Question 1

A price that is commonly used in an industry is called

Accepted Answer

A benchmark price is a standard or point of reference against which prices may be compared or assessed in an industry.

Question 2

The situation where the best strategy for a firm depends on the choice of strategy by other firms is called

Accepted Answer

In an oligopoly, a market is controlled by a few firms, and each firm's strategy heavily depends on the strategies chosen by other firms in the market. This interdependence is a key characteristic of oligopolistic markets.

Question 3

If a firm engages in limit pricing, its

Accepted Answer

Limit pricing involves setting a price low enough to deter entry by potential competitors, which typically results in lower profits compared to profit-maximizing pricing.

Question 4

Average cost pricing is the term used to describe the situation when a firm

Accepted Answer

Average cost pricing refers to the practice where a firm calculates the average cost of production for its products or services and then adds a percentage mark-up to determine the selling price. This method ensures that all costs are covered and a profit margin is achieved.

Question 5

For a firm that uses mark- up pricing and aims to achieve a particular level of total profit, its supply curve will be

Accepted Answer

Mark-up pricing involves setting prices above the average (total) cost to achieve a desired profit margin. As output increases, economies of scale may reduce the average cost, causing the gap between the supply curve and the average cost curve to narrow.

Question 6

If a firm is using a mark- up pricing policy, price will equal

Accepted Answer

Mark-up pricing policy involves setting prices based on the cost of producing a product plus a profit margin. The cost includes both average fixed costs (AFC) and average variable costs (AVC), hence the correct answer is B) AFC + AVC + profit mark-up.

Question 7

Cost- based pricing uses the idea that

Accepted Answer

The answer of Cost- based pricing uses the idea that...

Question 8

What must a firm know before it can set its output and profit mark- up levels to avoid shortages and surpluses?

Accepted Answer

The firm must know its demand curve to set its output and profit mark-up levels to avoid shortages and surpluses. The demand curve shows the relationship between the price of a good and the quantity demanded. By knowing its demand curve, the firm can determine the quantity of output that it can sell at a given price. This information is essential for setting the firm's output and profit mark-up levels.

Question 9

When is the size of the mark- up likely to be largest?

Accepted Answer

The size of the mark-up is likely to be largest when the firm has monopoly or oligopoly power because these firms have more control over their pricing strategies and face less competition, allowing them to set higher prices above their costs compared to firms in perfectly competitive markets.

Question 10

If a firm charges each customer the maximum price they are willing to pay for each unit, this is called_________degree price discrimination.

Accepted Answer

First-degree price discrimination, also known as perfect price discrimination, occurs when a seller charges each customer their maximum willingness to pay for each unit, capturing the entire consumer surplus.

Question 11

In which market structure could price discrimination not occur?

Accepted Answer

Price discrimination cannot occur in perfect competition because all firms are price takers, meaning they cannot set prices higher or lower for different consumers. In a perfectly competitive market, products are homogeneous, and there are many buyers and sellers, so no single seller has the power to influence market prices.

Question 12

When a firm sets its prices below average cost in order to drive out competitors, this is called

Accepted Answer

Predatory pricing occurs when a firm sets its prices below average cost with the intention of driving competitors out of the market. This strategy is used to eliminate or diminish competition, allowing the firm to increase prices once the competition has been weakened or eliminated.

Question 13

When a firm charges a consumer the full price for ten units of product X and then half the price of every other unit of product X bought, this is called

Accepted Answer

This is an example of second degree price discrimination, where prices vary according to the quantity consumed or bought, rather than the identity of the buyer or the time of purchase. Charging full price for the first ten units and half price for additional units is a form of volume discount, which falls under second degree price discrimination.

Question 14

Price discrimination increases profits because

Accepted Answer

Price discrimination allows firms to capture more consumer surplus by charging different prices to different consumers based on their willingness to pay, thereby increasing profits.

Question 15

Which of the following is not a necessary condition for a firm to be able to price discriminate?

Accepted Answer

For a firm to price discriminate, it is not necessary that unit costs are not constant. Price discrimination primarily requires the ability to segment markets, the firm being a price maker, and having some degree of market power to set different prices for different segments.

Question 16

Which of the following is not a type of price discrimination?

Accepted Answer

Limit pricing is a strategy used to deter entry into the market by setting prices low enough to discourage potential competitors, rather than a form of price discrimination which involves charging different prices to different consumers for the same product or service.

Question 17

If a firm charges everyone a different price, it is likely that they are engaging in

Accepted Answer

First degree price discrimination involves charging each customer a different price based on their willingness to pay, maximizing the firm's profit by capturing as much consumer surplus as possible.

Question 18

Which of the following is not an advantage of practising price discrimination?

Accepted Answer

Price discrimination often requires targeted advertising to different segments, which can increase advertising costs rather than decrease them.

Question 19

One of the reasons that firms use inter- temporal and peak- load pricing is that it enables them to exploit

Accepted Answer

Inter-temporal and peak-load pricing strategies allow firms to adjust prices based on the varying demand elasticity across different market segments or times. This approach helps in maximizing revenue by charging higher prices when demand is inelastic and lowering prices when demand is more elastic.

Question 20

What is a two part- tariff?

Accepted Answer

A two-part tariff involves an access fee and a separate usage fee. This pricing strategy is common in services where a basic access fee grants entry or membership, and additional charges apply based on usage or consumption levels.

Quiz 17: Pricing Strategy