Managerial Economics, Allen, Ch 9, Test Bank

Chapter 9: Managerial Use of Price Discrimination MULTIPLE CHOICE

1. The The opti optima mall leve levell of out outpu putt and and pric pricee for for the the prof profit it-m -max axim imiz izin ing g mono monopo poli list st in in the following figure would be:

a.  b. c. d. e.

Q = 30 and P  =  = $35. Q = 60 and P  =  = $20.  = $20. Q = 30 and P  = Q = 100 and P  =  = $35.

none of the above.

ANS: A DIF: Easy REF: 305 TOP: Motivation for Price Discrimination 2. a.  b. c. d. e. ANS: B Discrimination MSC: MSC: Fact Factua uall

MSC: Applied

Price discrimination is defined as: selling a product at the same price to each and every consumer. selling a product product at more than one price. price. selling a product at its marginal cost plus a markup. selling more than one version of a product. producing goods and services for sale within the firm. DIF:

Easy

REF: 306

TOP: Price

3. If the the mon monop opol olis istt show shown n in the the fol follo lowi wing ng fig figur uree coul could d prac practi tice ce fir first st-d -deg egre reee  price discrimination, discrimination, the consumer surplus would be:

a.  b. c. d. e. ANS: A Discrimination MSC: MSC: Appl Applie ied d

$0. $225. $450. $900. $1,200. DIF:

Easy

REF: 310

TOP: Price

4. If the the mon monop opol olis istt show shown n in the the fol follo lowi wing ng fig figur uree coul could d prac practi tice ce fir first st-d -deg egre reee  price discrimination, discrimination, the producer surplus would would be:

a.  b. c. d. e.

$0. $225. $450. $900. $1,200.

ANS: D Discrimination MSC: Applied

DIF:

Easy

REF: 310

TOP: Price

5. When a movie theater charges a higher price during the evening than during the day, it is practicing: a. peak load pricing.  b. first-degree price discrimination. c. second-degree price discrimination. d. third-degree price discrimination e. fourth-degree price discrimination. ANS: D Discrimination MSC: Conceptual

DIF:

Easy

REF: 312

TOP: Price

6. When Exxoff Oil Corporation offers discounts based on credit card records of gas quantities purchased, they are practicing: a. first-degree price discrimination.  b. second-degree price discrimination. c. third-degree price discrimination. d. markup pricing. e. tying. ANS: B Discrimination MSC: Conceptual

DIF:

Moderate

REF: 312

TOP: Price

7. When Pan United Airlines gives a $400 fare discount to persons with student IDs, they are practicing: a. first-degree price discrimination.  b. second-degree price discrimination. c. third-degree price discrimination. d. markup pricing. e. tying. ANS: C Discrimination MSC: Conceptual 8.  practicing: a.  b. c. d. e.

a.

Moderate

REF: 312

TOP: Price

When a utility charges homeowners less than big industrial users, it is first-degree price discrimination. fourth-degree price discrimination. third-degree price discrimination. markup pricing. tying.

ANS: C Discrimination MSC: Conceptual 9.

DIF:

DIF:

Moderate

REF: 312

TOP: Price

Cereal manufacturers’ use of coupons can be partially explained by: first-degree price discrimination.

 b. c. d. e.

second-degree price discrimination. third-degree price discrimination. markup pricing. tying.

ANS: C DIF: Moderate REF: 312 TOP: Using Coupons and Rebates for Price Discrimination 10.

MSC: Conceptual

If a firm supplies separable markets with price elasticities

1  and

!

2, it

!

should set prices  P 1 and P 2 so that: a.

P 1!1 = P 2!2.

 b.

P 1 /!1 = P 2 /!2.

c.

P 1(1 + 1/!1) = P 2 (1 + 1/!2).

d.

P 1/(1 – 1 /!1) = P 2 / (1 – 1/!2).

e.

P 1 = 1 – 1/!1 and P 2 = 1 – 1/!2.

ANS: C Discrimination MSC: Factual

DIF:

Moderate

REF: 313

TOP: Price

11.

If a firm supplies separable markets with price elasticities !1 = –3 and !2 = –  2, it should set prices  P 1 and P 2 so that: a.

P 1 = P 2.

 b.

3 P 1 = 2 P 2.

c.

2 P 1 = 3 P 2.

d.

2/3 P 1 = 1/2 P 2.

e.

2 P 1 = 2/3 P 2.

ANS: D Discrimination MSC: Applied

DIF:

Moderate

REF: 313

TOP: Price

12. Women are often charged more than men for haircuts performed by the same haircutter. This is not considered price discrimination because: a. women receive more consumer surplus from haircuts than men receive.  b. haircutters claim to spend more time on women’s hair, raising the cost of the haircut to the firm. c. firms make up the extra cost to consumers  by giving women free samples of products. d. men receive more consumer surplus from haircuts than women receive. e. women have a lower price elasticity of demand for haircuts. ANS: B Discrimination MSC: Conceptual 13.

DIF:

Moderate

REF: 314

TOP: Price

A firm with production located in a poor Georgia town sells toys locally for

$10 each and ships the same toys to sell in a wealthy North Carolina town for $15 each. They are not price discriminating if: a. laws in Georgia allow it.  b. laws in North Carolina allow it. c. total advertising costs are $5 per unit. d. total transportation costs are $5 per unit. e. consumers in North Carolina would pay more than $15 for the toys. ANS: D Discrimination MSC: Conceptual

DIF:

Moderate

REF: 314

TOP: Price

14. Gliberace’s Fashion Accessories of Las Vegas produces gemstone-encrusted formal wear for sale in Los Angeles and San Francisco subject to total cost TC   = 100 + 5(Q LA + QSF ). Demand for Gliberace’s stones in the two cities is given by Q LA = 70 – 2 P   LA and QSF   = 55 –  P SF . If Gliberace price discriminates between the two cities, how many stones will it sell in Los Angeles? a.  b. c. d. e.

30. 36. 38. 43. 48.

ANS: A DIF: Easy REF: 319 TOP: Using Coupons and Rebates for Price Discrimination

MSC: Applied

15. Gliberace’s Fashion Accessories of Las Vegas produces gemstone-encrusted formal wear for sale in Los Angeles and San Francisco subject to total cost TC   = 100 + 5(Q LA + QSF ). Demand for Gliberace’s stones in the two cities is given by Q LA = 70 – 2 P   LA and QSF  = 55 –  P SF . If Gliberace price discriminates between the two cities, what will its maximum profits be? a.  b. c. d. e.

$750. $825. $1,075. $975. $1,175.

ANS: D DIF: Easy REF: 319 TOP: Using Coupons and Rebates for Price Discrimination

MSC: Applied

16. Crusty Cakes sells donuts in Eastown and Westown. Its total costs are given  by TC   = 10(Q E  + QW ). The demand in each neighborhood is given by Q E  = 100 – 2 P   E  and QW  = 100 –  P W . If Crusty price discriminates between the two neighborhoods, how much

are its maximized profits? a.  b. c. d. e.

$850. $1,200. $2,475. $2,825. $3,250.

ANS: D DIF: Easy REF: 319 TOP: Using Coupons and Rebates for Price Discrimination

MSC: Applied

17. Gliberace’s Fashion Accessories of Las Vegas produces gemstone-encrusted formal wear for sale in Los Angeles and San Francisco subject to total cost TC   = 100 + 6(Q LA + QSF ). Demand for Gliberace’s stones in the two cities is given by Q LA = 70 – 2 P   LA and QSF  = 50 –  P SF . If Gliberace cannot price discriminate between the two cities, and so charges the same price in each, how many stones will it sell in Los Angeles? a. 12.  b. 15. c. 18. d. 21. e. 24. ANS: E DIF: Moderate REF: 319 TOP: Using Coupons and Rebates for Price Discrimination

MSC: Applied

18. When an electrical utility charges higher prices during the day than at night, it is practicing: a. peak load pricing.  b. first-degree price discrimination. c. second-degree price discrimination. d. third-degree price discrimination. e. fourth-degree price discrimination. ANS: A MSC: Factual

DIF:

Easy

REF: 322

TOP: Peak Load Pricing

19. The per-week demand for use of the Golden Gate Bridge in San Francisco is  P  = 13 – 0.15Q during peak traffic periods and  P  = 7 – 0.1Q during off-peak hours, where Q is the number of cars crossing the bridge in thousands and  P   is the toll in dollars. If the marginal congestion cost of using the bridge is  MC   = 5 + 0.2 Q, what is the optimal off-peak load toll for crossing the bridge? a. 6.5.  b. 8.0. c. 8.7. d. 9.9. e. 10.6. ANS: A MSC: Applied

DIF:

Easy

REF: 322

TOP: Peak Load Pricing

20. The per-week demand for use of the Golden Gate Bridge in San Francisco is  P  = 12 – 0.15Q during peak traffic periods and  P  = 9 – 0.1Q during off-peak hours, where Q is the number of cars crossing the bridge in thousands and  P   is the toll in dollars. If the marginal congestion cost of using the bridge is  MC   = 5 + 0.2 Q, what is the optimal off-peak load toll for crossing the bridge? a. 6.5.  b. 8.0. c. 8.7. d. 9.9. e. 10.6. ANS: B MSC: Applied 21.

DIF:

Easy

REF: 322

TOP: Peak Load Pricing

The per-week demand for use of the Golden Gate Bridge in San Francisco is

 P  = 12 – 0.15Q during peak traffic periods and  P  = 9 – 0.1Q during off-peak hours, where Q is the number of cars crossing the bridge in thousands and  P   is the toll in dollars. If the marginal congestion cost of using the bridge is  MC  = 5 + 0.2Q, what is the optimal peak load

toll for crossing the bridge? a.  b. c. d. e. ANS: D MSC: Applied

DIF:

6.5. 8.0. 8.7. 9.9. 10.6. Easy

REF: 322

TOP: Peak Load Pricing

22. The per-week demand for use of the Golden Gate Bridge in San Francisco is  P  = 13 – 0.15Q during peak traffic periods and  P  = 10 – 0.1Q during off-peak hours, where Q is the number of cars crossing the bridge in thousands and  P   is the toll in dollars. If the marginal congestion cost of using the bridge is  MC  = 5 + 0.2Q, what is the optimal peak load toll for crossing the bridge? a. 6.5.  b. 8.0. c. 8.7. d. 9.9. e. 10.5. ANS: E MSC: Applied

DIF:

Easy

REF: 322

TOP: Peak Load Pricing

23. When a monopolist requires a customer to pay an initial fee for the right to  buy a product as well as a usage fee for each unit of the product bought, this is known as a(n): a. bundling contract.  b. price differentiation. c. oligopolistic device. d. two-part tariff. e. maximizing device. ANS: D MSC: Factual

DIF:

Easy

REF: 324

TOP: Two-Part Tariffs

24. The demand for health club services is Q = 350 – 2 P  and the marginal cost of  providing these services is  MC  = 110 + 2Q. If a two-part tariff pricing system is used, what is the optimal price and quantity combination? P  = 52 and Q = 240. a. P  = 199 and Q = 52.  b. c. P  = 26 and Q = 162. P  = 162 and Q = 26. d. e. None of the above. ANS: D MSC: Applied

DIF:

Easy

REF: 327

TOP: Two-Part Tariffs

25. If the monopolist shown in the following figure could implement a two-part tariff, the entry fee would be: a.

$0.

 b. c. d. e. ANS: D MSC: Applied

$225. $450. $900. $1,200. DIF:

Easy

REF: 327

TOP: Two-Part Tariffs

26. The demand for health club services is Q = 100 – 2 P, and the marginal cost of  providing these services is  MC   = –110 + 2Q. If a two-part tariff pricing system is used, what is the optimal price and quantity combination? P  = 18 and Q = 64. a.  b. P  = 199 and Q = 52. P  = 26 and Q = 162. c. P  = 162 and Q = 26. d. e. None of the above. ANS: A MSC: Applied

DIF:

Moderate

REF: 327

TOP: Two-Part Tariffs

27. The demand for health club services is Q = 100 – 2 P, and the marginal cost of  providing these services is  MC   = –110 + 2Q. If a two-part tariff pricing system is used, what is the optimal fixed fee? a. 1,555.  b. 2,624. c. 1,024. d. 1,206. e. None of the above. ANS: C MSC: Applied

DIF:

Moderate

REF: 327

TOP: Two-Part Tariffs