Clayton State University ECON 6100 Chapter 13 and 14 Direct and Indirect Price Discrimination. 84 Questions and Answers.

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1. Which of the following is an example of price discrimination? a. Seniors paying a lower price for tickets at movie theatres b. Students paying discounted rates on travel c. Tourists paying highe... r prices on local attractions than locals d. All of the above TOPICS: Section 1: Introduction 2. The practice of buying a firm’s good in one market at a low price and selling it in another market for a higher price in order to profit from the price difference is known as a. Predatory pricing b. Price collusion c. Arbitrage d. Mark-up pricing TOPICS: Section 1: Introduction 3. The consequences of price discrimination are a. Consummate more transactions b. Extract more consumer surplus c. Increase producer surplus d. All of the above TOPICS: Section 1: Introduction 4. Movie theatres offer seniors discounts because a. Seniors have a more inelastic demand for movie tickets b. Seniors have a more elastic demand for movie tickets c. Seniors have a higher opportunity cost of their time d. Only B&C TOPICS: Section 1: Introduction 5. Movie theatres offer senior discounts because a. Seniors have a more elastic demand for movie tickets b. Seniors have lower incomes c. Seniors have a lower opportunity cost of time d. All of the above TOPICS: Section 1: Introduction 6. Relative to simple pricing, price discrimination leads to a. Consumer surplus being converted to producer surplus b. Increased profits c. A simplified pricing schedule d. Both a and b TOPICS: Section 1: Introduction 7. When a firm practices perfect price discrimination, a. Consumer surplus is maximized b. Producer surplus is minimized c. Producer surplus is maximized d. None of the above TOPICS: Section 2: Why (Price) Discrimination 8. The idea behind price discrimination is a. To be able to sell to high-value customers, who value the product most b. To be able to sell to the marginal customers, who are indifferent about the purchase c. To be able to sell to the low-value customers, who would otherwise not buy the product d. To be able to sell to both high and low value customers at different prices TOPICS: Section 2: Why (Price) Discrimination 9. Price discrimination is a. The practice of charging different prices to different individual buyers or customer groups b. The practice of differentiating the product to make demand less elastic c. The practice of deciding a single price to be charged to customers d. Always illegal ANSWER: a TOPICS: Section 2: Why (Price) Discrimination 10. Many bars close to campuses have started offering cheaper beer to consumers with a student ID. These bars a. Assume students have an inelastic demand curve b. Assume students have an elastic demand curve c. Are practicing price discrimination d. Both b and c TOPICS: Section 3: Direct Price Discrimination 11. Many bars close to campuses have started offering cheaper beer to consumers with a student IDs. These bars are using a. Direct price discrimination b. Indirect price discrimination c. Decreasing returns to scale d. None of the above ANSWER: a TOPICS: Section 3: Direct Price Discrimination 12. For direct price discrimination to work effectively a. The low-valued customers should not be able to engage in arbitrage b. You need to charge the same price to the different groups c. Both groups should have the same elasticity of demand d. None of the above ANSWER: a TOPICS: Section 3: Direct Price Discrimination 13. Amusement parks often offer discounts to locals with IDs. This is an example of a. A direct discrimination scheme b. An indirect discrimination scheme c. Diminishing marginal returns d. Vertical integration ANSWER: a TOPICS: Section 3: Direct Price Discrimination 14. Public transit offers discounted monthly passes to students, which can only be bought and used with valid student IDs. The transit system is using a. A direct discrimination scheme b. An indirect discrimination scheme c. The Robinson-Patman act d. None of the above ANSWER: a TOPICS: Section 3: Direct Price Discrimination 15. A firm practicing direct price discrimination will charge a higher price to a. Consumers known to have an elastic demand b. All consumers c. Consumers known to have an inelastic demand d. Consumers known to have a unitary elastic demand TOPICS: Section 3: Direct Price Discrimination 16. A firm practicing direct price discrimination will charge lower prices to a. Consumers with an elastic demand b. All consumers c. Consumers known to have an inelastic demand d. Consumers known to have a unitary elastic demand ANSWER: a TOPICS: Section 3: Direct Price Discrimination 17. For direct price discrimination to work, the firm a. Must be able to identify members of the low value group b. Charge the low-value group lower prices than the rest c. Prevent the low-value group from reselling their low priced goods to higher-valued group d. All of the above TOPICS: Section 3: Direct Price Discrimination 18. For direct price discrimination to work, a. The firm need not be able to identify members of the low-value group b. The firm must charge a single price to all its customers c. The firm need not worry about any arbitrage since all its customers are charged the same price d. None of the above TOPICS: Section 3: Direct Price Discrimination 19. For direct price discrimination to work a. The firm must be able to identify the members of the low value group b. The firm must charge a single price to all its customers c. The firm need not worry about any arbitrage since all its customers are charged the same price d. The firm should charge a higher price to those customers with the most elastic demand ANSWER: a TOPICS: Section 3: Direct Price Discrimination 20. For direct price discrimination to work a. The firm need not be able to identify the members of the low-value group b. The firm be able to charge the low-value customers a lower price than the higher-value customers c. The firm need not worry about any arbitrage since all its customers are charged the same price d. It needs to be too complicated for the customers to understand TOPICS: Section 3: Direct Price Discrimination 21. The Robinson-Patman act a. Is a part of the antitrust laws b. Makes it illegal to give a price discount on a good sold to another business c. Is also known as the Anti-Chain-store Act d. All of the above TOPICS: Section 4: Robinson-Patman Act 22. It is illegal for a business to price discriminate when selling goods to other businesses unless Both A & B are true a. Price discounts are cost-justified b. Discounts are offered to meet competitors’ price c. Either A or B is true d. TOPICS: Section 4: Robinson-Patman Act 23. The Robinson-Patman act a. Is a part of the antitrust laws b. Makes it illegal to give a price discount on a good sold to another business c. Makes it illegal to give a price discount on a good sold to final customers d. Both A&B TOPICS: Section 4: Robinson-Patman Act 24. Which of the following is FALSE? a. The Robinson-Patman act is a part of the antitrust laws b. Under the Robinson-Patman act it is illegal to give a price discount on goods sold to another business c. Under the Robinson-Patman act, it is illegal to give a price discount on goods sold to final customers d. Under the Robinson-Patman act, the only discount allowed is the one based on difference in servicing costs of different groups TOPICS: Section 4: Robinson-Patman Act 25. In which of the following cases does the Robinson-Patman act not apply? a. There are no cost differences to serving different groups b. Discounts are never offered to meet competition c. The industry does not engage in promotional allowances d. All of the above TOPICS: Section 4: Robinson-Patman Act 26. The __________ declared that some forms of price discrimination is illegal, especially when it decreases competition. a. Robinson-Patman Act b. Sherman Antitrust Act of 1890. c. Merger Act d. Federal Trade Commission Act. ANSWER: a TOPICS: Section 4: Robinson-Patman Act 27. Criticisms of the Robinson-Patman act a. It can reduces consumer surplus b. It can reduces producer surplus c. It can creates inefficiency through unconsummated transactions d. All of the above TOPICS: Section 4: Robinson-Patman Act 28. Which of the following would not be illegal according to the Robinson-Patman Act a. “Party Packers” getting 10cents off every pack of ribbon they buy after 1000 units b. “Fred’s Farms” offering 50 cents off a crate of strawberries to retailers to match other suppliers with similar rates c. “Sam’s Sandwiches” receiving 5 cents off per pound of cheese d. All of the above TOPICS: Section 5: Implementing Price Discrimination Schemes 29. Which of the following would be illegal according to the Robinson-Patman Act a. “Party Packers” getting 10cents off every pack of ribbon they buy after 1000 units b. “Sideline Superstore” receiving 50 cents off a crate of strawberries since it buys from many other suppliers c. “Sam’s Sandwiches” receiving 5 cents off per pound of cheese, since they are closer to the warehouse of the supplier d. None of the above ANSWER: a TOPICS: Section 5: Implementing Price Discrimination Schemes 30. For a firm to maximize total profits through price discrimination, it should a. Charge a high price to consumers with an inelastic demand and low price to consumers with an elastic demand b. Charge a low price to consumers with an inelastic demand and high price to consumers with an elastic demand c. Charge the same price to both sets of consumers d. Charge nothing to both set of consumers-throw a party ANSWER: a TOPICS: Section 5: Implementing Price Discrimination Schemes 31. Scenic Cinemas surveyed its audience and found that while most movie goers prefer weekends, seniors visit on weekdays. How should the theatre respond? a. Increase prices for the weekday shows, decrease the prices for the weekend shows b. Decrease both the weekday and weekend ticket prices c. Decrease prices for the weekday shows, increase prices on the weekends d. Increase both the weekday and weekend prices TOPICS: Section 5: Implementing Price Discrimination Schemes 32. An important lesson about pricing is a. Do not bargain with the customer b. When bargaining with the customer, do not bargain over the bundled price, bargain over unit price c. When bargaining with the customer, do not bargain over the unit price, bargain over the bundled price d. Bargain with the customer over everything TOPICS: Section 6: Only Schmucks Pay Retail 33. Senior Discounts The Doug’s Delicious Diner faces a demand curve for its daily special in which there are an equal number of potential buyers at every $0.20 price point between $8.00 and $6.00. If the marginal cost is $6.35, what price maximizes profits? Doug notices that at this price the unserved portion of demand are all senior citizens. If it offered a senior discount, how much should it be? ANSWER: Starting at $8.00, as the diner lowers the price in increments of $0.20, it earns another sale. Multiply this price times this quantity to get revenue and then take the difference from the last price point to get the MR. At a price of $7.20, MR > MC but at $7.00 MR < MC, so charge $7.20. Price Quantity Revenue MR MC $8.00 1 $8.00 $8.00 $6.35 $7.80 2 $15.60 $7.60 $6.35 $7.60 3 $22.80 $7.20 $6.35 $7.40 4 $29.60 $6.80 $6.35 $7.20 5 $36.00 $6.40 $6.35 $7.00 6 $42.00 $6.00 $6.35 $6.80 7 $47.60 $5.60 $6.35 $6.60 8 $52.80 $5.20 $6.35 $6.40 9 $57.60 $4.80 $6.35 $6.20 10 $62.00 $4.40 $6.35 $6.00 11 $66.00 $4.00 $6.35 At his price, no seniors are served and Doug can charge them a separate price if they show proper ID. The demand curve leftover for them is given by: Price Quantity Revenue MR MC $7.00 1 $7.00 $7.00 $6.35 $6.80 2 $13.60 $6.60 $6.35 $6.60 3 $19.80 $6.20 $6.35 $6.40 4 $25.60 $5.80 $6.35 $6.20 5 $31.00 $5.40 $6.35 $6.00 6 $36.00 $5.00 $6.35 For seniors, at a price of $6.80, MR > MC but at $6.60 MR < MC, so charge $6.80. So Doug can offer them a $0.40 discount. 34. Hardcover Books The marginal cost of printing a typical hard cover novel is $12.00 while the same book in paperback has a marginal cost of $2.00 lower. So why do publishers charge an average of $15 more for hard cover books? ANSWER: Hard cover versus paperback is used as a price discrimination scheme. Paperback versions usually come many months after the hard cover version. Customers who really like a particular author are more demand inelastic and tend to be impatient for the next book. This way the publishers can extract a higher price from the inelastic customers before they charge a lower price to the more elastic segment of demand. 35. Cowboy Hat Markets Cody’s Cowboy Hat Emporium has two stores Fort Worth, TX. One in the Stockyards area that caters to tourists and another a mile further north that caters to ranch hands. Why doesn’t Cody sell to both customer types out of one store? ANSWER: Two stores keep tourists from arbitraging away the price differences in Cody’s discrimination scheme. Since tourists do not have too many opportunities to buy cowboy hats, their demand rather inelastic. Ranch hands often replace their hats and are more aware of the different retailers and so are more elastic demanders. Cody takes advantage of this fact by charging higher prices at the Stockyards. It does not sell to ranch hands out of this store because tourists would try to arbitrage away the price differential. 36. Amusement Park / Cola Tie-in The Six Flags Over Texas amusement part in the middle of the Dallas-Fort Worth Metroplex has a tie-in marketing campaign with Coca-Cola during the summer. In local grocery stores, some Coke cans offer $5 off admission to the park. Why does Six Flags limit these cans so that none are sold further than 20 miles from the park? ANSWER: This is a price discrimination scheme trying to separate locals from tourists. Tourists do not get to go to the park as often as locals and so their demand is less elastic. Locals have many opportunities to visit the park and so their demand for additional visits over the summer is relatively elastic. The discount on the Coke can is an attempt to offer lower prices to the more elastic locals. Six Flags limits the distribution of the specially marked cans to just locals as a way to limit arbitrage. 37. Indirect price discrimination differs from direct price discrimination because a. In indirect price discrimination high value consumers can sometimes still get the low price b. In direct price discrimination firms do not have to worry about cannibalizing c. Direct price discrimination encourages rivals to enter but indirect discrimination does not d. There is no difference between the two ANSWER: a TOPICS: Section 1: Introduction 38. When deciding what price to charge customers, a firm may choose to charge different prices based on customers’ a. Age b. Willingness to pay c. Location d. All of the above TOPICS: Section 1: Introduction 39. Which of the following is not an example of price discrimination? a. Senior citizen discount at the movies b. Grocery coupons c. Shipping a package further costs more d. Charging a higher price for ice-cream during the summer and a lower price in the winter TOPICS: Section 1: Introduction 40. When a grocery store offers discount coupons in Sunday papers, it is trying to a. Price discriminate b. Undercut its competition c. Reward the frequent readers d. Provide a social service ANSWER: a TOPICS: Section 1: Introduction 41. For a firm to maximize total profits through price discrimination, it should a. charge a low price to high-value consumers and a high price to low-value consumers b. charge a high price to high-value consumers and a high price to low-value consumers c. charge a low price to high-value consumers and a low price to low-value consumers d. charge a high price to high-value consumers and a low price to low-value consumers TOPICS: Section 1: Introduction 42. With no price discrimination, a. A firm sells every unit at different prices b. A firm sells every unit at same prices c. Low-value groups pay a lower price than the high-value groups d. Low-value groups pay a higher price than the high-value groups TOPICS: Section 1: Introduction 43. Airlines charge a ____________price to business travelers compared to leisure travelers because business travelers have a ____________ demand than leisure travelers. a. Higher; more elastic b. Higher; less elastic c. Lower; more elastic d. Lower; less elastic TOPICS: Section 1: Introduction 44. Charging prices closer to what consumers are willing to pay for a good a. Reduces consumers surplus b. Increases producer surplus c. Both a and b d. None of the above TOPICS: Section 1: Introduction 45. Arbitrage a. Is the act of to buying low in one market and selling high in another market b. Can force a seller to go back to uniform pricing c. Can offset the benefits of direct price discrimination d. All of the above TOPICS: Section 1: Introduction 46. Which of the following is FALSE about indirect price discrimination a. The firm is able to identify each customer’s willingness to pay b. The firm is able to charge different prices to the different value customers c. The firm is be able to prevent arbitrage d. All of the above ANSWER: a TOPICS: Section 2: Indirect Price Discrimination 47. Which of the following is FALSE about indirect price discrimination a. It requires identifying some feature that is correlated with different value customers b. The firm must be able to charge different prices to the different value customers c. The firm must be able to prevent arbitrage d. All of the above TOPICS: Section 2: Indirect Price Discrimination 48. Amusement parks often offer coupons to the local market that are not available to tourists. This is an example of a. Direct discrimination scheme b. Indirect discrimination scheme c. Both of the above d. None of the above TOPICS: Section 2: Indirect Price Discrimination 49. Advance-purchase discounts offered by airlines are an example of a. Direct price discrimination b. Indirect price discrimination c. All of the above d. None of the above TOPICS: Section 2: Indirect Price Discrimination Use the following table for questions 50-57 Cooking Wok Value to home users Value to professional Chefs No-name brand $50 $60 High-end professional series $70 $100 50. If the groups are equal size and the firm can only set one price, how should the firm price the high-end wok? a. Price low and sell to both the users b. Price high and sell only to the professional chefs c. Price low and sell only to the home users d. All of the above ANSWER: a TOPICS: Section 2: Indirect Price Discrimination 51. Given an equal amount of users, if the firm can only set one price, how should the firm price the no-name brand wok? a. Price low and sell to both the users b. Price high and sell only to the professional chefs c. Price low and sell only to the home users d. All of the above ANSWER: a TOPICS: Section 2: Indirect Price Discrimination 52. What is the maximum that the firm can charge for the no-name brand wok without losing customers? a. $50 b. $60 c. $70 d. $100 ANSWER: a TOPICS: Section 2: Indirect Price Discrimination 53. How much more do the Chefs value the high-end woks to the low-end woks? a. $20 b. $30 c. $40 d. $50 TOPICS: Section 2: Indirect Price Discrimination 54. Given that the firm offers both the products, what is the maximum price it can charge for the high-end wok to have the chefs only buy the high-end wok? a. $70 b. $80 c. $90 d. $100 TOPICS: Section 2: Indirect Price Discrimination 55. Given that the firm offers both the products would the chefs ever pay the full $100 for the high-end wok a. Yes, because they value it at $100 b. No, because they value it at $70 c. No, because they can get a positive consumer surplus buying the no-name brand d. All of the above TOPICS: Section 2: Indirect Price Discrimination 56. Given that the firm decides to only offer the high-end wok, what is the highest price it can charge the chefs? a. $70 b. $80 c. $90 d. $100 TOPICS: Section 2: Indirect Price Discrimination 57. Given that the firm offers both the products, what prices can it offer to motivate the two groups to profitably self-sort into buying the correct brand a. No-name $60; High-end $100 b. No-name $50; High-end $100 c. No-name $50; High-end $90 d. No-name $60; High-end $90 TOPICS: Section 2: Indirect Price Discrimination Use the following table for questions 58-66 Carving knives Home users Professional Chefs No-name brand $40 $70 High-end professional series $60 $130 58. Given that the firm only chooses to sell the no-name brand, how should it price its product? a. Price low, sell to both users b. Price high, sell only to the professional chefs c. Price low, sell only to the professional chefs d. Price high, sell only to the home users ANSWER: a TOPICS: Section 2: Indirect Price Discrimination 59. Given that the firm only chooses to sell the high-end professional series, how should it price its product? a. Price low, sell to both users b. Price high, sell only to the professional chefs c. Price low, sell only to the professional chefs d. Price high, sell only to the home users TOPICS: Section 2: Indirect Price Discrimination 60. Given that the firm wants to sell both the versions, how high can the no-name brand be priced? a. $30 b. $40 c. $60 d. $70 TOPICS: Section 2: Indirect Price Discrimination 61. Given that the firm wants to sell both the versions, how much surplus does buying the no-name brand give the professional chefs? a. $30 b. $40 c. $50 d. $60 ANSWER: a TOPICS: Section 2: Indirect Price Discrimination 62. Given that the firm wants to sell both the versions, how high can the high-end professional knives be priced? a. $60 b. $70 c. $80 d. $100 TOPICS: Section 2: Indirect Price Discrimination 63. Given that the firm wants to sell both the versions, how should it price its products to have the users self-sort themselves profitably? a. No-name $60; High-end $130 b. No-name $60; High-end $100 c. No-name $40; High-end $100 d. No-name $40; High end $130 TOPICS: Section 2: Indirect Price Discrimination 64. How much would the firm make in revenue if it prices both its products successfully? a. $110 b. $120 c. $130 d. $140 TOPICS: Section 2: Indirect Price Discrimination 65. How much would the firm make in revenue if it chooses to sell only the high-end professional series? a. $100 b. $110 c. $120 d. $130 TOPICS: Section 2: Indirect Price Discrimination 66. In this case the firm should a. Produce both the versions and price discriminate since doing so gives a higher revenue b. Produce only the no-brand version c. Produce only the hi-end professional series d. Exit the marketplace ANSWER: a TOPICS: Section 2: Indirect Price Discrimination 67. The “damaged goods” strategy refers to a. Trying to sell damaged goods to your customers b. Damaging the goods after they have been paid for but before the shipping c. Incurring additional costs to make the cheaper goods unattractive to high-value users d. Incurring additional costs to make the more expensive goods better quality TOPICS: Section 2: Indirect Price Discrimination 68. The “metering” scheme refers to a. Discriminating consumers through the amount of product bought b. Giving away core technology and making up for it through higher margins on secondary sales c. An indirect method of price discrimination d. All of the above TOPICS: Section 2: Indirect Price Discrimination 69. Metering is a. A form of indirect price discrimination b. A form of direct price discrimination c. An evaluation of a product d. An example of bundling ANSWER: a TOPICS: Section 2: Indirect Price Discrimination 70. Firms can practice indirect price discrimination by a. Offering volume discounts b. Using two-part pricing c. Offering a bundle containing a number of units d. All of the above TOPICS: Section 2: Indirect Price Discrimination 71. The strategy of sorting customers into high or low value based on the amount of sales made is known as the a. Damaged goods strategy b. The willy-nilly strategy c. The Metering Strategy d. All of the above TOPICS: Section 2: Indirect Price Discrimination 72. Which of the following is an example of the “metering” strategy a. A doll company selling dolls at cost but charging high margins on doll accessories b. A cell phone company offers free locked in phones but charges high prices per call c. A catering company pays its chefs higher wages to make sure that the bargain meals are just slightly burnt d. Only A&B TOPICS: Section 2: Indirect Price Discrimination 73. Which of the following is an example of a “metering” strategy a. A supermarket offers free parking space but charges higher for grocery b. A television reseller spends time making sure that the picture quality of the bargain priced sets is fuzzy c. Razors are sold at unit cost while razor blades have large profit margins d. All of the above TOPICS: Section 2: Indirect Price Discrimination 74. Which of the following is an example of the “damaged goods” strategy a. A doll company selling dolls at cost but charging high margins on doll accessories b. A cell phone company offers free locked in phones but charges high prices per call c. A catering company pays its chefs higher wages to make sure that the bargain meals are just slightly burnt d. None of the Above TOPICS: Section 2: Indirect Price Discrimination 75. Which of the following is an example of a “damaged goods” strategy a. A supermarket offers free parking space but charges higher for groceries b. A television reseller spends time making sure that the picture quality of the bargain priced sets is fuzzy c. A gift store hikes up the prices on gift wrapping services during its seasonal sale d. All of the above TOPICS: Section 2: Indirect Price Discrimination 76. The difference between individual and aggregate demand is a. Individual demand is the total demand of all the individuals in a market b. In the aggregate demand, each point represents a single consumer’s different values for a single unit of the good c. In the aggregate demand, each point represents a consumer group’s value of the good d. All of the above TOPICS: Section 3: Volume Discounts as Discrimination 77. A supermarket sells you a pound of coffee on the condition that you buy a gallon of milk. This is an example of a. Bundling b. Tie in Sale c. Price Discounting d. Both a and b TOPICS: Section 3: Volume Discounts as Discrimination 78. One reason demand curves slope downwards is a. Marginal value increases with each purchase b. Marginal value declines with each purchase c. Total value declines with each purchase d. All of the above TOPICS: Section 3: Volume Discounts as Discrimination 79. For a retailer buying from a wholesaler, volume discounts do not violate the Robinson-Patman act because a. To sell larger volumes, the retailer himself has to offer discounts b. To sell larger volumes, the retailer has to incur costs in promoting the item c. To sell larger volumes, the retailer has to hold the items in inventory longer d. All of the above TOPICS: Section 3: Volume Discounts as Discrimination 80. Consumers demand different features from cough medications taken for daytime use versus nighttime use. Drug companies conveniently package both medications together. This strategy is designed to a. Allow consumers to buy the two together b. Stop consumers from buying each medicine separately c. Make the consumers more homogenous so that maximum consumer surplus can be extracted with a single price d. None of the above TOPICS: Section 4: Bundling Different Goods Together 81. Which of the following are ways to sell a customer additional units without dropping the price on previous purchases a. Offer quantity discounts b. Offer two-part pricing ex: membership fees c. Bundle the goods together d. All of the above TOPICS: Section 4: Bundling Different Goods Together 82. Buy Airline Tickets over the Weekend A recent study by economists Steven Puller and Lisa Taylor found that airline tickets purchased over the weekend were priced 5% lower on average. Why would airlines charge lower prices to customers making bookings on the weekend? 83. Circle of Crust Pie Five Pizzas has a frequent purchaser program, called Circle of Crust, in which patrons earn points with every purchase. With enough points, the patron’s next purchase is free. How does this program alter customer decisions? 84. Dremel Tools Dremel sells a high speed rotary tool appropriate for many workshop projects. They have developed hundreds of accessories and bits for their tools for many different applications. Why is the markup on the accessories higher than the markup on the rotary tools? [Show More]

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