaging in arbitrage." Evaluate this statement; state whether it is true or false and explain your answer.

Accepted Answer

The answer of "Buy low and sell high is advice...

Question 20

If a firm charges different consumers different prices for the same product and the difference cannot be attributed to cost variations, then it is engaging in
A) odd pricing.
B) cost-plus pricing.
C) price discrimination.
D) markup pricing.

Accepted Answer

Price discrimination occurs when a business charges different prices for the same product or service to different customers. This can occur for a variety of reasons, such as customer loyalty or willingness to pay. It is illegal to discriminate price based on gender, race, religion, or nationality, as these types of discrimination are prohibited by law.

Quiz 16: Pricing Strategy

The following table contains the actual prices charged by four Web sites for a Blu-ray disc of the movie The Twilight Saga: Breaking Dawn - Part 2 in October 2013. Explain whether the information in this table contradicts the law of one price.

Successful price discrimination cannot take place if

The law of one price holds exactly only if there are transactions costs associated with buying a product in one location and selling it in another location.

Most movie theatres charge different prices to different groups of customers for movie admission but not on movie popcorn. Which of the following is a reason for this?

Which of the following products allows the seller to identify different groups of consumers (segment the market) at virtually no cost?

Entrepreneurs who earn arbitrage profit are able to do so by extracting the total consumer surplus from buyers.

Toot Sweets Bakery sells freshly baked muffins from 6.30 am at $1.20 per muffins. By 4 pm, the remaining muffins are marked down to $0.60 each. Which of the following statements is true?

What is meant by the "law of one price"? In discussing the law of demand, Hubbard and O'Brien claim there has been no evidence of an exception to the law (that is, no evidence of an upward-sloping demand curve). Are there exceptions to the law of one price?

Which of the following is not a way by which price discriminating firms can segment a market?

Charging different prices to different consumers for the same product when the price differences are not due to differences in cost is called arbitrage.

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

Under what circumstances will the law of one price hold, and when might it not hold?

Firms price discriminate

Are sellers who practice arbitrage taking advantage of buyers?

The following table contains the actual prices charged by four Websites for the PlayStation 3 game The Last of Us in October 2013. Explain whether the information in this table contradicts the law of one price.

Why is price discrimination legal but not discrimination based on race or gender?

Dell Computers allows potential consumers to customize personal computers to their desires. Dell's strategy is successful because offering bundles that more exactly meets a consumer's preference allows Dell to extract more consumer surplus.

If a firm charges different consumers different prices for the same product and the difference cannot be attributed to cost variations, then it is engaging in