Microeconomics, 4e – Testbank 2 (Hubbard)
Chapter 16 Pricing Strategy
16.1 Pricing Strategy, the Law of One Price, and Arbitrage
1) The price of admission to Walt Disney World
A) can vary by your age and address.
B) is the same for everyone.
C) is kept low to attract customers, but Disney earns most of its profits by selling tickets to rides
and attractions inside the park.
D) is kept low to attract customers, but prices of rides and attractions inside the park vary by
your age, address and other factors.
2) In the 1950s, Walt Disney began to plan the development of a theme park that would
eventually become Disneyland. Disney hired an economist to help determine whether the park
would be a financial success. This economist surveyed managers of existing amusement parks
for advice. Many of these managers
A) believed that a theme park would be very successful because the Disney name created a
market among children and parents who had watched Disney cartoons and movies such as Snow
White.
B) recommended that the theme park be located in California because population in the state
would increase greatly in the future. Disney followed this advice.
C) recommended that Disney not build the park and leave the amusement park business to those
who knew what they were doing.
D) recommended that Disney first build an audience for his park by offering the ABC television
network a weekly program that would feature Disney movies, cartoons and original
programming. Walt Disney followed this advice. Both the television program and Disneyland
were financial successes.
3) Walt Disney began planning for Disneyland in the early 1950s. When he began to consider
how the amusement park would be funded
A) he decided to use the profits earned from his company’s cartoons and motion pictures.
B) he had trouble raising the required funds. Eventually, he convinced a television network to
fund the amusement park in exchange for providing a weekly television program.
C) he decided to borrow money from Hollywood banks. The banks quickly agreed to loan
Disney the money because of Disney’s reputation and previous success.
D) he had trouble raising the required funds from banks, so he decided to issue “Disney bonds.”
He had no trouble paying the interest and principal on the bonds with profits from Disneyland.
4) When Disneyland opened in 1955, what prices were charged for admission and rides?
A) Admission was free; customers paid for rides.
B) All customers paid the same price for admission; rides were free.
C) Admission prices varied by your age, home address and occupation; rides were free.
D) All customers paid the same low price for admission; customers were also charged prices for
rides.
5) Today, Walt Disney World charges different customers different prices for admission. This
pricing strategy is called
A) arbitrage.
B) odd pricing.
C) cost-price pricing.
D) price discrimination.
6) Many firms use technology to gather information on the preferences of consumers and their
responses to changes in prices. This information is then used to adjust prices of the firms’ goods
and services. This practice is called
A) price discovery.
B) empirical research.
C) yield management.
D) econometrics.
7) Which of the following will prevent firms from engaging in price discrimination?
A) yield management
B) arbitrage
C) transactions costs
D) odd pricing
8) What is meant by the “law of one price”?
A) Identical products should sell for the same price everywhere.
B) A law was passed in 1913 that made it illegal to sell the same good or service to different
people for different prices.
C) This is a section of the Sherman Act that forced trusts (for example, the Standard Oil
Company) to charge the same price for the same good or service in different states.
D) Foreign companies should not be allowed to sell a product in the United States for prices
different from prices these companies charge in other countries.
9) The costs in time and other resources that parties incur in the process of agreeing to and
carrying out an exchange of goods or services are called
A) exchange costs.
B) implicit costs.
C) transactions costs.
D) selling costs.
10) Harry attended a baseball card show in New York City where he bought a number of rookie
cards of Pittsburgh Pirates baseball players from the 1950s and 1960s. Harry then sold the cards
in Pittsburgh, Harry’s hometown, where he knew the cards sold for higher prices. The profits
Harry earned from these transactions are called
A) arbitrage profits.
B) normal profits.
C) accounting profits.
D) implicit profits.
11) The law of one price
A) states that consumers can only buy one good or service at a time.
B) is a law passed by Congress that prohibits firms from selling a product at two different prices
in the same market at the same time.
C) states that consumers will pay any price for a product that has a perfectly inelastic demand
curve.
D) states that identical products should sell for the same price everywhere.
12) According to the law of one price, identical products should sell for the same price
everywhere if
A) consumers have knowledge of the prices charged for products in different markets.
B) transactions costs are zero.
C) firms can prevent consumers from engaging in arbitrage.
D) there are no tariffs or other restrictions on imports or exports.
13) Many people sell goods through eBay at prices that are higher than the prices they paid for
these goods. Economists consider these transactions as
A) examples of zero sum games, since the value of the goods sold is exactly equal to the prices
paid for them.
B) unproductive since the goods sold have been produced in the past.
C) examples of exploitation of buyers of the goods by the sellers.
D) examples of arbitrage.
14) Harvey Morris bought dishes and pitchers made of blue glass during the Great Depression at
a flea market. He later resold these items on eBay. The profits Harvey earned from these sales
are
A) subject to a retail profits tax.
B) are not economic profits because Harvey did not add value to the items but took advantage of
the buyers who were not aware of how much Harvey paid for the items.
C) the result of arbitrage.
D) accounting profits but not economic profits.
15) According to the law of one price,
A) if transaction costs are zero, identical goods should sell for the same price everywhere.
B) if transactions costs are zero, firms must sell a product at a price equal to its marginal cost.
C) if transactions costs are zero, all firms must earn the same profit margin.
D) there must be no differences in the cost of producing identical goods by different producers.
16) Arbitrage refers to the act of
A) resolving a dispute in front of an arbitrator instead of a court of law.
B) buying a product in one market at a low price and reselling in another market at a higher
price.
C) trading in the foreign exchange market.
D) suing a producer for illegal business practices.
17) The process of rapidly adjusting prices based on information gathered on consumers’
preferences and their responsiveness to changes in price is called
A) yield management.
B) elasticity management.
C) brand management.
D) marketing.
18) Transactions costs refer to
A) the implicit costs of production.
B) the costs in time and other resources that parties incur in the process of agreeing to and
carrying out an exchange of goods or services.
C) the raw material cost of production.
D) the cost of transporting goods from one destination to another.
19) 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.
20) Charging different prices to different consumers for the same product when the price
differences are not due to differences in cost is called arbitrage.
21) Entrepreneurs who earn arbitrage profit are able to do so by extracting the total consumer
surplus from buyers.
22) 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.
23) “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.
24) 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?
25) The following table contains the actual prices charged by four Websites for the PlayStation 3
game Batman: Arkham City in December 2011.
Target
$51.99
Wal-Mart
49.96
Best Buy
59.99
GameStop
59.99
Explain whether the information in this table contradicts the law of one price.
1) If Mort’s House of Flowers sells one dozen roses to different customers at different prices,
economists would consider this an example of
A) price gouging.
B) rational ignorance.
C) arbitrage.
D) price discrimination.
2) Price discrimination is the practice of
A) charging different prices for the same good when the price differences are not due to
differences in cost.
B) charging different prices for the same good when the price differences arise because of
differences in cost.
C) charging different prices for different qualities of a product.
D) charging higher prices for brand named goods and lower prices for generic versions of the
goods.
3) Which of the following is necessary in order for a firm to successfully practice price
discrimination?
A) The firm must practice product differentiation.
B) The demand for the firm’s product is inelastic.
C) The firm must be able to segment the market for the product.
D) The firm’s transactions costs must be zero.
4) Arnold Marion, a first-year economics student at Fazer College, was given an assignment to
find an example of price discrimination and present it to his class. When asked for his example
Arnold said “I went to a Milwaukee Brewers baseball game with my cousin last week. We paid
$25 each for our seats in left field. My aunt and uncle paid $50 each for their tickets; they sat
five rows behind the first base dugout. This is an example of price discrimination since we paid
different prices for the same product, and the differences were not due to differences in costs.”
How would Arnold’s economics instructor assess Arnold’s example?
A) He would agree with Arnold that he had found an example of price discrimination, but would
add that arbitrage would occur if ticket scalpers sold Brewers tickets for more than the prices
Arnold and his uncle paid.
B) He would disagree with Arnold’s example because the $25 seats and the $50 seats were not
the same products.
C) He would agree with Arnold that he had found an example of price discrimination and would
explain that the elasticity of demand for Brewers tickets is different for Arnold and his uncle.
D) He would disagree with Arnold’s example because there were differences in transactions costs
for the $50 tickets and the $25 tickets.
5) Which of the following is not a requirement for a successful price discrimination strategy?
A) A firm must have the ability to charge a price greater than marginal cost.
B) Some consumers must have a greater willingness to pay for the product than other consumers,
and the firm must be able to know what prices consumers are willing to pay.
C) The firm must be able to prevent arbitrage.
D) Transactions costs must be the same for all consumers.
6) Which of the following is not a requirement for a successful price discrimination strategy?
A) A firm must have market power.
B) The firm must be able to prevent consumers who buy a product at a low price from reselling it
to other consumers at a high price.
C) Managers must practice yield management.
D) Some consumers must have greater willingness to pay for the product than other consumers,
and the firm must be able to know what prices consumers are willing to pay.
7) Which of the following is a reason why a firm would not engage in price discrimination?
A) Price discrimination is illegal in some western states and the owners of firms in these states
face civil or criminal prosecution if they engage in price discrimination.
B) Some firms are not able to segment the market for the products they sell.
C) Some firms do not want to violate the law of one price.
D) The transactions costs associated with selling the product exceed the price of the product.
8) Insurance companies typically charge women lower prices than men for automobile insurance.
Is this an example of price discrimination?
A) No, because, on average, women have better driving records than men and the costs of
insuring men are greater than the costs of insuring women.
B) Yes, because the costs of selling insurance to men and women are the same.
C) Yes, because insurance companies can prevent arbitrage; that is, women cannot transfer their
insurance coverage to men.
D) No, because there are too many insurance companies for any one company to have market
power. A firm must possess market power in order to practice price discrimination.
9) Price discrimination is a rational strategy for a profit-maximizing firm when
A) it is possible to engage in arbitrage across market segments.
B) it is not possible to segment consumers into identifiable markets.
C) there is no opportunity for arbitrage across market segments.
D) firms want to increase the amount of consumer surplus received by its customers.
10) Bubba’s Hula Shack bar and bistro has begun giving customers who can show proof that they
arrived at the establishment by public transportation a 10 percent discount on their total bill. This
is an example of
A) arbitrage.
B) two-part tariff pricing.
C) price discrimination.
D) odd pricing.
11) Bubba’s Hula Shack bar and bistro has begun giving customers who can show proof that they
arrived at the establishment by public transportation a 10 percent discount on their total bill. All
else equal, customers who arrive by public transportation to take advantage of Bubba’s Hula
Shack discount have a ________ for the services of the establishment than customers who drive
to the establishment.
A) higher price elasticity of demand
B) lower price elasticity of demand
C) higher price elasticity of supply
D) lower price elasticity of supply
12) One reason why airlines charge business travelers and leisure travelers different prices is
A) business travelers fly according to schedules that are planned months in advance. Many
leisure travelers buy their tickets at the last minute.
B) business travelers usually travel alone. Leisure travelers often fly with friends and family
members; therefore, they have a more inelastic demand for airline tickets than business travelers.
C) business travelers fly more often than most leisure travelers. As a result, their employers are
able to bargain with airlines for lower fares than leisure travelers pay.
D) business travelers often have inflexible schedules and have to travel on a particular day. The
opposite is true for leisure travelers.
13) Perfect price discrimination is also known as
A) monopoly.
B) first-degree price discrimination.
C) third-degree price discrimination.
D) yield management.
14) The prices college students and faculty members pay for Apple computers are lower than the
prices Apple charges on its Website and in retail stores. Apple charges lower prices to college
students and faculty members because
A) college students and faculty members have a more elastic demand for computers than the
general public.
B) Apple can deduct from its federal taxes some of the costs of the computers it sells to college
students and faculty members.
C) college students and faculty members have a more inelastic demand for computers than the
general public.
D) college students and faculty members typically buy more supplies from Apple (print
cartridges, paper, etc.,) than the general public.
15) College students and faculty members have a more elastic demand than the general public
for Apple’s iMac desktop computers. From this we can conclude that
A) Apple will charge college students and faculty members higher prices than it charges the
general public.
B) Apple will charge college students and faculty members lower prices than it charges the
general public.
C) the general public will earn arbitrage profits by buying iMac desktop computers from Apple
and reselling them to college students and faculty members.
D) Apple will earn economic profits from the computers it sells to the general public but will
break even on the computers it sells to college students and faculty members.
16) Many colleges and universities practice yield management to maximize the revenue they
receive from tuition and
A) to maximize the amount of aid they receive from the federal government.
B) to maximize the amount of their student loans.
C) to maximize the size of their endowments.
D) to increase the academic quality of the students who enroll in their schools.
17) Many colleges and universities practice yield management. As a result, they offer different
financial aid packages to different students. One result of yield management is that colleges often
A) offer a less generous financial aid package to students who apply for an early admission
decision.
B) offer a more generous financial aid package to students who apply for an early admission
decision.
C) offer a less generous financial aid package to students with relatively high family incomes.
D) offer a less generous financial aid package to students who don’t participate in many
extracurricular activities when they are in high school.
18) If a firm knew every consumer’s willingness to pay and could prevent arbitrage it could
charge every consumer a different price. This practice is known as
A) first-degree exploitation, or perfect price discrimination.
B) maximization of producer surplus, or perfect price discrimination.
C) first-degree price discrimination, or perfect price discrimination.
D) first-degree transfer of consumer surplus, or perfect price discrimination.
19) A price-discriminating firm charges the highest price to
A) the group with the largest demand.
B) the group with the most elastic demand.
C) the group with the least elastic demand.
D) the group with demand that is unit-elastic.
20) In which market structure is it not possible to practice price discrimination?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
21) Which of the following is not an example of price discrimination?
A) Adobe Systems offers software at discounted prices to students and faculty at K-12 and
university levels.
B) Unlike foreign tourists, citizens of Cambodia are exempted from paying an admission fee to
the temples of Angkor.
C) Senior citizens may purchase special fare tickets for public transportation that are not
available to others.
D) Buyers at an automotive parts store receive a discount for bulk buying because the store is
able to pass on to its customers some of the lower average cost for producing large quantities.
22) Erin and Deidre, two residents in Ithaca, New York, are planning a trip to Boston. Erin, the
sales manager for a large retailer, has to attend a business meeting. Deidre, a college student on
vacation, is planning a leisurely trip to visit friends and relatives. Whose demand curve for air
travel is likely to be more elastic?
A) Erin
B) Deidre
C) There is no difference in their price elasticities of demand.
D) The elasticity of the demand curves for Erin and Deidre cannot be determined without more
information.
23) Erin and Deidre, two residents of Ithaca, New York, are planning a trip to Boston. Erin, the
sales manager for a large retailer, has to attend a business meeting. Deidre, a college student on
vacation, is planning a leisurely trip to visit friends and relatives. Which of the following
statements is true?
A) An airline that price discriminates will charge Erin a higher price.
B) An airline that price discriminates will charge Deidre a higher price.
C) Since there is no difference in the cost of producing air travel, airlines will not charge
different prices to Erin and Deidre.
D) An airline cannot price discriminate because buyers can resell their tickets through the
Internet.
24) Suppose Dublin Electronics charges regular customers $90 for a Blu-ray player but allows
senior citizens to purchase the same item for $75. Is this likely to be a successful price
discriminating strategy?
A) Yes, firms price discriminate to maximize profits.
B) No, price discrimination will not be effective because the store cannot prevent senior citizens
from buying large quantities of Blu-ray players and reselling them for a profit.
C) Yes, because senior citizens are likely to have a more elastic demand and therefore will be
willing to pay a lower price compared to regular customers.
D) No, because there are many different brands of Blu-ray players and consumers will shop
around.
25) Which of the following products allows the seller to identify different groups of consumers
(segment the market) and practice price discrimination?
A) clothing items sold through Macy’s Department Store
B) a hamburger sold at Burger King
C) a cafe latte sold at Starbucks
D) tickets to matinee shows at a movie theatre
26) Why might a producer practice price discrimination?
A) to make its products more affordable to those with low incomes
B) to maximize economic efficiency
C) to maximize profits
D) to maximize quantity demanded