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Chapter 11 Price Discrimination
MULTIPLE CHOICE
1. Price discrimination exists when a firm sells __________ goods at more than one price to __________
groups of customers.
a. different; similar
b. existing; distinct
c. discounted; large
d. identical; different
e. limited; restricted
ANS: D DIF: Easy REF: What Is Price Discrimination?
TOP: I. MSC: Remembering
2. Price discrimination exists when a firm is able to sell the same good at more than one price to different
groups of:
a. producers.
b. firms.
c. consumers.
d. promoters.
e. commodities.
ANS: C DIF: Easy REF: What Is Price Discrimination?
TOP: I. MSC: Remembering
5. In 1996, Victoria’s Secret shipped different catalogs to customers based on their buying habits.
Frequent customers received catalogs with lower prices, whereas new customers received catalogs
with higher prices for those same items. Victoria’s Secret was practicing:
a. monopolistic competition.
b. reservation pricing.
c. price retention.
d. efficient pricing.
e. price discrimination.
ANS: E DIF: Easy REF: What Is Price Discrimination?
TOP: I. MSC: Applying
8. One reason that firms may be unable to utilize price discrimination as a viable strategy is because:
a. it is always illegal to price-discriminate.
b. firms are unwilling to maximize profits.
c. most consumers’ reservation prices are well publicized.
d. firms are unable to prevent resale of the product they offer for sale.
e. firms are unlikely to increase profits after paying for increased marketing costs.
ANS: D DIF: Easy REF: Conditions for Price Discrimination
TOP: I.A. MSC: Remembering
10. Price discrimination allows firms to make more money by partitioning their customers into at least two
distinct groups, those that:
a. the firm wants to retain as customers and those that will decide to buy elsewhere.
b. have a similar elasticity of demand and those who are unaware of their demand elasticity.
c. will get a discount and those that are willing to pay more.
d. differ from their usual customer type and those with characteristics common to their
customer base.
e. are willing to pay more and those that are easily misled by discounts.
ANS: C DIF: Medium REF: Conditions for Price Discrimination
TOP: I.A. MSC: Remembering
12. Airlines require every passenger with a ticket to have a matching government-issued photo
identification. Price discrimination is made easier because:
a. this practice prevents a passenger who purchased a discounted fare from reselling that
ticket to another customer who is willing to pay more.
b. this practice allows airlines to determine the different personal characteristics of their
buyers at a zero cost.
c. this type of price discrimination is mandated and supported by the federal government.
d. customers acknowledge that they are exchanging higher ticket prices for decreased safety
regulations.
e. customers are then willing to divulge relevant information to the airline about their
reservation price.
ANS: A DIF: Medium REF: Conditions for Price Discrimination
TOP: I.A. MSC: Understanding
13. If a firm is unable to distinguish which of their buyers has inelastic demand and which has a relatively
elastic demand, then the firm will be unable to price discriminate because they will:
a. not know how much of the product to offer for sale.
b. not know enough about their customer base to prevent resale.
c. not know which price to charge which customer.
d. not know how many of their customers will buy the product when it is offered for sale.
e. be unable to predict how much of their sales will be retained as profit.
ANS: C DIF: Medium REF: Conditions for Price Discrimination
TOP: I.A. MSC: Understanding
15. Hotwire.com, an online travel company specializing in cheap and discounted hotel rates and airfares,
often asks customers if their travel dates are flexible when pricing their potential bookings. This
practice helps Hotwire.com practice price discrimination by allowing it to:
a. easily distinguish between different groups of buyers.
b. book reservations for customers who are most likely to travel before those who are less
likely to travel.
c. post higher prices initially and then lower the price based on room availability.
d. determine which customers are simply comparison shopping and which ones are ready to
make a purchase.
e. offer high prices to customers with flexible travel dates and low prices to those who are on
a fixed income.
ANS: A DIF: Easy REF: Conditions for Price Discrimination
TOP: I.A. MSC: Applying
Reese Witherspoon plans to visit her hometown of New Orleans, Louisiana. When her assistant
checked the hotel reservation website, there were four published rates available, which are
summarized in the accompanying table. Use this table to answer the questions that follow.
17. Why would the hotel require a guest to provide appropriate identification to receive the AARP
member rate, the military rate, or the government rate?
a. to prevent resale of discounted rooms to other buyers not eligible for the discounted price
b. to honor those who serve in the military and offer support to the troops
c. to encourage active membership in the American Association of Retired Persons (AARP)
d. to ensure that distinguished government guests are assigned the appropriate costs
e. to limit the number of patrons who receive each type of rate
ANS: A DIF: Easy REF: Conditions for Price Discrimination
TOP: I.A. MSC: Applying
18. The following excerpt contains a campus-wide announcement about a concert at the University of
West Georgia (UWG). Students were required to show their identification card to purchase tickets at
the lower price, but on concert day, student-priced ticket holders were not required to show
identification.
The Band Perry [a Grammy-nominated country music act] will perform live at the University of West
Georgia Coliseum on Sunday, April 22, as part of its Purveyors of Performance Tour 2012. . . . Prices
are $10 in advance or $15 on the day of the show for those with a UWG [Student] ID, and $20 in
advance or $25 on the day of the show for the general public.
Source: “CAMPUS NEWS: The Band Perry Comes to UWG, ” UWG media (blog) UWG Center for Student Involvement,
http://uwgmedia.blogspot.com/2012/04/band-perry-comes-to-uwg_19.html, April 19, 2012.
Which price discrimination condition was satisfied by requiring students to show their ID card for their
initial ticket purchase?
a. The concert promoter was able to prevent the resale of the product or service to another
student.
b. The concert promoter was able to prevent the resale of the product or service to another
student.
c. The concert promoter was able to prevent the resale of the product or service to another
consumer who is willing to pay more.
d. The concert promoter was able to distinguish easily among groups of sellers with different
price elasticities of supply.
e. The concert promoter was able to distinguish easily between true fans of the Band Perry
and those who just wanted to see a cheap concert.
ANS: B DIF: Medium REF: Conditions for Price Discrimination
TOP: I.A. MSC: Applying
19. In the past, the University of Georgia (UGA) sold enrolled students a pack of paper tickets that granted
them discounted access to all home football games. Recently the university changed its policy to the
following, “Student tickets will be inscribed on your valid UGA ID. There will be no physical tickets
for home games.” This rule change was most likely implemented to:
a. encourage greater student attendance at home football games and thus gain higher profits.
b. keep students from actively practicing price discrimination at sporting events.
c. prevent students from reselling their discounted tickets to other buyers who are willing to
pay full price for their tickets.
d. prevent ticket scalpers from being less willing to engage in price discrimination or other
illegal activities near college campuses.
e. promote the use of a technological advance in card inscribing in order to avoid the
negative externalities associated with the overprinting of paper materials.
ANS: C DIF: Medium REF: Conditions for Price Discrimination
TOP: I.A. MSC: Applying
21. Despite the gain from higher profits, firms are not always able to price-discriminate because:
a. they are unable to partition their customers into distinct groups.
b. it is always illegal to price-discriminate in the United States.
c. they already hold a large degree of market power.
d. they already provide their goods at the lowest possible prices.
e. they can easily determine each customer’s reservation price.
ANS: A DIF: Medium REF: Conditions for Price Discrimination
TOP: II.A. MSC: Understanding
22. Price discrimination can help improve efficiency in the market because goods are sold to more people,
thus increasing profits. If all consumers have similar tastes, will a firm be able to price-discriminate?
a. Yes, because the market is homogeneous
b. Yes, as long as reselling is prohibited in the market
c. No, because the firm will not be able to distinguish among groups of consumers
d. No, because the similarities among consumers will lead to collusion among buyers
e. Yes, because there will be a monopoly in the market (because all consumers want to
purchase the same goods and services)
ANS: C DIF: Medium REF: Conditions for Price Discrimination
TOP: II.A. MSC: Understanding
23. An executive, a surfer, and a schoolteacher each decide to fly from Atlanta, Georgia, to Honolulu,
Hawaii. The schoolteacher can travel only during the months of June and July. The executive must
travel in May for a meeting with her overseas board of directors. The surfer can travel anytime during
the calendar year but he faces a limited budget. The lowest airfare for each month is summarized in the
following table. Assuming that the airline faces a constant cost of production each month for a flight,
why is it beneficial for the airline to charge different prices each month?
24. Internet service providers such as Comcast are able to price-discriminate easily for many reasons.
Which of the following is a reason for them to price-discriminate?
a. They offer better services than the competition.
b. They can easily identify new customers from old customers.
c. They let the customers choose from different packages based on income.
d. There are many competitors providing Internet services.
e. Some companies offer additional services such as cable and phone.
ANS: B DIF: Medium REF: Conditions for Price Discrimination
TOP: II.A. MSC: Applying
26. The main reason firms cannot price-discriminate under perfect competition is because:
a. firms are price-takers and cannot set prices for their goods.
b. firms cannot identify different kind of consumers perfectly.
c. some goods are being resold in the market.
d. there is a lot of heterogeneity among consumers’ tastes.
e. all firms share the same production technology.
ANS: A DIF: Medium REF: Conditions for Price Discrimination
TOP: II.B. MSC: Understanding
27. Price discrimination allows businesses to make additional profits and allows markets to work more:
a. equitably.
b. efficiently.
c. independently.
d. realistically.
e. unfairly.
ANS: B DIF: Medium REF: One Price Versus Price Discrimination
TOP: II.A. MSC: Remembering
29. Reflect on the following excerpt from a Washington Post article about dynamic pricing by online retail
giant Amazon.com.
Few things stir up a consumer revolt quicker than the notion that someone else is getting a
better deal. That’s a lesson Amazon.com has just learned. Amazon, the largest and most potent force in
e-commerce, was recently revealed to be selling the same DVD movies for different prices to different
customers. It was the first major Web test of a strategy called “dynamic pricing,” which gauges a
shopper’s desire, measures his means and then charges accordingly. The Internet was supposed to
empower consumers, letting them compare deals with the click of a mouse. But it is also supplying
retailers with information about their customers that they never had before, along with the technology
to use all this accumulated data. While prices have always varied by geography, local competition and
whim, retailers were never able to effectively target individuals until the Web. “Dynamic pricing is the
new reality, and it’s going to be used by more and more retailers,” said Vernon Keenan, a San
Francisco Internet consultant. “In the future, what you pay will be determined by where you live and
who you are. It’s unfair, but that doesn’t mean it’s not going to happen.”
Source: David Streitfeld, “On the Web, Price Tags Blur: What You Pay Could Depend on Who You Are,” Washington Post, September 27,
2000, A1.
The producer, who can charge each customer according to his or her willingness to pay for a product,
can:
a. minimize producer surplus by using price discrimination.
b. maximize consumer surplus by using perfect price prejudice.
c. minimize market efficiency by using two-tiered price discrimination.
d. maximize profits by using perfect price discrimination.
e. minimize loss by using perfect price determination.
ANS: D DIF: Medium REF: One Price Versus Price Discrimination
TOP: I.B. MSC: Applying
31. A firm that is able to differentiate between each of its customers by selling the same good at a unique
price to each customer is practicing:
a. reservation price discrimination.
b. perfect price discrimination.
c. inelastic demand discrimination.
d. idealized price discrimination.
e. exclusive price discrimination.
ANS: B DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Remembering
32. Perfect price discrimination exists when a firm sells __________ good at a unique price to
__________.
a. a complementary; each group of buyers
b. a similar; most of their customers
c. a substitute; different customers
d. a discounted; a few of their customers
e. the same; each customer
ANS: E DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Remembering
35. In New York City’s Chinatown, tourists flock to shops to buy souvenirs from local retailers. Each
store sells similar items but each salesperson tries to determine a customer’s reservation price before
reaching a deal. In this scenario, the salesperson is attempting:
a. perfect price discrimination.
b. to minimize producer loss.
c. to minimize consumer loss.
d. to maximize buyer behavior.
e. price-taking discrimination.
ANS: A DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
36. Which of the following is a real-world example of an attempt at perfect price discrimination?
a. a restaurant’s blue-plate special
b. a discount on preinstalled computer software
c. a car dealership selling an automobile
d. a college’s varying tuition rates, depending on state of residence
e. an advertisement for “buy one, get one free” pizza before 3:00 P.M.
ANS: C DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
37. Suppose two brothers own identical skydiving companies but have decided to experiment with
different pricing structures. The older brother’s company, Air Adventures, sets its prices using the
profit-maximizing rule, while the younger brother’s company, Sky Warriors, sets its prices using a
two-tiered price discrimination model. Assuming that both companies face the same market demand
curves, marginal costs, and costs of production, and wield significant market power for their service
area, which of the following is most likely to occur?
a. Air Adventures will generate a similar net revenue to Sky Warriors.
b. Sky Warriors will generate a higher net revenue than Air Adventures.
c. Sky Warriors will generate a lower net revenue than Air Adventures.
d. Air Adventures will generate a higher net revenue than Sky Warriors.
e. Sky Warriors will eventually switch to the Air Adventures model.
ANS: B DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
38. The following excerpt describes Qcue, a software-based dynamic pricing management company that
has developed software to assist professional and collegiate sports teams increase their ticket sales by
practicing near-perfect price discrimination.
Dynamic pricing will become much more prevalent in both professional and collegiate sports over the
next few years. . . . In an industry where the demand across games tends to be dissimilar for a plethora
of reasons—some predictable, yet some spurious—it only makes sense that the pricing of sports tickets
should allow teams the ability to price their inventory in the most efficient way possible. . . .
“Accurately pricing tickets is a very difficult process,” says Barry Kahn, the CEO of Qcue. “In the
initial stages, we had both technical and emotional barriers to overcome. We were changing the way
things had been done for so many years, moving from pricing tickets 9 months out and keeping them
static, to allowing the price to flex right up until the first pitch. That meant educating those in charge of
ticketing operations as well as the fans.” . . . In 2009, Qcue had one client. In 2010, they were working
with three teams. Today their roster includes 30+ teams across MLB, MLS, NHL and NBA.
Source: Patrick Rishe, “Dynamic Pricing: The Future of Ticket Pricing in Sports,” Forbes,
http://www.forbes.com/sites/prishe/2012/01/06/dynamic-pricing-the-future-of-ticket-pricing-in-sports/, January 6, 2012.
Another market that is well known for this practice is the market for:
a. airline tickets.
b. secondary education.
c. online music.
d. economics textbooks.
e. college dorm rooms.
ANS: A DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
The accompanying figure depicts the demand (D) curve for general admission concert tickets to see
ECON-Jammin’, the world’s first economics rock band, which is scheduled to visit your city next
month. The concert venue can accommodate 100 fans with a marginal cost (MC) of $10 per person.
39. If ECON-Jammin’ charges a single price for their concert tickets and follows the profit-maximizing
rule for the perfectly competitive firm, what will be the price that is charged?
a. $50 per ticket
b. $45 per ticket
c. $40 per ticket
d. $35 per ticket
e. $30 per ticket
ANS: E DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
40. If ECON-Jammin’ charges a single price to see its band in concert and follows the profit-maximizing
rule for the perfectly competitive firm, how many people will attend the concert?
a. 50
b. 40
c. 30
d. 20
e. 10
ANS: D DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
41. If ECON-Jammin’ charges a single price to see its band in concert and follows the profit-maximizing
rule for the perfectly competitive firm, how much net revenue will be generated?
a. $1,600
b. $600
c. $400
d. $350
e. $200
ANS: C DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
42. ECON-Jammin’ has recently discovered that its fans are made up of two distinct groups, which they
can easily distinguish. They have decided to utilize their economic knowledge and offer a high-priced
ticket of $40 per person and a low-priced ticket of $20 per person. Based on this information, what is
the net revenue earned by the sales of the high-priced ticket?
a. $500
b. $300
c. $250
d. $200
e. $150
ANS: B DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
43. ECON-Jammin’ has recently discovered that its fans are made up of two distinct groups, which they
can easily distinguish. They have decided to utilize their economic knowledge and offer a high-priced
ticket of $40 per person and a low-priced ticket of $20 per person. Based on this information, what is
the net revenue earned by the sales of the low-priced ticket?
a. $200
b. $300
c. $400
d. $500
e. $600
ANS: B DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
44. ECON-Jammin’ has recently discovered that its fans are made up of two distinct groups, which they
can easily distinguish. They have decided to utilize their economic knowledge and offer a high-priced
ticket of $40 per person and a low-priced ticket of $20 per person. Based on this information, what is
the gain in net revenue from using price discrimination versus a single-price model?
a. $200
b. $150
c. $100
d. $50
e. $0
ANS: A DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
EJH Cinemas, a movie theater next to your university, attracts two types of customers: those who are
associated with the university (students, faculty, and staff) and locals who live in the surrounding area.
There are 10,000 university customers interested in purchasing movie tickets from EJH Cinemas, with
a maximum willingness to pay of $7 per ticket. There are 20,000 local customers interested in
purchasing tickets, with a maximum willingness to pay of $9 per ticket. The movie theater incurs a
constant marginal cost of $4 per ticket. For simplicity, assume each customer purchases, at most, one
ticket.
45. What will be the amount of EJH Cinemas’ total revenue if the price is $7 per ticket?
a. $250,000
b. $210,000
c. $180,000
d. $140,000
e. $105,000
ANS: B DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
46. What is the amount of consumer surplus if the price is $7 per ticket?
a. $120,000
b. $90,000
c. $80,000
d. $40,000
e. $0
ANS: D DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
47. What will be the amount of EJH Cinemas’ total revenue if the price is $9 per ticket?
a. $250,000
b. $210,000
c. $180,000
d. $140,000
e. $105,000
ANS: C DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
48. What is the amount of consumer surplus if the price is $9 per ticket?
a. $120,000
b. $90,000
c. $80,000
d. $40,000
e. $0
ANS: E DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
49. If EJH Cinemas decides to practice price discrimination, charging $9 for a standard ticket available to
everyone but only $7 for a ticket if you show your university identification (students, faculty, and
staff), what will be the movie theater’s total revenue?
a. $250,000
b. $200,000
c. $180,000
d. $170,000
e. $150,000
ANS: A DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
50. If EJH Cinemas decides to practice price discrimination, charging $9 for a standard ticket available to
everyone but only $7 for a ticket if you show your university identification (students, faculty, and
staff), what will be the amount of consumer surplus?
a. $0
b. $5,000
c. $15,000
d. $20,000
e. $25,000
ANS: A DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
The Varsity, located in downtown Atlanta, is the world’s largest drive-in restaurant. Located near the
Georgia Tech campus, the drive-in attracts two distinct types of customers: college students and
visitors to Atlanta. The owners are considering offering a student discount of $1 off their combo meal,
which is regularly priced at $9. There are 5,000 students interested in purchasing a combo meal, with
a maximum willingness to pay of $8. There are 5,000 visiting customers interested in purchasing the
combo meal, with a maximum willingness to pay of $9. Assume that each customer, at most, will
purchase a single meal and the marginal cost is $5.
51. What will be the amount of the Varsity’s total revenue before the offer of a student discount when the
single price of $9 per combo meal goes into effect?
a. $90,000
b. $85,000
c. $60,000
d. $45,000
e. $35,000
ANS: D DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
52. What is the amount of total consumer surplus if the Varsity offers the combo meal at the single price
of $9 per meal?
a. $20,000
b. $15,000
c. $10,000
d. $5,000
e. $0
ANS: E DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
53. What will be the amount of total revenue for the Varsity if the owners offer a single price of $8 per
combo meal?
a. $90,000
b. $85,000
c. $80,000
d. $65,000
e. $40,000
ANS: C DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
54. What is the difference in the amount of total consumer surplus if the Varsity offers the combo meal at
the single price of $8 per combo meal instead of the previous single price of $9 per combo meal?
a. no change in consumer surplus
b. $16,500 decrease in consumer surplus
c. $15,000 decrease in consumer surplus
d. $10,000 increase in consumer surplus
e. $5,000 increase in consumer surplus
ANS: E DIF: Easy REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
55. If the Varsity decides to practice price discrimination, what will be its total revenue if it charges most
customers $9 for a standard combo meal but charges a reduced price of $8 for only those customers
who show their student identification card?
a. $95,000
b. $90,000
c. $85,000
d. $80,000
e. $75,000
ANS: C DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
56. If the Varsity decides to practice price discrimination, what will be the amount of consumer surplus if
it charges most customers $9 for a standard combo meal but charges a reduced price of $8 for only
those customers who show their student identification cards?
a. $0
b. $500
c. $1,000
d. $2,500
e. $5,000
ANS: A DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
57. Which of the following examples is the closest to perfect price discrimination?
a. nontransferable goods that are sold in an auction
b. Internet-access package deals for new and old customers
c. monthly versus daily bus tickets
d. daily deals in an electronics store
e. clubs offering waived cover charges for “ladies night”
ANS: A DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.B. MSC: Applying
58. Consider the accompanying table. You are the only provider of bottled water for three cities. Because
you have access to a natural spring, the marginal cost to produce an additional bottle is $0. How many
bottles of water would you need to produce to maximize your profits and at what price would you sell
it?
59. Mirabella Creations is a custom jewelry company that specializes in unique, handmade, wearable
artwork. Each piece of jewelry offered for sale is made after an extensive customer consultation, which
results in a one-of-a-kind piece of heirloom jewelry. To maximize profits, the firm owner should
charge:
a. the same price to all customers.
b. the price that the market will bear.
c. a price that will cover the firm’s fixed costs.
d. a price that is close to each customer’s willingness to pay.
e. a price that is competitive with mass-market jewelers available in their service area.
ANS: D DIF: Medium REF: One Price Versus Price Discrimination
TOP: III.C. MSC: Understanding
61. You are the only provider of bottled water for three cities. Because you have access to a natural spring,
the marginal cost to produce an additional bottle is $0. As you know, firms discriminate to improve
profits. How much would your firm earn in additional profit if you practice price discrimination across
cities, charging a different price in each city, versus charging everyone a single price?
a. $9
b. $10
c. $20
d. $30
e. $5
ANS: A DIF: Difficult REF: One Price Versus Price Discrimination
TOP: III.C. MSC: Applying
62. You are the only provider of bottled water for three cities. Because you have access to a natural spring,
the marginal cost to produce an additional bottle is $0. Imagine you could price-discriminate perfectly
in this market and that you are a profit-maximizing firm. Calculate how much more profit your firm
would earn if you practiced perfect price discrimination instead of practicing imperfect price
discrimination (charging different prices in each city)?
a. $55
b. $30
c. $25
d. $20
e. $10.
ANS: A DIF: Difficult REF: One Price Versus Price Discrimination
TOP: III.C. MSC: Applying
63. Perfect price discrimination transfers the gains from trade from __________, but it also creates
maximum efficiency.
a. firms to buyers
b. consumers to producers
c. corporations to sole proprietorships
d. producers to consumers
e. monopolies to profit-maximizing firms
ANS: B DIF: Easy REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Remembering
64. For the companies that are able to engage in price discrimination, the practice:
a. is profitable.
b. increases the welfare of consumers.
c. is sometimes inefficient for the market.
d. is difficult to maintain over the long run.
e. decreases the welfare of producers.
ANS: A DIF: Easy REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Remembering
65. The reason economists use the term perfect for firms that are able to charge each customer a price
exactly equal to the price the customer is willing to pay is because it:
a. is a perfect example of capitalism.
b. always works perfectly, just like the theoretical model.
c. describes a market outcome that produces no deadweight loss.
d. charges each customer his or her own perfect price.
e. works perfectly to benefit the producers selling the product.
ANS: C DIF: Easy REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Understanding
66. Suppose the market for golf clubs has moved from a perfectly competitive market to one that is
completely dominated by firms practicing perfect price discrimination. Which of the following
statements is true about the change in welfare?
a. The change creates a deadweight loss.
b. Society’s total welfare is zero after the change.
c. There is a decrease in deadweight loss accompanied by a decrease in producer surplus.
d. Some surplus has been lost to society, but consumers are better off overall.
e. All of the surplus previously enjoyed by consumers has been shifted to producers.
ANS: E DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Understanding
67. When a market model moves from that of a monopoly to one in which perfect price discrimination is
practiced, the deadweight loss:
a. increases.
b. remains unchanged.
c. can increase or decrease depending on the type of loss.
d. decreases.
e. fluctuates.
ANS: D DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Understanding
68. Despite creating maximum market efficiency, perfect price discrimination is often disliked by
consumers because it transfers the gains in trade from:
a. consumers to producers.
b. producers to consumers.
c. firms to producers.
d. buyers to consumers.
e. firms to buyers.
ANS: A DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Understanding
69. One of the benefits of perfect price discrimination over a monopoly is that it can increase:
a. marginal welfare.
b. total welfare.
c. average welfare.
d. cost of production.
e. marginal cost.
ANS: B DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Understanding
70. The following excerpt describes Qcue, a software-based dynamic pricing management company that
has developed software to assist professional and collegiate sports teams to increase their ticket sales.
Dynamic pricing will become much more prevalent in both professional and collegiate sports over the
next few years. . . . In an industry where the demand across games tends to be dissimilar for a plethora
of reasons—some predictable, yet some spurious—it only makes sense that the pricing of sports tickets
should allow teams the ability to price their inventory in the most efficient way possible. . . .
“Accurately pricing tickets is a very difficult process,” says Barry Kahn, the CEO of Qcue. “In the
initial stages, we had both technical and emotional barriers to overcome. We were changing the way
things had been done for so many years, moving from pricing tickets 9 months out and keeping them
static, to allowing the price to flex right up until the first pitch. That meant educating those in charge of
ticketing operations as well as the fans.” . . . In 2009, Qcue had one client. In 2010, they were working
with three teams. Today their roster includes 30+ teams across MLB, MLS, NHL and NBA.
Source: Patrick Rishe, “Dynamic Pricing: The Future of Ticket Pricing in Sports,” Forbes,
www.forbes.com/sites/prishe/2012/01/06/dynamic-pricing-the-future-of-ticket-pricing-in-sports/, January 6, 2012.
When teams are able to change ticket prices minute to minute based on demand, they are attempting
to:
a. discount tickets to their most loyal fans.
b. transfer surplus from consumers to producers.
c. prevent the resale of tickets through ticket reselling websites like StubHub!
d. confuse the fans of their rivals in order to gain a home-field advantage.
e. break down the technical and emotional barriers that exist between fans and team owners.
ANS: B DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Applying
71. In 1996, Victoria’s Secret shipped different catalogs to customers based on their buying habits.
Frequent customers received catalogs with lower prices, whereas new customers received catalogs
with higher prices for those same items. What is the firm’s motivation for practicing price
discrimination, despite knowing that if their customers’ found out, the company could potentially
experience a loss in sales?
a. Price discrimination increases profit.
b. Reservation pricing decreases cost.
c. Price determination offsets risk.
d. Efficient pricing clears the market.
e. Price discrimination decreases deadweight loss.
ANS: A DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Applying
72. Reflect on the following excerpt from a Washington Post article about dynamic pricing by online retail
giant Amazon.com.
Few things stir up a consumer revolt quicker than the notion that someone else is getting a better deal.
That’s a lesson Amazon.com has just learned. Amazon, the largest and most potent force in
e-commerce, was recently revealed to be selling the same DVD movies for different prices to different
customers. It was the first major Web test of a strategy called “dynamic pricing,” which gauges a
shopper’s desire, measures his means and then charges accordingly. The Internet was supposed to
empower consumers, letting them compare deals with the click of a mouse. But it is also supplying
retailers with information about their customers that they never had before, along with the technology
to use all this accumulated data. While prices have always varied by geography, local competition and
whim, retailers were never able to effectively target individuals until the Web. “Dynamic pricing is the
new reality, and it’s going to be used by more and more retailers,” said Vernon Keenan, a San
Francisco Internet consultant. “In the future, what you pay will be determined by where you live and
who you are. It’s unfair, but that doesn’t mean it’s not going to happen.”
Source: David Streitfeld, “On the Web, Price Tags Blur: What You Pay Could Depend on Who You Are,” Washington Post, September 27,
2000, A1.
For the consumer, who might have to pay based on “where you live and who you are,” perfect price
discrimination may feel unfair because it results in a:
a. decrease in total welfare.
b. loss of consumer surplus.
c. loss of producer surplus.
d. decrease in deadweight loss.
e. loss of market efficiency.
ANS: B DIF: Difficult REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Applying
The accompanying figure depicts a generalized downward-sloping market demand (D) curve for a
product. It also shows the firm’s relevant marginal revenue (MR) curve and marginal cost (MC) curve.
Refer to this figure to answer the questions that follow.
73. For a perfectly competitive market, which area(s) are designated as consumer surplus?
a. A
b. B
c. C
d. A + B
e. A + B + C
ANS: E DIF: Easy REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Analyzing
74. For a monopoly that charges a single price of P1, which area(s) are designated as consumer surplus?
a. A
b. B
c. C
d. A + B
e. There is no consumer surplus.
ANS: A DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Analyzing
75. If the firm can price-discriminate perfectly, which area(s) are designated as consumer surplus?
a. A
b. B
c. C
d. A + B
e. There is no consumer surplus.
ANS: E DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Analyzing
76. For a perfectly competitive market, which area(s) are designated as deadweight loss?
a. A
b. B
c. C
d. A + B
e. There is no deadweight loss.
ANS: E DIF: Easy REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Analyzing
77. For a monopoly that charges a single price of P1, which area(s) are designated as deadweight loss?
a. A
b. B
c. C
d. A + B
e. There is no deadweight loss.
ANS: C DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Analyzing
78. If the firm can perfectly price discriminate, which area(s) are designated as deadweight loss?
a. A
b. B
c. C
d. A + B
e. There is no deadweight loss.
ANS: E DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Analyzing
The accompanying figure depicts a generalized downward-sloping market demand (D) curve for a
product. It also shows the firm’s relevant marginal revenue (MR) curve and marginal cost (MC) curve.
Use this figure to answer the questions that follow.
80. For a monopoly that charges a single price of $6, calculate producer surplus.
a. $160
b. $120
c. $80
d. $40
e. $0
ANS: C DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Analyzing
82. What is the change in total welfare if the firm moves from a perfect competition model to a monopolist
model that charges a single price of $6?
a. There would be a loss of $160 in total welfare.
b. There would be a gain of $80 in total welfare.
c. There would be a loss of $40 in total welfare.
d. There would be a gain of $120 in total welfare.
e. There would be no change in total welfare.
ANS: C DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Analyzing
83. What is the change in total welfare if the firm moves from a perfect price discrimination model to a
perfect competition framework?
a. There would be a loss of $160 in total welfare.
b. There would be a gain of $80 in total welfare.
c. There would be a loss of $40 in total welfare.
d. There would be a gain of $120 in total welfare.
e. There would be no change in total welfare.
ANS: E DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Analyzing
84. What is the change in total welfare if the firm moves from a monopolist model that charges a single
price to a perfect competition model?
a. There would be a loss of $160 in total welfare.
b. There would be a loss of $80 in total welfare.
c. There would be a gain of $40 in total welfare.
d. There would be a gain of $120 in total welfare.
e. There would be no change in total welfare.
ANS: C DIF: Medium REF: Welfare Effects of Price Discrimination
TOP: III.A. MSC: Analyzing
The accompanying figure depicts the downward-sloping market demand (D) curve for a five-day
western Caribbean cruise on Carnival Cruise Lines. The price (P) is per person in U.S. dollars, and
the quantity (Q) is the number of passenger tickets sold. This figure also shows the company’s relevant
marginal revenue (MR) curve and marginal cost (MC) curve. Use this figure to answer the questions
that follow.
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