Test bank for managerial economics and business strategy chapter 11 PDF

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Chapter 11Pricing Strategies for Firms with Market PowerMultiple Choice Questions1. You are the manager of a Mom and Pop store that can buy milk from a supplier at $3 pergallon. If you believe the elasticity of demand for milk by customers at your store is −4, thenyour profit-maximizing price is:A. ...

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Chapter 11 - Pricing Strategies for Firms with Market Power

Chapter 11 Pricing Strategies for Firms with Market Power Multiple Choice Questions 1. You are the manager of a Mom and Pop store that can buy milk from a supplier at $3.00 per gallon. If you believe the elasticity of demand for milk by customers at your store is −4, then your profit-maximizing price is: A. $2.00. B. $2.50. C. $4.00. D. $5.00. Answer: C Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

2. You are the manager of a gas station and your goal is to maximize profits. Based on your past experience, the elasticity of demand by Texans for a car wash is −4, while the elasticity of demand by non-Texans for a car wash is −6. If you charge Texans $20 for a car wash, how much should you charge a man with Oklahoma license plates for a car wash? A. $1.50 B. $15.00 C. $18.00 D. $20.00 Answer: C

Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

3. Which of the following is true for perfect competition but not true for monopolistic competition and monopoly? A. MC = MR B. P = MC C. Positive long run profits D. P = MC and positive long run profits Answer: B Learning Objective: 11-02 11-1 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power Topic: Basic Pricing Strategies Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

4. A monopoly producing a chip at a marginal cost of $6 per unit faces a demand elasticity of −2.5. Which price should it charge to optimize its profits? A. $6 per unit B. $8 per unit C. $10 per unit D. $12 per unit Answer: C

Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

5. A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. Which of the following is the marginal revenue function for the firm? A. MR = 60 − 2Q B. MR = 50 − Q C. MR = 100 − Q D. MR = 50 − 2Q Answer: D Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

6. A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. The monopoly price is: A. $30. B. $20. C. $10. D. $40. Answer: A

Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium 11-2 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power

7. A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. The demand elasticity of a widget at the monopoly price and quantity is: A. −1.5. B. −2. C. −2.5. D. 2. Answer: A

Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

8. A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. What are the profits of the monopoly in equilibrium? A. $300 B. $400 C. $500 D. $600 Answer: B Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

9. A monopoly produces widgets at a marginal cost of $10 per unit and zero fixed costs. It faces an inverse demand function given by P = 50 − Q. Suppose fixed costs rise to $400. What happens in the market? A. The firm will raise the price. B. The firm will shut down immediately. C. The firm continues to produce the same output and charge the same price. D. The firm will reduce its output and raise price. Answer: C Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

11-3 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power

10. Which of the following is NOT a condition for a firm to engage in price discrimination? A. Consumers are partitioned into two or more types, with one type having a more elastic demand than the other. B. The firm has a means of identifying consumer types. C. The consumers are sincere in revealing their true natures. D. There is no resale market for the good. Answer: C Learning Objective: 11-02 Topic: Strategies That Yield Even Greater Profits Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

11. Suppose P = 20 − 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. The local monopoly tries to maximize its profits by equating MC = MR and charging a uniform price. What will be the equilibrium price and output? A. $6.33, 3.33 units B. $6.33, 5 units C. $13.33, 3.33 units D. $10, 5 units Answer: C Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

12. Suppose P = 20 − 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. The firm currently uses a standard pricing strategy. Which of the following will allow the firm to enhance the profits? A. Engage in two-part pricing. B. Engage in commodity bundling. C. Engage in randomized pricing. D. Engage in two-part pricing and engage in commodity bundling. Answer: A Learning Objective: 11-02 Topic: Strategies That Yield Even Greater Profits Blooms: Analyze AACSB: Analytical Thinking Difficulty: 02 Medium

11-4 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power

13. Suppose P = 20 − 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. If fixed costs are zero and the firm engages in two-part pricing, the most profits the firm will earn is: A. $5. B. $10. C. $25. D. $50. Answer: C Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

14. Cinemas sometimes give senior citizens discounts. What is the possible privately motivated purpose for them to do so? A. Purely because entrepreneurs are benevolent. B. Senior citizens have a more elastic demand for movies than ordinary citizens. C. Senior citizens lack recreational activities. D. None of the preceding statements is correct. Answer: B Learning Objective: 11-03 Topic: Strategies That Yield Even Greater Profits Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

15. Which of the following pricing strategies does NOT usually enhance the profits of firms with market power? A. Price matching B. Cross-subsidies C. Two-part pricing D. Marginal cost pricing Answer: D Learning Objective: 11-04 Topic: Strategies That Yield Even Greater Profits Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

11-5 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power

16. Which of the following statements is true? A. The more elastic the demand, the higher the profit-maximizing markup. B. The more elastic the demand, the lower the profit-maximizing markup. C. The higher the marginal cost, the lower the profit-maximizing price. D. The higher the average cost, the lower the profit-maximizing price. Answer: B Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

17. In a Cournot oligopoly with N firms and identical marginal costs, the relationship between the price elasticity of market demand and that of the firm is: A. EM = EF. B. EM = NEF. C. EM = EF/N. D. No deterministic relationship. Answer: C Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

18. A new firm successfully enters a three-firm Cournot oligopoly without changing the demand and cost structures. The new price becomes: A. 75 percent of the original price. B. 50 percent of the original price. C. the same as the original price. D. unknown for lack of other information. Answer: D Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

11-6 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power

19. The idea of charging two different groups of consumers two different prices is practiced in: A. price discrimination. B. two-part pricing. C. price matching. D. None of the preceding statements is correct. Answer: A Learning Objective: 11-02 Topic: Strategies That Yield Even Greater Profits Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

20. One of the conditions under which price discrimination is profitable is: A. ability to identify consumer types. B. inability to resell the good. C. differences in demand elasticities. D. All of the statements associated with this question are correct. Answer: D Learning Objective: 11-02 Topic: Strategies That Yield Even Greater Profits Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

21. During spring break, students have an elasticity of demand for a trip to Florida of −3. How much should an airline charge students for a ticket if the price it charges the general public is $360? Assume the general public has an elasticity of −2. A. $240 B. $250 C. $260 D. $270 Answer: D Learning Objective: 11-01 Topic: Basic Pricing Strategies Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

11-7 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power

22. A local video store estimates its average customer's demand per year is Q = 7 − 2P, and it knows the marginal cost of each rental is $0.5. How much should the store charge for an annual membership in order to extract the entire consumer surplus via an optimal two-part pricing strategy? A. $9 B. $10 C. $11 D. $12 Answer: A Learning Objective: 11-02 Topic: Strategies That Yield Even Greater Profits Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

23. A local video store estimates its average customer's demand per year is Q = 7 − 2P, and it knows the marginal cost of each rental is $0.5. How much should the store charge for each rental if it engages in optimal two-part pricing? A. $0.35 B. $0.5 C. $0.7 D. $1.00 Answer: B Learning Objective: 11-02 Topic: Strategies That Yield Even Greater Profits Blooms: Apply AACSB: Analytical Thinking Difficulty: 01 Easy

24. A local video store estimates its average customer's demand per year is Q = 7 − 2P, and it knows the marginal cost of each rental is $0.5. What is the annual profit that the video store expects to make on an average customer if it engages in optimal two-part pricing? A. $6 B. $7 C. $8 D. $9 Answer: D Learning Objective: 11-02 Topic: Strategies That Yield Even Greater Profits Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

11-8 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power

25. If your demand for renting videos is Q = 5 − 2P, should you purchase the annual membership from a video store that charges $0.5 per rental, plus an annual membership fee of $12? A. Definitely yes B. Definitely no C. Probably yes D. Cannot be decided Answer: B Learning Objective: 11-02 Topic: Strategies That Yield Even Greater Profits Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

26. What price should a firm charge for a package of two shirts given a marginal cost of $2 and an inverse demand function P = 6 − 2Q by the representative consumer? A. $2 B. $6 C. $8 D. $10 Answer: C Learning Objective: 11-02 Topic: Strategies That Yield Even Greater Profits Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

27. A Broadway theater sells weekday show tickets at a lower price than for a weekend show. This is an example of: A. price discrimination. B. peak-load pricing. C. price discrimination or peak-load pricing. D. None of the preceding statements is correct. Answer: C Learning Objective: 11-03 Topic: Strategies That Yield Even Greater Profits Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

11-9 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power

28. A campus auditorium sells tickets at half price to students during the last 30 minutes before a concert starts. This is an example of: A. price discrimination. B. peak-load pricing. C. price discrimination or peak-load pricing. D. None of the preceding statements is correct. Answer: C Learning Objective: 11-04 Topic: Strategies That Yield Even Greater Profits Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

29. A necessary cost-side condition for a firm to implement a cross-subsidization pricing strategy is: A. economies of scale. B. economies of scope. C. constant marginal cost. D. limited capacity. Answer: B Learning Objective: 11-03 Topic: Strategies That Yield Even Greater Profits Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

30. The special cost structure that is necessary for a firm to adopt a peak-load pricing policy is: A. economies of scale. B. economies of scope. C. constant marginal cost. D. limited capacity. Answer: D Learning Objective: 11-03 Topic: Strategies That Yield Even Greater Profits Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

31. The special demand structure that induces a firm to use a cross-subsidization strategy is: A. perfect substitution among products. B. imperfect substitution among products. C. independent demand for products. D. interdependent demand for products. Answer: D 11-10 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power Learning Objective: 11-03 Topic: Strategies That Yield Even Greater Profits Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

32. Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal cost, but the high equipment rental fee keeps generating big profits. Which pricing strategy is the management using? A. Price discrimination B. Two-part pricing C. Commodity bundling D. Cross-subsidization Answer: D Learning Objective: 11-03 Topic: Strategies That Yield Even Greater Profits Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

33. Which of the following strategies will most likely NOT enhance profits in a Bertrand oligopoly? A. Two-part pricing B. Price matching C. Randomized pricing D. Brand loyalty Answer: A Learning Objective: 11-02 Topic: Strategies That Yield Even Greater Profits Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

34. Firms that use a price-matching strategy attempt to keep price at: A. marginal cost. B. the oligopoly price. C. the monopoly price. D. the oligopoly price or the monopoly price. Answer: C Learning Objective: 11-04 Topic: Strategies That Yield Even Greater Profits Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

11-11 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 11 - Pricing Strategies for Firms with Market Power

35. Price-matching strategies may fail to enhance profits when: A. firms cannot prevent customers from making deceptive claims. B. firms have different marginal costs. C. firms cannot prevent customers from making deceptive claims or firms have different marginal costs. D. None of the statements are correct. Answer: C Learning Objective: 11-04 Topic: Strategies That Yield Even Greater Profits Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

36. Which of the following statements about a price-matching strategy is incorrect? A. It may be applied in situations besides Bertrand oligopoly. B. It requires that the firms can monitor their rival's prices. C. It reduces the incentive for a rival firm to initiate a price war. D. It only guarantees to match prices that are advertised publicly. Answer: B Learning Objective: 11-04 Topic: Strategies That Yield Even Greater Profits Blooms: Understand AACSB: Knowledge Application Difficulty: 03 Hard

37. Which of the following pricing policies compensate customers if the firm fails to provide the best price in the market? A. Price matching B. Beat-or-pay C. Brand loyalty D. Randomized pricing Answer: B Learning Objective: 11-04 Topic: Strategies That Yield Even Greater Profits Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

38. Which group of policies aims at discouraging rivals from starting a price war? A. Price matching and randomized pricing B. Price matching, brand loyalty, and commodity bundling C. Randomized pricing, price discrimination, and cross-subsidization D. Peak-peak pricing, two-part pricing, and price matching Answer: A 11-12 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distribu...