Test Bank Chapter 14
Chapter 14—Pricing Techniques and Analysis
MULTIPLE CHOICE
1. The segmenting of customers into several small groups such as household, institutional, commercial,
and industrial users, and establishing a different rate schedule for each group is known as:
a.
first-degree price discrimination
b.
market penetration
c.
third-degree price discrimination
d.
second-degree price discrimination
e.
none of the above
2. Which of the statements about price discrimination is (are) false?
a.
It must be possible to segment the market.
b.
It must be difficult to transfer the seller’s product from one market segment to another.
c.
Public utilities practice first-degree price discrimination.
d.
There must be differences in the elasticity of demand from one segment to another.
e.
c and d
3. Which of the following pricing policies best identifies when a product should be expanded,
maintained, or discontinued?
a.
full-cost pricing policy
b.
target-pricing policy
c.
marginal-pricing policy
d.
market-share pricing policy
e.
markup pricing policy
4. Second-degree price discrimination:
a.
is also known as block rate setting
b.
is imperfect in the eyes of a monopolist
c.
is regularly practiced by public utilities
d.
is effective only in the case of services or products which are sold in easily metered units
e.
all of the above
5. Electricity pricing that varies in its billing expense throughout the day is called
a.full
pricing
b.
marginal
cost
pricing
c.dynamic
pricing
d.
variable
Test Bank Chapter 14
pricing
e. full cost pricing
pricing
6. In ____ price discrimination, the monopolist charges each consumer the highest price that purchaser is
willing to pay for each unit purchased (provided that this price exceeds the marginal cost of
production).
a.
first-degree
b.
second-degree
c.
third-degree
d.
a and b
e.
none of the above
7. ____ is a new product pricing strategy which results in a high initial product price. This price is
reduced over time as demand at the higher price is satisfied.
a.
Prestige pricing
b.
Price lining
c.
Skimming
d.
Incremental pricing
e.
None of the above
8. ____ is the price at which an intermediate good or service is transferred from the selling to the buying
division within the same firm.
a.
Incremental price
b.
Marginal price
c.
Full-cost price
d.
Transfer price
e.
none of the above
9. For a monopolist that engages in price discrimination, when the price elasticity in market 1 is less (in
absolute value) than in market 2, the optimal price in market 1 will exceed the optimal price in market
2.
a.
true
b.
false
10. To maximize profits, a monopolist that engages in price discrimination must allocate output in such a
way as to make identical the ____ in all markets.
a.
ratio of price to marginal cost
b.
ratio of marginal cost to marginal utility
c.
ratio of price to elasticity
d.
marginal revenue
e.
none of the above
11. Barbers give a price discount to kids. According to price discrimination, if barbers use price
discrimination, this implies demand for hair cuts by kids is more elastic.
a. True
b. False
12. Third-degree price discrimination exists whenever:
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. the seller can separate markets by geography, income, age, etc., and charge different prices to
these different groups.
d. the seller will bargain with buyers in each of the markets to obtain the best possible price.
13. 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.
14. Firms that have a cover charge for their customers and charge for each item they purchase as well are
exhibiting
a. universal access price discrimination
b. declining block price discrimination.
c. mixed bundling price discrimination.
d. two-part price discrimination.
e. uniform pricing
15. A manufacturer produces two types of computer software, Word processing (W) and Spreadsheet (S),
which is offered to two different retail outlets (#1 and #2). The following table shows the maximum
price each retail outlet is willing to pay for each individual software product.
Product W Product S
Retail #1 $170 $105
Retail #2 $95 $135
What is the optimal pricing strategy that will maximize revenue for the manufacturer, given the
maximum the retail outlets are willing to pay?
a. Bundle both products (W and S) and sell them at $230.
b. Price product W at $170 and Product S at $135.
c. Price product W at $170 and Product S at $170.
d. Price product W at $95 and Product S at $105.
e. Bundle both products (W and S) and sell them at $275.
16. Vacation tours to Europe invariably package visits to disparate regions: cities, mountains, and the
seaside. Bundling, a type of second degree price discrimination, is most profitable when:
a. the preference rankings of vacationers travelling together are negatively correlated.
b. a preference for cities is always higher than preferences for mountain vistas.
c. preference rankings of vacationers travelling together are positively correlated.
d. preference for the seaside is always higher than preferences for city excursions.
e. no one wants to take a European vacation package to cities, mountains, and the seaside.
17. The optimal mark-up is: m = -1/ (E+1). When the mark-up on cookware equals 50%, then demand
elasticity (E) for cookware is:
a. -1
b. -1.5
c. -2
d. -3
18. [Advanced Material] Cross functional revenue management examines capacity, pricing, and customer
account management in order to maximize revenue.
Capacity Planning
Pricing Customer Account Management
If the MegaPlex Movie Theater finds that too often they have to turn customers away from their theaters
at peak movie times for blockbusters creating too much slippage, cross functional revenue management
suggests:
a. They could consider increasing the capacity of each theater to be able to seat more customers.
b. They could lower the price at the peak times to reduce the problem of spoilage.
c. They could stop showing blockbuster movies and select more critically acclaimed art films to
decrease spoilage.
d. They could stop showing movies at night.
19. [Advanced Material] Restaurants try to buy just enough fish to match the expected walk-ins and
reservations. If they buy a lot more fish, in the language of revenue management:
a. Spoilage increases
b. Spillage increases
c. Overbooking increases
Order
Acceptance
20. [Advanced Material] If an airline company decides to buy smaller jets with fewer seats, then the problem
of:
a. spillage and spoilage both increase.
b. spillage decreases, but spoilage increases.
c. spillage and spoilage both decrease.
d. spoilage decreases, but spillage increases.
21. [Advanced Material] If airlines found that the number of no-shows starts to increase, then its policy
for optimal overbooking would tend to:
a. make them reduce the amount of overbooking.
b. cause them to increase the amount of overbooking.
c. let them keep the same amount of overbooking.
PROBLEM
1. Consolidated Salt Company sells table salt to both retail grocery chains and commercial users (e.g.,
bakeries, snack food makers, etc.). The demand function for each of these markets is:
Retail grocery chains:
P1 = 180 − 8Q1
Commercial users:
P2 = 100 − 4Q2
where P1 and P2 are the prices charged and Q1 and Q2 are the quantities sold in the respective markets.
Consolidated’s total cost function (which includes a “normal” return to the owners) for salt is:
TC = 50 + 20(Q1 + Q2)
(a)
Determine Consolidated’s total profit function.
(b)
Assuming that Consolidated is effectively able to charge different prices in the two
markets, what are the profit-maximizing price and output levels for the product in the
two markets? What is Consolidated’s total profit under this condition?
(c)
Assuming that Consolidated is required to charge the same price in each market, what
are the profit-maximizing price and output levels? What is Consolidated’s total profit
under this condition?
= P1Q1 + P2Q2 − TC
= (180 − 8Q1)Q1 + (100 −4Q2)Q2 − [50 + 20(Q1 + Q2)]
= 180Q1 − 8Q12 + 100Q2 − 4Q22 − 50 − 20Q1 − 20Q2
= −50 + 160Q1 + 80Q2 − 8Q12 − 4Q22
