Quiz 7

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) A firm is charging a different price for each unit purchased by a consumer. This is called…
A) first-degree price discrimination.
B) second-degree price discrimination.
C) peak-load pricing
D) third-degree price discrimination.

2) If a firm has market power and the ability to prevent resale, and it knows different customers have
different demand curves but it cannot predict reservation prices before purchase, the firm may employ
____ as a pricing strategy as opposed to price maximizing with one price.
A) First degree price discrimination
B) Second Degree Price Discrimination
C) Third Degree Price Discrimination
D) Bundling

3) A third-degree price discriminating monopolist can sell its output either in the local market or on an
internet auction site (or both). After selling all of its output, the firm discovers that the marginal
revenue earned in the local market was $20 while its marginal revenue on the internet auction site
was $30. To maximize profits the firm should…
A) sell less in both markets until marginal revenue is zero.
B) have sold more output in the local market and less at the internet auction site.
C) have sold less output in the local market and more on the internet auction site.
D) do nothing until it acquires more information on costs.

4) You produce stereo components for sale in two markets, foreign and domestic, and the two groups
of consumers cannot trade with one another. If your firm practices third-degree price discrimination to
maximize profits, the marginal revenue
A) in the foreign market will equal the marginal cost.
B) in the domestic market will equal the marginal revenue in the domestic market.
C) in the domestic market will equal the marginal cost.
D) all of the above

5) You produce stereo components for sale in two markets, foreign and domestic, and the two groups
of consumers cannot trade with one another. You will charge the higher price in the market with the
A) higher own price elasticity of demand (more elastic demand).
B) lower own price elasticity of demand (more inelastic demand).
C) larger teenage population.
D) greater consumer incomes.

6) Johnny's Shop-and-Pay is a regional grocery chain, and their marketing manager is trying to
determine the profit-maximizing coupon program for the store's laundry detergent brand. Coupon
users at the store have an elasticity of demand for this product that equals -3, and the elasticity of
demand for non-users of the coupon for the store brand equals -1.5. If the full retail (undiscounted)
price of the detergent is $10 per box, what is the optimal discount to provide for coupon users?
A) The optimal strategy is to charge the same price to both groups
B) 25% off
C) 50% off
D) 75% off
7) MNO Limited publishes a magazine targeted at urban professionals who live on the east and west
coasts of the U.S., and all of the magazines are printed at a marginal cost of $0.50 per copy at a
publishing plant in Kansas. If the East Coast elasticity of demand for the magazine is -1.25 and the
West Coast elasticity of demand is -1.50, what prices should MNO Limited charge for the magazines
in these two markets in order to maximize profits?
A) Price should be $2.50 on the West Coast and $1.50 on the East Coast
B) Price should be $0.50 in both markets
C) Price should be $1.50 on the West Coast and $2.50 on the East Coast
D) Price should be $0.40 on the West Coast and $0.33 on the East Coast

8) Uber employs what is calls “surge pricing” that requires riders to pay higher rates at relatively busy
times for the ride sharing service. This is an example of _____.
A) second degree price discrimination
B) peak load pricing
C) a two part tariff
D) bundling

9) A national restaurant chain has a “favorite eaters” club where each member pays $10 annually to
join the club, then enjoys a $0.50 dessert once a week. This is an example of _____.
A) second degree price discrimination
B) peak-load pricing
C) a two part tariff
D) bundling

10) Which of the following statements is NOT compatible with explanations for why peak-load pricing
is more profitable than charging a single price?
A) Marginal cost of production is much higher under peak demand.
B) Marginal revenue must be the same across different time periods.
C) Consumer willingness to pay for the product varies a lot across different time periods.
D) Marginal revenue changes a lot across different time periods.