Managerial Economics, 7e (Keat)
Chapter 10 Special Pricing Practices
Multiple-Choice Questions
1) A cartel is defined to be
A) any oligopolistic industry with fewer than 4 firms.
B) a form of oligopoly in which firms agree to sell at different prices like in monopolistic
competition.
C) a form of oligopoly in which firms formally agree to establish a common strategy, often a
common price, in effect acting like a monopoly.
D) a form of oligopoly in which firms agree to compete with each other on an equal basis.
2) A successful and stable cartel can be established if there are
A) many firms producing a storable product.
B) many firms producing a perishable product.
C) a few firms producing a storable product.
D) a few firms producing a perishable product.
3) All of the following are conditions which are favorable to the formation of cartels except
A) the existence of a small number of firms.
B) geographic proximity of firms.
C) homogeneity of the product.
D) easy entry into the industry.
4) Prices under an ideal cartel situation will be equal to
A) monopoly prices.
B) competitive prices.
C) prices under monopolistic competition.
D) marginal cost.
5) A cartel price will be established at the quantity where
A) total cost equals the industry total revenue.
B) average cost equals the industry revenue.
C) the sum of the members’ marginal costs equals industry marginal revenue.
D) marginal cost equals industry price.
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6) Cartel agreements tend to break down
A) during economic downturns.
B) because of price “chiseling” by one or more members.
C) when there is overcapacity in the industry.
D) All of the above
7) The position of a cartel will become weaker if there is ________ excess-capacity among the
firms belonging to the cartel.
A) minimum
B) no
C) zero
D) high
8) Barometric price leadership exists when
A) one firm in the industry initiates a price change and the others may or may not follow.
B) one firm imposes its best price on the rest of the industry.
C) when all firms agree to change prices simultaneously.
D) when one company forms a price umbrella for all others.
9) Barometric price leadership can occur when oligopolistic firms
A) compete on the basis of differentiated products.
B) want to avoid price competition and violating antitrust laws.
C) try to enforce cartel agreements.
D) All of the above
10) Dominant price leadership exists when
A) one firm drives the others out of the market.
B) the dominant firm decides how much each of its competitors can sell.
C) the dominant firm establishes the price at the quantity where its MR = MC, and permits all
other firms to sell all they want to sell at that price.
D) the dominant firm charges the lowest price in the industry.
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11) The oligopolistic situation in which a company’s objective is to maximize revenue subject to
a minimum profit requirement is usually referred to as
A) the aggregate model.
B) the Baumol model.
C) the aggressive model.
D) the Marshall model.
12) In the Baumol model, the total quantity sold will usually be larger than
A) if perfect competition prevailed.
B) if total costs were minimized.
C) if profit were maximized.
D) if companies were interdependent.
13) In the Baumol model, a change in fixed costs will
A) increase total quantity sold.
B) have no effect on total quantity sold.
C) decrease total quantity sold.
D) have an effect on total quantity sold.
14) In order for price discrimination to exist
A) markets must be capable of being separated.
B) markets must be interdependent.
C) different demand price elasticities must exist in different markets.
D) demand price elasticities must be identical in all markets.
E) Both A and C
15) The result for the seller of being able to practice price discrimination will be
A) higher profits.
B) lower demand elasticity.
C) lower quantity sold.
D) cost minimization.
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16) The practice by a monopolist of charging each buyer the highest price he/she is willing to
pay is called
A) first-degree discrimination.
B) second-degree discrimination.
C) third-degree discrimination.
D) fourth-degree discrimination.
17) When state universities charge higher tuition fees to out-of-state students than to local
students, the universities are practicing
A) first-degree discrimination.
B) second-degree discrimination.
C) third-degree discrimination.
D) fourth-degree discrimination.
18) The following are possible examples of price discrimination except
A) prices in export markets are lower than for identical products in the domestic market.
B) senior citizens pay lower fares on public transportation than younger people at the same time.
C) a product sells at a higher price at location A than at location B, because transportation costs
are higher from the factory to A.
D) subscription prices for a professional journal are higher when bought by a library than when
bought by an individual.
19) Under conditions of first-degree price discrimination
A) production will equal that which would exist under perfect competition.
B) production will exceed that which would prevail under perfect competition.
C) prices will be lower than under perfect competition.
D) production will always be lower than under perfect competition.
20) Second-degree price discrimination occurs when
A) different prices are charged for different blocks of services.
B) different groups of buyers are charged different prices based on their price elasticities of
demand.
C) a different price is charged for each amount of a product purchased.
D) None of the above
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21) Third-degree price discrimination exists when
A) the seller knows exactly how much each potential customer is willing to pay and will charge
accordingly.
B) different prices are charged by blocks of services.
C) when the seller can separate markets by geography, income, age, etc., and charge different
prices to these different groups.
D) when the seller will bargain with buyers in each of the markets to obtain the best possible
price.
22) By far, the most frequently encountered price discrimination is the
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) fourth-degree price discrimination.
23) If a product which costs $8 is sold at $10, the profit margin is
A) $2.
B) 25%.
C) 20%.
D) None of the above
24) If a product which costs $8 is sold at $10, the mark-up is
A) $2.
B) 25%.
C) 20%.
D) None of the above
25) The correct expression for cost plus pricing is
A) Price = Cost (1 + profit margin).
B) Price = Cost + profit margin.
C) Price = Cost (1 + mark-up).
D) Price = Cost + (1 + mark-up).
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26) If the demand elasticity for a product is -2, and a profit-maximizing firm sells the product for
$10, its marginal cost must be
A) $5.
B) $10.
C) $15.
D) $8.
27) When mark-up equals 50% and AC = MC, then demand elasticity will be
A) -1.
B) -1.5.
C) -2.
D) -3.
28) The pricing of a product at each stage of production as the product moves through several
stages is called
A) transfer pricing.
B) cost plus pricing.
C) penetration pricing.
D) monopolistic pricing.
29) Transfer pricing is a method used to
A) determine whether a firm should make or buy a component product.
B) determine the correct value of a product as it moves from one stage of production to another.
C) minimize a multinational firm’s tax liabilities.
D) All of the above
30) A company which charges a lower price than may be indicated by economic analysis to gain
a foothold in the market is practicing
A) price skimming.
B) psychological pricing.
C) penetration pricing.
D) prestige pricing.
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31) Assume that a multinational company produces components in country A and ships them to a
subsidiary in country B. In order to increase its profits
A) the company should charge a high transfer price for the components if income taxes in
country B are higher than in country A.
B) the company should charge a low transfer price for the components if income taxes in country
B are higher than in country A.
C) the company should charge a high transfer price for the components if income taxes in
country A are higher than in country B.
D) None of the above
32) Revenue maximization occurs when a firm sells at a price
A) that is equal to its minimum average variable cost.
B) where its marginal revenue is equal to its marginal cost.
C) where its marginal revenue is zero.
D) None of the above
33) “Tying” is a form of price discrimination which involves a buyer
A) agreeing to purchase a product at a fixed price regardless of the amount purchased.
B) paying different prices based on the amounts of a product purchased.
C) required to buy one product in order to purchase some other product.
D) All of the above
34) Gasoline and heating oil are examples of products which are
A) joint products in fixed proportions.
B) joint products in variable proportions.
C) joint products that are complements.
D) unrelated to each other.
35) When a firm sets a price relatively low in order to increase the market share, it is referred as
A) price skimming.
B) limit pricing.
C) penetration pricing.
D) predatory pricing.
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