TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
1) To the extent that customers can resell products to each other, the effectiveness of a price discrimination strategy will be undermined.
2) In the Airline Pricing Strategies case discussed in the text, a product with fewer rules and restrictions can command a higher price.
3) The markups restaurants apply to various items are heavily influenced by the price elasticity of the demand for each item.
4) Because it is based on differences in the price elasticity of demand among different groups of consumers, third-degree price discrimination is a more profitable price discrimination strategy than is first-degree price discrimination.
5) All else constant, as the price elasticity of demand decreases, so does the marginal revenue resulting from a decrease in price.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
6) As macroeconomic conditions improve and consumers’ incomes and wealth increase, their demand for many products tends to become ________ price inelastic. As such, the ability of firms to mark up price above cost will ________.
less; increase B) more; increase C) more; decrease D) less; decrease
7) Promotional pricing would best be categorized as a form of:A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) no price discrimination.
8) Assume there is a decrease in the number of substitutes for a good produced by a profit-maximizing price-setting firm. All else constant, this would cause the firm’s ability to markup price above average cost to:
A) increase.
B) decrease.
C) stay the same.
D) cannot be determined with the information given.
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
9) When the macroeconomy is doing poorly (as it was in 2009), profits of existing firms decrease, creating an incentive for existing firms to exit unprofitable markets. This in turn makes it more difficult for the remaining firms to mark up price over average or marginal cost.
10) It is frequently observed that when a city is located next to a major highway, gas stations located close to the highway charge higher prices than gas stations located farther away. This is an example of:
first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) illegal price discrimination.
11) “Personalized pricing” and “group pricing” are examples of:A) first-degree and second-degree price discrimination, respectively.
B) first-degree price discrimination.C) first-degree and third-degree price discrimination, respectively. D) second-degree and third-degree price discrimination, respectively.
12) Which of the following statements is not correct?
A) First-degree and third-degree price discrimination work to increase a firm’s profits by
converting consumer surplus into revenue for the firm.
B) First-degree price discrimination works to increase a firm’s profits by converting consumer
surplus into revenue for the firm, while third-degree price discrimination increases a firm’s profits by more accurately assessing the willingness to pay of different groups of consumers.
C) First-degree and third-degree price discrimination work to increase a firm’s profits by more accurately matching willingness to pay to the marginal costs of production.
D) Because it focuses on more accurately assessing the willingness to pay of different groups of consumers, third-degree price discrimination will increase a firm’s profits more than will first-degree price discrimination.
13) The difference between the total willingness to pay for a good and the amount actually spent measures:
A) the amount by which producers are better off, i.e., producers’ surplus. B) the total benefits from consuming the good.C) the amount by which consumers are better off, i.e., consumers’ surplus.
D) the net gain from the production and consumption of the good.
14) Assume the inverse demand function for a good can be written as: P = 30 – 2Q. Assuming P = $10, the resulting consumer surplus would be equal to:
A) $50. B) $100. C) $200. D) $225.
15) BOGOs, i.e., buy-one, get-one-free offers, are an example of third-degree price discrimination.
16) As the price elasticity of demand for an item increases, so does the firm’s ability to mark up the price of the item above average cost.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
17) When the marginal revenue resulting from a decrease in price is negative, demand for the product is:
A) unit elastic. B) elastic.C) inelastic.
D) cannot be determined without more information.
18) All else constant, as the price elasticity of demand for a good at the equilibrium price decreases, the amount of consumer surplus derived from purchasing the equilibrium quantity of the good increases.
19) The goal of “personalized pricing” is to determine how much each individual customer is willing to pay for a product. As such, it is an application of first-degree price discrimination.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the ?
20) By and large, the price of each item on a restaurant menu is:
A) a function of cost and the price elasticity of demand for the item.
B) an accurate reflection of the item’s marginal cost.
C) based strictly on consumer demand.
D) a fixed multiple of the item’s total cost.
21) As practiced by book publishers, versioning involves first selling the hardcover edition of a book and then switching to a paperback edition to sell additional copies. As such, this is an application of second-degree price discrimination.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
22) Assume you have been hired to advise two different firms, A and B, regarding the price each firm should charge for its product, focusing on the amount each firm should mark up price over marginal cost. While both firms are price setters, the product produced by firm A is extremely unique and enjoys widespread appeal. In contrast, firm B sells a fairly standard product for which there are are several good, but not perfect, substitutes. How would your advice to each firm differ? How does the price elasticity of demand influence your recommendations?
23) In many areas of the country, electricity customers pay a set per unit price for each of the first X kilowatts and a lower per unit price for any additional kilowatts of electricity consumed in a month. This is an illustration of second-degree price discrimination.
24) Which of the following is an example of price discrimination?
A) Bundling complementary products to attract additional sales.
B) Reducing the price of a product to reduce excess inventory.
C) Increasing the price of a product when demand for the product increases.
D) Charging different prices for a product in different regions of the country due to differences
in transportation costs.
25) Which of the following is considered a necessary condition for successful price discrimination?
A) Firms are able to prevent resale among different groups of customers.
B) Firms must operate in a perfectly competitive market.
C) A firm’s customers must all have the same price elasticity of demand.
D) Firms must be able to determine each customer’s maximum willingness to pay for the
product in question.
26) Effective price discrimination will enable a perfectly competitive firm to earn positive economic profits in both the short run and the long run.
27) All else constant, there is an inverse relationship between the price elasticity of demand and the marginal revenue resulting from a decrease in price.
28) If a firm is successful in its efforts to reduce the price elasticity of demand for its product, all else constant, the optimal markup that can be used in setting price will increase.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers ?
29) The situation in which a firm charges different prices for different blocks of output is referred to as:
A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) fourth-degree price discrimination.
30) The situation in which a firm is able to charge the maximum price consumers are willing to pay for each unit of output the firm sells is referred to as:
A) first-degree price discrimination. B) second-degree price discrimination. C) third-degree price discrimination. D) fourth-degree price discrimination.