Chapter 10 Problems
B
When segmenting your market demand into groups, base them on _____ and _____ characteristics. A. equal; unifying B. verifiable; difficult-to-change C. easy-to-observe; demand-unifying D. income; preference (10.5)
D
A certain city has four hospitals, and there are no other hospitals within 200 miles. Two of the hospitals are more specialized than the other two because one has a large cardiac unit and the other has a specialized cancer-treatment center. The local market for hospital services is what type of market? A. Monopoly B. Monopolistic competition C. Perfect competition D. Oligopoly (10.1)
A
A firm's ability to raise its product price without losing many customers to competing businesses is known as A. market power. B. marginal revenue. C. revenue dependability. D. competitive power. (10.1)
B
A large department store advertises time-of-day discounts for particular items on a special sale day. The store is using _____ to create a _____ for the most price-sensitive customers to gain low prices. A. bundling; segmentation B. fluctuating prices; hurdle C. haggling; segmentation D. alternate versions; group pricing (10.5)
A
Arturo makes and sells organic frozen yogurt with fresh fruit toppings. He wants to price discriminate according to a preference for organic food so that those with the most inelastic demand for organic food pay the highest price. To accomplish this, to which group should he give discount coupons for his yogurt? A. Customers of the local fast-food restaurant B. Members of the local organic food co-op C. People who come to the community's weekly farmer's market D. Students at the local art school (10.5)
C
As the quantity sold rises for a seller in imperfect competition, what happens to the difference between price and marginal revenue? A. It gets smaller and smaller. B. It remains constant and is smaller than price. C. It gets larger and larger. D. It remains constant and is equal in size to price. (10.2)
A
Companies with market power face a trade-off between A. having a higher profit margin and selling a larger quantity. B. reducing costs and increasing profit. C. having a higher marginal cost and a reduction in output. D. gaining market share and reducing costs. (10.2)
A
Coupons and rebates provide discounts to the especially price-sensitive consumers even though they are available to all consumers. Why do only price-sensitive consumers avail these discounts? Price-Sensitive consumers A. are more willing to take the time to locate and use the coupons and rebate forms. B. want to buy at full price in order to appear prosperous. C. are the only ones who receive the coupons and rebate forms. D. have the identifying characteristic that the seller uses to segment the customers. (10.5)
D
Customers would be less loyal and more price sensitive in which of the following situations? A. Customers are aware of the prices of all sellers. B. There is only one seller in the market. C. The market's companies sell differentiated products. D. The switching costs are low. (10.3)
B, C, D
Duolingo is a widely used foreign language app, with 300 million users in 2018. While there is a free version of the app, a premium Duolingo subscription eliminates advertisements during language practice and offers new quizzes with the ability to save lessons for offline use. a. Identify each hurdle for users of the free version of the app. A. the subscription fee paid for the premium version of the app A. the advertisements that users of the free version must endure B. the absence of enhanced features—new quizzes and C. the ability to save lessons for offline use—enjoyed by users of the premium version b. By offering both a free and a premium version of the app, Duolingo A. profits only from the free version, not the premium version. B. profits only from the premium version, not the free version. C. profits more than it would if it offered just one version of the app. D. profits less than it would if it offered just one version of the app. (PS10)
B
Following the Rational Rule for Sellers, how does output for a seller who has market power compare to output for a seller who does not have market power? A. The level of market power has no impact on output. B. Output is higher without market power than with market power. C. Output is higher with market power than without market power. D. Output is the same in both situations. (10.2)
B
In which of the following situations would a company have a lower chance of losing customers when it raises the price of its product? A. Companies advertise their prices. B. The product is differentiated across companies. C. Customers have many sellers to choose from. D. There are low switching costs. (10.3)
D
The output in a market with market power is A. higher than the output in a market without market power. B. more predictable than the output in a market without market power due to product differentiation. C. efficient because marginal cost is equal to marginal revenue. D. inefficient because the marginal benefit to society of extra output exceeds the marginal cost. (10.2)
D
The threat of potential substitutes is high when the substitutes: A. have higher production costs than the original product. B. face high barriers to enter the market. C. cause customers to incur high switching costs. D. offer greater value for their price than the original product. (10.3)
D
To prevent people from pretending to qualify for the market segment with the lowest price, a company manager that engages in group pricing needs to make sure that A. each consumer has no way of knowing the range of prices paid by other consumers. B. there are equivalent prices paid by consumers in each segment. C. segmentation is on a detailed set of qualifications. D. there is a simple way to verify the segment in which a consumer qualifies. (10.5)
A, C, D
Michelle owns an independent bookstore and has observed that college graduates read more than people without degrees. She is considering offering a 10% discount on book purchases to customers who have a postsecondary degree. Why might Michelle's plan hurt rather than help her business? A. People who read more books are likely to have a higher willingness to pay than others. B. High educational achievement is not a difficult-to-change characteristic. C. Whether an individual has a postsecondary degree is not easily verifiable. D. People with higher education typically earn more than others and so may have a higher willingness to pay. (PS10)
D
Which of the following is NOT a strategy used by a company to "lock-in" customers to ensure demand for its product? A. Generating positive network effects. B. Increasing switching costs. C. Building goodwill and loyalty among customers. D. Pressuring the government to require a license for entry into the market (10.1)
A
Bree's Bait Shop is a successful store that specializes in highly effective fishing tackle. Bree has employed a high‑tech computer tracking system that allows her to separate her customers into two different groups of consumers with differing price elasticities of demand. Bree is interested in increasing her profits through price discrimination and approaches your marketing firm for advice. Assuming her demand curve is downward sloping, you tell her there is one more crucial piece of information you must have in order to advise her. What do you ask Bree? A. Are you able to prevent selling between customers?B. What is your current output? C. Are you currently producing where MR=MCMR=MC? D. What are your total costs? (10.4)
D
Your company sells 19 units at a price of $10 and must change price to $9.90 in order to sell 20 units. What is the marginal revenue of the twentieth unit? A. $198.00 B. -$.10 C. $9.90 D. $8.00 (10.2)
B
A 2009 article in the Economist explained a barrier to entry that existed 40 years ago for foreign banks wanting to operate in Britain. Foreign banks could not operate in Britain unless they had an office that was within walking distance of the Bank of England, which served as the industry's regulator at the time. This requirement served as a barrier to entry into the banking industry in Britain because A. existing banks threatened to crush any competitors that entered the market. B. office space within walking distance to the Bank of England was limited. C. there was a surplus of office space in this area of London. D. customers faced high switching costs to transfer their bank accounts to foreign banks. (10.1)
B
All of the following are commonly used to create a hurdle for price-sensitive consumers to overcome in order to get a lower price EXCEPT A. coupons. B. group pricing. C. bundling. D. haggling. (10.5)
B, A, B, B, A, B
Classify the statements as either true or false. a. Price discrimination is illegal under all circumstances. A. True B. False b. Airlines are often able to price discriminate. A. True B. False c. Firms do not have an incentive to price discriminate because it results in some groups paying a lower price than others. A. True B. False d. Perfect price discrimination occurs when perfectly competitive firms charge some people higher prices than others. A. True B. False e. All else being equal, single price monopolists earn lower profits than firms that can price discriminate. A. True B. False f. Price discrimination only occurs with natural monopolies. A. True B. False (10.4)
C
Consumer surplus will _____ when a monopolist goes from single-price monopoly to perfect price discrimination. A. remain the same B. increase C. decrease D. initially increase and then return to its original level (10.4)
A
If a monopolist engages in perfect price discrimination: A. it produces the efficient quantity of output. B. there is no producer surplus. C. the producer surplus is equal to the monopoly profit. D. the government will impose an average cost pricing rule on the monopoly. (10.4)
B
In the long run, the number of sellers and the level of profit in a market are both affected heavily by the _____ in the market. A. type of product B. strength of the barriers to entry C. income tax levels D. level of variable costs (10.3)
D
In which of the following cases would a company's profits be threatened? A. The threat of potential substitutes for its product diminishes. B. Barriers to entry into its industry rise. C. Its customers face higher switching costs. D. One of its key input providers gains market power in the input market. (10.3)
B
In which of the following situations would the supplier have the greatest power to hurt a business that is its customer? A. The business could use an alternative input mix that uses significantly less of the supplier's product. B. The supplier rents building space to a bakery in a real estate market with a vacancy rate of less than .5%. C. The supplier is one of 100 companies selling the input needed by the business. D. The cost for the business to switch to a different supplier is low. (10.3)
B
Which of the scenarios does NOT fit into the model of the five competitive forces? A. competition created by bargaining power of buyers B. competition from complement goods and services C. competition from substitute goods and services D. competition from existing firms E. competition from potential entrants (10.3)
B
Monopoly profit will _____ when a monopolist goes from single-price monopoly to perfect price discrimination. A. remain the same B. increase C. decrease D. initially increase and then return to its original level (10.4)
D
A characteristic of oligopoly that is not present in other market structures is that there A. is only one seller and that seller holds a high level of market power. B. are many sellers that produce identical products. C. are many sellers and each produces a differentiated version of the product. D. are a small number of sellers and they have market power. (10.1)
D, D, E, E, A
Monopolies exist because of barriers to entry, obstacles that prevent other firms from entering an industry and competing for market share. For each case, indicate which barrier to entry applies. a. Coca‑Cola's vast market share in the soft drink market: A. Legal barrier B. Control of a resource C. Brand loyalty D. Network externalities b. China's control of the market for rare earths (a group of minerals used to produce electronics): A. Brand loyalty B. Legal barrier C. Economies of scale D. Control of a resource E. Network externalities c. Pfizer's control of the production of Viagra: A. Control of a resource B. Economies of scale C. Network externalities D. Brand loyalty E. Legal barrier d. The local utility company that can provide electricity to the entire market at a lower average cost than other producers: A. Legal barrier B. Control of a resource C. Network externalities D. Brand loyalty E. Natural monopoly e. Facebook's position in social media: A. Network externalities B. Control of a resource C. Legal barrier D. Economies of scale (PS10)
B
Monopolistic competition is a market characterized by A. many sellers that produce identical products. B. many sellers that produce different versions of the same product. C. a few sellers that can impact the other sellers through their actions. D. one seller that competes against itself. (10.1)
D, C, D
Sears, an American retail store, was the largest retailer (measured by revenue) in the United States until the 1990s. In 2018, Sears filed for bankruptcy. Some commentators have argued that the rise of Amazon drove Sears to bankruptcy. However, others argue that Sears was in decline long before Amazon became a dominant force in the market. Consider each of the arguments given for Sears' downfall. Sears' management disregarded the impact of online retailers entering Sears' market space. a. This is an example of Sears failing to prepare for A. the tremendous bargaining power of online retailers. B. non-price competition with existing competitors. C. price wars with existing competitors. D. the threat of new entry into the retail space. Sears' management failed to consider the effect of services not offered by Sears, such as second-day shipping, which was offered by some online retailers. b. This is an example of Sears failing to prepare for A. buyers using their bargaining power to demand new services. B. sellers using their bargaining power to offer services not available at Sears. C. substitute services that would be appealing to Sears' customer base. D. the intensity of competition among existing competitors. Sears could not compete against the low prices and wide variety offered by Walmart stores. c. This is an example of Sears failing to prepare for A. the threat of new entry into the retail space. B. new innovations leading to substitute products and services. C. buyers using their bargaining power to demand lower prices. D. the intensity of competition among existing competitors. (PS10)
C
The Clean Company sells a bottle of bathroom cleaner for $4 and a grout brush for $3. It offers a special deal for a package containing both the bathroom cleaner and the grout brush for $5. This type of quantity discount is known as A. group pricing. B. imperfect goods. C. bundling. D. shopping around. (10.5)
C
Under the Five Forces framework, how can the market power of customers impact a seller's profitability? A. They can raise the selling price sellers charge. B. The market power increases the total number of customers, raising market demand. C. Customers with market power can use their leverage to lower the selling price that sellers charge. D. The market power reduces the total number of customers, raising market demand. (10.3)
C, D
What is a natural monopoly? A. A monopoly resulting from one firm's exclusive ownership of a natural resource required to produce a good. B. A monopoly that results from government issuing patents. C. A monopoly that faces a high fixed cost and low marginal costs so that the average total cost curve slopes downward. D. A market in which there is only one firm. Which of the firms is most likely to be a natural monopoly? A. A pharmaceutical company that has the exclusive right to sell a patented drug. B. A restaurant that is unable to practice price discrimination and must charge all consumers the same price. C. A firm that owns nearly all of the diamond mines in the world. D. Municipal Power Light, the local supplier of electricity. (10.1)
D
When looking at a firm's behavior, you know it is engaging in price discrimination when it A. charges customers more than they would prefer to pay. B. asks about personal information such as race, gender, and sexual orientation before offering services. C. does not accept payment with a smartphone. D. charges a different price to different customers that is not reflective of the firm's costs. (10.4)
D
Which of the following government policies would create a direct barrier to entry for new sellers in a market? A. banning switching costs to protect consumers B. ensuring that all sellers have equal access to inputs C. taxing business profits with a progressive tax D. granting a patent to the developer of a new product (10.1)
B
Which of the following is NOT one of the five forces that determine the structure of competition in a market? A. the bargaining power of buyers B. the existing market price C. competition from existing competitors D. potential competitors (10.3)
E
Perfect price discrimination is characterized by charging A. customers a different price, depending on their income. B. prices that are different from competitors' prices. C. different prices to customers based on when they purchase the good or service. D. customers a different price, depending on their gender. E. each customer a price equal to his or her maximum willingness to pay. (10.4)
D
Sergio sells identical shirts under two brand names — Rags and Bees. The shirts with the Rags label sell for $70, and the shirts with the Bees label sell for $40. The Rags shirts hang wrinkle-free on a hanger, and the Bees shirts are folded and have some wrinkles. This is an example of price discrimination through A. using shopping around to create a hurdle. B. segmenting into groups based on customer income. C. assuming that customers are unaware of quality. D. using an imperfect product to create a hurdle. (10.5)
C
Some vending machines on college campuses sell identical items, such as the same bags of potato chips, for two different prices. The low-priced chips generally sell out by the end of the day, leaving the more expensive chips for late-night visitors to the vending machines. What must the vending machine operators think about the demand of people who visit the machine at night relative to those who visit the machine during the day? Why might they think this? A. People who buy snacks at night have more elastic demand than people who buy snacks during the day. B. People who are in the building late at night are likely to have an office in which they can store food.People who buy snacks at night have more elastic demand than people who buy snacks during the day. People buying snacks at night have probably already eaten three full meals. C. People who buy snacks at night have less elastic demand than people who buy snacks during the day. D. People buying snacks at night have fewer substitutes from which to choose, since a lot of restaurants and other stores are likely to be closed.People who buy snacks at night have less elastic demand than people who buy snacks during the day. People who buy from the vending machines at night are more likely to bring food from home and thus not need food from a vending machine. (PS10)
D
Consider a case of possible price discrimination: lunch specials at restaurants. Some restaurants may offer a soup and salad for five dollars during lunch hours and offer the same dish for eight dollars during dinner hours. Suppose that the soup and salad is the cheapest dinner option, and that the restaurant, although usually only half full during lunch hours, is often full enough during dinner hours that people end up choosing to eat elsewhere because of the wait. In what way might this difference in prices not be price discrimination? A. Since different customers pay different prices for an otherwise identical meal, this must be price discrimination. B. People often pay more for dinner than they do for lunch. If the price of a soup and salad during lunch relative to the average lunch price is the same as the price of a soup and salad during dinner relative to the average dinner price, then the restaurant is not price discriminating, since the relative prices are equal.The restaurant does not have its servers try to identify the elasticity of the individual demand curves of its customers and then charge different prices, so this is not price discrimination. C. People might be willing to pay more for soup and salad during dinner hours, so the restaurants are not price discriminating since they are simply charging a higher price to people that are willing to pay the higher price. D. People that come in and order the soup and salad for dinner might cause customers who would have ordered a more expensive meal to instead eat elsewhere because of the wait. As such, the marginal costs of the two meals to the restaurant are different; thus, this is not necessarily price discrimination. (PS10)
B
Heri owns one of three shoe repair shops in his city. Then he loses some of his customers when a luggage repair shop expands its services to include shoe repair as well as luggage repair. Which of the five forces in the Five Force framework is Heri facing when the luggage shop expands its services? A. threat of potential substitutes B. threat of entry C. threat of existing competitors D. bargaining power of buyers (10.3)
D
How would the discount effect on marginal revenue differ for a seller increasing sales from 100 units to 101 units compared to an increase in sales from 1,000 units to 1,001 units? A. The discount effect would be larger for a change from 100 to 101 units than 1,000 to 1,001 units. B. The discount effect would be the same in both situations and would be larger than price. C. The discount effect would be the same in both situations and would be less than price. D. The discount effect would be smaller for a change from 100 to 101 units than 1,000 to 1,001 units. (10.2)
B
In which of the following situations would Max's Doughnut Shop have the greatest market power? A. There are two rival doughnut shops within three miles but no other bakeries. B. The closest doughnut shop or bakery is 25 miles away from Max's shop. C. The closest doughnut shop is 10 miles away, but there is a bakery with breakfast pastries two miles away. D. Within three miles, there are five other doughnut shops and three bakeries that sell breakfast pastries. (10.1)
C
Michelle owns the largest florist shop in her town. Each week, she orders a truckload of flowers from the flower wholesaler. The other two florists in town order only one-third as many flowers. Because Michelle's order fills the delivery truck, the wholesaler sells flowers to her at a lower price than the other florists must pay. How will this situation impact potential new entrants? A. The cost differential can easily be offset by creating a demand differential, so it will have little impact. B. New florists will not be affected because input prices are minor factors in markets. C. New florists will be discouraged from entering the market because of the difficulty of competing on cost. D. New florists will be encouraged to enter because they will be energized by the challenge to succeed. (PS10)
D
Most U.S. grocery stores sell a variety of boxed breakfast cereals. This observation indicates that the boxed breakfast cereal market is A. an oligopoly. B. a perfectly competitive market. C. a monopoly. D. a monopolistically competitive market. (10.1)
A
Which of the following is NOT one of the three steps to take in segmenting customers into groups? A. Charge higher prices to groups with more elastic demand. B. Give discounts to chosen groups based on identifiable characteristics. C. Base discounts on characteristics that are hard to change. D. Divide the consumers into groups whose demand differs. (10.5)
C
Which statement describes a monopoly? A. Many firms produce identical products with no control over the market price. B. Many firms produce differentiated products with control over market price. C. A single firm produces a product with no close substitutes and control over the market price. D. A single firm produces a product with many close substitutes and limited control over the market price. (10.2)
