ECON 101-CHAPTER-9-14

ECON-101-CHAPTER-9-14 CHAPTER 9 2. Which of the following markets are closest to perfectly competitive a. The market for smart phones b. The market for generic pharmaceuticals c. The market f ...

ECON-101-CHAPTER-9-14 CHAPTER 9 2. Which of the following markets are closest to perfectly competitive a. The market for smart phones b. The market for generic pharmaceuticals c. The market for sport shoes d. The market for fast food 3. A firm in a faces a demand curve. a. perfectly competitive market; perfectly inelastic b. perfectly competitive market; perfectly elastic c. monopoly market; perfectly elastic d. monopoly market; horizontal 4. In a perfectly competitive market industry, firm’s prices are equal to a. Average revenue b. Marginal revenue c. Both a and b d. None of the above 5. In the long-run, a perfectly competitive firm will achieve a. An average rate of return b. Above average profits c. Losses d. Economic Profits 6. A perfectly competitive firm has a. A perfectly elastic demand for its products b. A perfectly inelastic demand for its products c. A downward sloping demand for its products d. None of the above 7. If a firm in a perfectly competitive industry is experiencing higher than normal returns, in the long-run a. Some firms will leave the industry and price will rise b. Some firms will enter the industry and price will rise c. Some firms will leave the industry and price will fall d. Some firms will enter the industry and price will fall 8. A sudden increase in the market demand in a competitive industry leads to a. A market equilibrium profits higher than the original equilibrium in the short-run b. A market equilibrium profits equal to the original equilibrium in the long-run c. Both a and b d. None of the above 9. Once the patent for a drug in the pharmaceutical industry expires, the market for the generic equivalents a. Is usually considered competitive b. Is a monopolistic market c. Has no effect on the profits earned by the original producer d. Would not exist 10. In a competitive industry buffeted by demand and supply shocks, prices increase and decrease, but economic profits tend to revert to zero. Hence, profits are exhibiting a. Above-average return b. Positive earnings c. Mean reversion d. None of the above 11. A sudden rise in the market demand in a competitive industry leads to a. A short run market equilibrium price higher than the original equilibrium b. A market equilibrium lower than the short run price c. Entry of new firms into the market d. All of the above 12. A sudden rise in the market demand in a competitive industry leads to a. A short run market equilibrium price higher than the original equilibrium b. A market equilibrium higher than the short run price c. Some firms exiting the market d. All of the above 13. A sudden rise in the market demand in a competitive industry leads to a. A short run market equilibrium price lower than the original equilibrium b. A market equilibrium lower than the short run price c. Some firms exiting the market d. All of the above 14. A sudden rise in the market demand in a competitive industry leads to a. A short run market equilibrium price lower than the original equilibrium b. A market equilibrium higher than the short run price c. Entry of new firms into the market d. All of the above 15. A sudden fall in the market demand in a competitive industry leads to a. A short run market equilibrium price lower than the original equilibrium b. A market equilibrium price higher than the short run price c. Some firms exiting the market d. All of the above 16. A sudden fall in the market demand in a competitive industry leads to a. A short run market equilibrium price higher than the original equilibrium b. A market equilibrium price lower than the short run price c. Some firms exiting the market d. All of the above 17. A sudden fall in the market demand in a competitive industry leads to a. A short run market equilibrium price lower than the original equilibrium b. A market equilibrium price lower than the short run price c. New firms entering the market d. All of the above 18. A sudden fall in the market demand in a competitive industry leads to a. A short run market equilibrium price higher than the original equilibrium b. A market equilibrium price higher than the short run price c. New firms entering the market d. All of the above 19. A sudden decrease in the market demand in a competitive industry leads to a. A market equilibrium price higher than the original equilibrium in the short-run b. A market equilibrium price equal to the original equilibrium in the long-run c. Both a and b d. None of the above 20. A sudden decrease in the market demand in a competitive industry leads to a. Losses in the short-run and average profits in the long-run b. Above average profits in the short-run and average profits in the long- run c. New firms being attracted to the industry d. Demand creating supply 21. A sudden increase in the market demand in a competitive industry leads to a. Losses in the short-run and average profits in the long-run b. Above average profits in the short-run and average profits in the long- run c. New firms being attracted to the industry d. Both B&C 22. In a competitive industry a. firms produce a product or service with very close substitutes b. the firms products have a very elastic demand c. the firms have many rivals d. all of the above 23. In a competitive industry a. firms have no cost advantages b. some firms have cost advantages, while others do not c. all the firms have highly differentiated products d. Consumers have strong preferences across brands 24. In a competitive industry a. the industry has high barriers to entry b. the industry has high barriers to exit c. the industry has high barriers to entry and exit d. the industry has no barriers to entry or exit 25. In a competitive industry a. firms sell more if price is above marginal cost b. firms sell more is price is below marginal cost c. firms sell less if price is above marginal cost d. none of the above 26. In a competitive industry, the competitive firm’s profits are a. independent of the industry in which they compete b. closely linked to the industry in which they compete c. determined only by their own differentiated product d. determined solely by the inelastic demand for their product 27. Competitive firms can earn positive profits in the a. Long run only b. Long run and the short run c. Short run only d. All of the above 28. The main reason(s) firms in a competitive market cannot earn positive profits in the long run is(are) a. assets can quickly move in and out of the industry when demand fluctuates b. an increase in demand leads to entry of firms which absorb the extra demand c. a decrease in demand leads to exit of firms from the market such that there is no surplus d. all of the above 29. The main reason(s) monopolies can earn positive profits for a while is(are) a. assets cannot quickly move in and out of the industry when demand fluctuates b. an increase in demand does not lead to entry of firms to absorb the extra demand c. both A&B d. none of the above 30. In the long run, in a competitive industry a. economic profits are zero b. firms break even c. price equals average cost d. all of the above 31. Two cities face identical prices for their housing. City A decided to be a pollution free city “Clean town” and all the factories would locate in city B “Smogville”, we expect the prices of housing in city A “Clean town” to a. increase b. decrease c. stay the same d. none of the above 32. Two cities face identical prices for their housing. City A decided to be a pollution free city “Clean town” and all the factories would locate in city B “Smogville”, we expect the prices of housing in city B “Smogville” to a. increase b. decrease c. stay the same d. none of the above 33. Two cities face identical prices for their housing. City A decided to be a pollution free city “Clean town” and all the factories would locate in city B “Smogville”, in equilibrium, we expect to see a. a compensating differential between the prices of housing between the two cities b. the prices of housing in both the cities to be identical c. The prices of housing in B to be higher d. All of the above ANSWER: a TOPICS: Section 2: The Indifference Principle 34. Two cities A&B are deciding upon joint pollution laws. Right now they both face identical prices for their housing. If they decide that city A is to be a pollution free city “Clean town” and all the factories would locate in city B “Smogville”, in the long run, we expect to see a. Asthmatics moving to Smogville b. Poorer families moving to Cleantown c. Residents in both the cities relocating based on their tolerance for pollution d. Residents in both the cities being worse off 35. Two cities A&B are deciding upon joint pollution laws. Right now they both face identical prices for their housing. If they decide that city A is to be a pollution free city “Clean town” and all the factories would locate in city B “Smogville”, in the long run, we expect to see a. Asthmatics moving to Cleantown b. Poorer families moving to Smogville c. Residents in both the cities relocating based on their tolerance for pollution d. All of the above 36. The concept of mean reversion is defined by a. the tendency of profits to revert to zero b. the tendency of costs to revert to zero c. the tendency of economic profits to revert to zero d. the tendency of profits to revert to negative 37. The indifference principle states that a. If an asset is mobile, then in the long run, it will be indifferent about where it is used b. In the long run, a mobile asset will make the same profit, no matter where it goes c. If an asset is mobile, then in the long run, it would stay with the first user d. Only A&B 38. According to the indifference principle, housing prices a. tend to converge over time b. tend to leave individuals indifferent about where they live c. only tend to be different to compensate individuals for differences in living conditions d. only B&C 39. In the long run, if housing prices are higher in San Diego, California, versus Nashville, Tennessee, then a. individuals would move to Nashville b. individuals would move San Diego c. there would be no movement across the two cities, since the difference in prices is pure compensation for difference in living conditions d. Both B&C 40. According to the indifference principle, in the long run if being a teacher is more desirable than being a garbage collector, a. teachers would be paid a relatively higher salary than garbage collectors b. teachers would be paid a relatively lower salary than garbage collectors c. teachers and garbage collectors would both be paid the same wages d. none of the above 41. Firemen generally are paid higher wages because a. they are usually highly educated b. they are usually working under riskier conditions c. they are working long and uncertain hours d. both B&C 42. Critical care surgeons get paid higher salaries than family doctors because a. they usually work under highly stressful conditions b. they usually have to get longer training c. they usually work uncertain hours d. all of the above 43. Robert, as a baker has to work long hours and doesn’t get much time with his family. Robert’s boss, in order to keep Robert working at the bakery would soon have to offer him a a. positive compensating differential b. negative compensating differential c. nothing can make Robert stay d. none of the above 44. In equilibrium, high risk stocks would typically be accompanied by a. low returns b. no returns c. high returns 45. Low risk stocks are usually accompanied by a. low returns b. no returns c. high returns d. no sales-no one would buy low risk stocks 46. In equilibrium the typical investor a. prefers high risk assets to low risk assets b. prefers low risk assets to high risk assets c. is indifferent between buying low and high risk assets d. does not stay in the market 47. In equilibrium, low risk assets earn a return than high risk assets a. higher b. lower c. similar d. none of the above 48. A risk premium is a. the difference between the earnings of a low risk asset and a high risk asset b. premium paid to a security holder to compensate him for bearing a higher risk c. both A&B d. none of the above 49. A compensating wage differential is a. the difference between the wage of an individual working in favorable conditions and the wage of an individual working in unfavorable conditions b. compensation paid to an individual for working in a less desirable environment c. premium paid to a security holder to compensate him for bearing a higher risk d. Only A&B 50. An investor has to choose between stocks A&B, each selling for $10. Stock A, can either increase in price to $12, with a 50% probability or stay at $10 with a 50% probability. Stock B can either increase in price to $15 with a 50% probability or go down to $7 with a 50% probability. Which of the stocks would the investor choose a. Stock A b. Stock B c. None of the stocks d. The investor would exit the market 51. Jim has a choice between two jobs. Job A would pay him $15 an hour with certainty, and the job B is commission based where he could earn $12, with a 50% probability and $18 with a 50% probability. Which job would he choose? a. Job A b. Job B c. Neither of the jobs d. He would choose to exit the labor market 52. Alan is offered a gamble. Heads he wins $100, tails he wins $20. If the game costs $60, would he play? a. Yes he would play since the expected value is equal to the price of the play b. Yes he would play since the expected value of the play is higher than the price of the play c. No he would not play since the price of the play is higher than the expected value d. No he would not play since this is a fair bet and he is not being offered any risk premium 53. Which of the following is least like a monopoly a. Twitter b. YouTube c. Facebook d. Google 54. A monopoly firm is a and faces a sloping demand curve. a. Price taker; horizontal b. Price maker; horizontal c. Price maker; downward d. Price taker; downward 55. Profits of a monopoly are driven to zero a. Immediately in the short-run as assets freely move from low-valued uses to high-valued uses instantly b. In the long run because the demand curve becomes more inelastic c. In the long run because the assets eventually move from low to high valued use d. In the short run because the demand curve becomes more elastic 56. Lipitor, a heart medication with few substitutes, should have an own-price elasticity of demand that is: a. Relative elastic b. Relatively inelastic c. Perfectly inelastic d. Perfectly elastic 57. A new cure for Toenail fungus is discovered for individuals resistant to the original treatment. At this point the firm producing this drug a. Could be considered a monopoly b. Would be protected from entry by patents c. Would be facing many new entries in the market d. Only A&B 58. Nike faces a more demand for its products than a shoe polish producer. a. inelastic b. elastic c. perfectly elastic d. perfectly inelastic 59. Monopoly firms manage to earn positive profits, even in the long run because a. they have no close substitutes b. there are high barriers of entry to the market c. they have a cost advantage difficult to duplicate d. all of the above 60. Which of the following cannot be classified as a market structure? a. Perfect Competition b. Monopoly c. All of the above d. None of the above 61. In the short-run, a monopoly is most likely to achieve a. An average rate of return b. Above average profits c. Economic Profits d. Both B&C 62. In the long-run, a monopoly is most likely to achieve a. An average rate of return b. Above average profits c. Economic Profits d. Both B&C 63. A market tends to be monopolistic if a. The good has too many substitutes b. The good has very few substitutes c. There are too many rivals d. The good has too few complements 64. A monopoly has a. A perfectly elastic demand curve b. A perfectly elastic supply curve c. An inelastic demand curve d. A less elastic demand curve than a competitive firm 65. A monopoly has a. A perfectly elastic demand curve b. A perfectly elastic supply curve c. An inelastic demand curve d. A more elastic demand curve than a competitive firm 66. All these are characteristics of a monopoly except, a. There is one seller of the product b. Has few substitutes c. Controls a large share of the market d. Controls a small share of the market 67. A small town in West Texas has one gas station. If the price of oil increases, the price of gas that the station charges will most likely a. increase. b. decrease. c. remains the same. d. may increase or decrease. 68. Monopolies can earn positive profits a. In the long run only b. Until they disappear due to new entry c. In the short run only d. None of the above 69. In a monopoly a. the industry has high barriers to entry b. the industry has high barriers to exit c. the industry has high barriers to entry and exit d. the industry has no barriers to entry or exit 70. In the long run, a monopoly’s a. economic profits are zero b. economic profits are negative c. economic profits are positive d. demand is perfectly inelastic 71. Generic Drug Industry Dynamics When a brand name drug’s patent protection expires, many generic producers are usually ready to enter the market. These firms’ products are close substitutes, they have similar production technologies, the regulatory hurdles to enter are not so great, and, within a few months, there are plenty of rivals. What would you predict for the profitability during these first few months after generic drug entry? ANSWER: These conditions describe an industry that will become close to the ideal of perfect competition. The initial generic drug entrant will be able to set prices well above marginal cost until a second entrant emerges and thus earn substantial profits. As more competitors enter, the prices they can charge fall until, with enough entry, prices are close to marginal costs and little, if any, profits are earned. 72. Brand Name Drug Industry Dynamics Market approval in the US for new pharmaceutical products is a long, arduous, and expensive process. Once approved, patent protection keeps close substitute products from entering for some years. If the demand for a particular product is stable, what would you predict for the profitability after approval and prior to patent expiration? ANSWER: The prices and profits should be relatively constant over this period. There may be an initial period when the drug maker must inform the potential customers of the benefits of this product that will make demand and prices lower. But, after that, these firms enjoy a stable monopoly. 73. MBA Degree Programs Every year various business magazines rank the quality of the different MBA programs. Why don’t all prospective students flock to the highest ranked program? ANSWER: This is an application of the indifference principle. All else equal, students would choose the higher ranked programs. But all else is not equal. Some differences include the cost of attending, differences in location (cost of living, etc.), cost in application preparation which will make students indifferent between a higher ranked and lower ranked program. CHAPER 1. Firms maintain their completive edge by CHAPTER 10 a. Providing a good at lower costs than their rivals b. Providing a superior product at the same cost as your rival c. Being innovative d. All the above ANSWER: d TOPICS: Section 1: Strategy is Simple 2. Which of the following is the foundation for success for a company facing competition a. Create an advantage over the competition b. Protect the advantage created over the competition c. Create and protect advantages over the competition d. None of the above ANSWER: c TOPICS: Section 1: Strategy is Simple 3. If a customer values good A at $15, and it costs the firm $10 to produce, current profit per unit is a. $10 b. $8 c. $5 d. $1 ANSWER: c TOPICS: Section 1: Strategy is Simple 4. Strategy is a. The art of matching the resources and capabilities of a firm to the opportunities and risks in its environment b. Developing a resource for the company that is both rare and valuable to create competitive advantage c. Making sure that the resource developed is non-fungible to create a sustainable advantage d. All of the above ANSWER: d TOPICS: Section 1: Strategy is Simple 5. Intense market competition is for consumers, since it . a. Bad; erodes producer surplus b. Bad, increases variety in the market c. Good, increases the price level in the market d. Good; decreases the price level in the market ANSWER: d TOPICS: Section 2: Sources of Economic Profit 6. Intense market competition is for producers, since it . a. Bad; erode consumer surplus b. Bad, erode producer profits c. Good, increase the price level in the market d. Good; decrease the price level in the market ANSWER: b TOPICS: Section 2: Sources of Economic Profit 7. It is more profitable for a firm to be than a. In perfect competition; monopolists b. A monopolists; in perfect competition c. Not in business; in business d. All of the above ANSWER: b TOPICS: Section 2: Sources of Economic Profit 8. The IO Economics perspective locates the source of competitive advantage for a firm at the a. Individual firm level b. Industry level c. Customer Level d. None of the above ANSWER: b TOPICS: Section 2: Sources of Economic Profit 9. The RBV perspective locates the source of competitive advantage for a firm at the a. Individual firm level b. Industry level c. Customer Level d. None of the above ANSWER: a TOPICS: Section 2: Sources of Economic Profit 10. In the IO perspective, it is important to enter an industry with a. High barriers to entry b. Low buyer power c. Low supplier power d. All of the above ANSWER: d TOPICS: Section 2: Sources of Economic Profit 11. In the IO perspective, it is important to enter an industry with a. High barriers to entry b. High buyer power c. High supplier power d. All of the above ANSWER: a TOPICS: Section 2: Sources of Economic Profit 12. In the IO perspective it is important to enter an industry with a. Low supplier power b. Low threat from substitutes c. Low levels of rivalry between firms d. All of the above ANSWER: d TOPICS: Section 2: Sources of Economic Profit 13. In the IO perspective it is important to enter an industry with a. High supplier power b. Low threat from substitutes c. Low levels of rivalry between firms d. Only B & C ANSWER: d TOPICS: Section 2: Sources of Economic Profit 14. In the IO perspective it is important to enter an industry with a. High barriers to entry b. Differentiated products c. Small number of competing firms of different sizes d. All of the above ANSWER: d TOPICS: Section 2: Sources of Economic Profit 15. Which of the following could potentially capture the value created in a market a. Suppliers b. Industry rivals c. Buyers d. All of the above ANSWER: d TOPICS: Section 2: Sources of Economic Profit 16. Supplier power tends to be high when a. your firm purchases critical inputs from the supplier b. your input choices are highly differentiated c. Both A&B d. None of the above ANSWER: c TOPICS: Section 2: Sources of Economic Profit 17. Supplier power tends to be low when a. The supplier provides critical inputs b. The supplier provides homogenous inputs c. Both A&B d. None of the above ANSWER: b TOPICS: Section 2: Sources of Economic Profit 18. Supplier power tends to be low when a. The supplier provides non-critical inputs b. The supplier provides homogenous inputs c. Both A&B d. None of the above ANSWER: c TOPICS: Section 2: Sources of Economic Profit 19. Supplier power tends to be higher when a. Suppliers are concentrated b. There are high costs to switching between suppliers c. Both A&B d. None of the above ANSWER: c TOPICS: Section 2: Sources of Economic Profit 20. Supplier power tends to be lower when a. Suppliers are less concentrated b. There are low costs to switching between suppliers c. Both A&B d. None of the above ANSWER: c TOPICS: Section 2: Sources of Economic Profit 21. Supplier power tends to be lower when a. Suppliers are concentrated b. There are high costs to switching between suppliers c. Both A&B d. None of the above ANSWER: d TOPICS: Section 2: Sources of Economic Profit 22. You operate a small poultry farm in east Texas. You sell most of your output through a regional distributor of poultry products in the area. In this case, you are subject to a. Low buyer power b. High buyer power c. No buyer power d. All of the above ANSWER: b TOPICS: Section 2: Sources of Economic Profit 23. More buyer power means a. Buyers would find it easier to capture the value created b. Buyers would find it more difficult to capture the value created c. Buyers would not be able to capture any value created d. None of the above ANSWER: a TOPICS: Section 2: Sources of Economic Profit 24. Even if there are significant barriers to entry, firms may not be highly profitable a. Substitute product offerings among rivals b. The ability of consumers to switch to substitute products easily c. All of the above d. None of the above ANSWER: c TOPICS: Section 2: Sources of Economic Profit 25. Rivalry among firms would tend to be high if a. There is a small number of firms in the market b. There is a large number of firms in the market c. There is only one firm in the market d. None of the above ANSWER: b TOPICS: Section 2: Sources of Economic Profit 26. Rivalry among firms would tend to be high if a. Firms are located further from each other b. Firms are located close to one another c. There is only one firm in the market d. None of the above ANSWER: b TOPICS: Section 2: Sources of Economic Profit 27. Rivalry among firms would tend to be high if a. Customers are locked into the competitors technology b. Customers can easily switch between competitor’s technologies c. All of the above d. None of the above ANSWER: b TOPICS: Section 2: Sources of Economic Profit 28. Rivalry among firms would tend to be highest if a. the industry is growing quickly b. the industry is growing slowly c. the industry is shrinking d. None of the above ANSWER: c TOPICS: Section 2: Sources of Economic Profit 29. To decrease supplier power, the firm can a. Increase rivalry among its suppliers b. Buy from multiple suppliers c. Both A&B d. None of the above ANSWER: c TOPICS: Section 2: Sources of Economic Profit 30. To decrease buyer power, the firm can a. Differentiate its product b. Decrease dependency on a single buyer c. Sell its products in locations with multiple buyers d. All of the above ANSWER: d TOPICS: Section 2: Sources of Economic Profit 31. Porter’s five forces portray a. A zero-sum game b. A game where your profitability comes at the expense of someone else’s c. The ability of market participants to create a larger total pie d. Only A&B ANSWER: d TOPICS: Section 2: Sources of Economic Profit 32. A software design company wants to pursue a platform strategy. Which of the following strategies is the firm likely to want to adopt? a. Focus on softening rivalry b. Encourage complementary innovation c. Encourage substitute innovation d. All of the above ANSWER: b TOPICS: Section 2: Sources of Economic Profit 33. The industrial organization or (IO) perspective predicts a. firm’s profitability differs only if they are in different industries b. firms within an industry are equally profitable c. firm’s profitability within industries varies widely d. Only A&B ANSWER: d TOPICS: Section 2: Sources of Economic Profit 34. The RBV perspective predicts a. firm’s profitability differs only if they are in different industries b. firms within an industry are equally profitable c. firm’s profitability within industries varies widely d. Only A&B ANSWER: c TOPICS: Section 2: Sources of Economic Profit 35. The RBV perspective is based on a. Resource mobility b. Resource immobility c. Resource heterogeneity d. Only A&C ANSWER: d TOPICS: Section 2: Sources of Economic Profit 36. Which of the following is more likely to be able to command a higher price for its products a. A specialty frozen yogurt producer, with high quality product b. A mall kiosk selling costume jewelry c. A specialty toy store that allows customers to self-design teddy bears d. Both A&C ANSWER: d TOPICS: Section 2: Sources of Economic Profit 37. Which firm in an industry is likely to have higher profits? a. Sellers with higher costs than their competitors b. Sellers with lower costs than their competitors c. Sellers with the same costs as their competitors d. All of the above ANSWER: b TOPICS: Section 2: Sources of Economic Profit 38. The resource based perspective indicates that firms exhibit different performances within the same industry because a. Some firms have better resources than others b. Some firms have organizational structures that can be duplicated c. Some firms sell goods that have a more elastic demand d. Some firms sell goods that have a perfectly elastic demand ANSWER: a TOPICS: Section 2: Sources of Economic Profit 39. Supplier power tends to be low when a. Suppliers are less concentrated b. Inputs provided by the supplier are not vital c. Inputs are homogenous d. All the above ANSWER: d TOPICS: Section 2: Sources of Economic Profit 40. Supplier power is high when a. Suppliers are concentrated b. The inputs provided are critical c. The inputs provided are unsubstitutable d. All of the above ANSWER: d TOPICS: Section 2: Sources of Economic Profit 41. The industrial organization economics perspective locates the source of competitive advantage at the a. Individual firm level b. Industry level c. Both a and b d. None of the above ANSWER: b TOPICS: Section 2: Sources of Economic Profit 42. The resource based view locates the source of competitive advantage at the a. Individual firm level b. Industry level c. Both a and b d. None of the above ANSWER: a TOPICS: Section 2: Sources of Economic Profit 43. Which of the following is true according to the IO perspective? a. Industry structure determines firm conduct which in turn determines firms’ performance b. Industry structure determines firm performance which in turn determines firms’ conduct c. Industry conduct determines firm structure which in turn determines firms’ performance d. Industry performance determines firm conduct which in turn determines firms’ structure ANSWER: a TOPICS: Section 2: Sources of Economic Profit 44. Typical structure characteristics of interest to Industrial Organization researchers include a. Barriers to entry b. Product differentiation among firms c. The number and size distribution of firms d. All of the above ANSWER: d TOPICS: Section 2: Sources of Economic Profit 45. Industries with high barriers to entry a. Pushes profits to normal returns b. Increases the likelihood of firms entering the industry c. Help firms sustain long term profits d. Increases the number of competitors ANSWER: c TOPICS: Section 2: Sources of Economic Profit 46. All of the following are examples of entry barriers, except a. Government protection through patents or licensing requirements b. Strong brands c. Low capital requirements for entry d. Lower costs driven by economies of scale ANSWER: c TOPICS: Section 2: Sources of Economic Profit 47. One of the limitation of Five Forces is that they a. Reduce producer surplus b. For one firm to increase profit, the profit of another participant must decrease c. Does not provide a firm with sustainable competitive advantage d. Both b and c ANSWER: b TOPICS: Section 2: Sources of Economic Profit 48. Assumptions that underlie the Resource-based View include a. Resource heterogeneity b. Resource immobility c. Barriers to entry d. Both a and b ANSWER: d TOPICS: Section 2: Sources of Economic Profit 49. The concept that explains the firm’s ability to produce output with differing bundles of resources is called a. Resource heterogeneity b. Resource immobility c. Barriers to entry d. Imitability ANSWER: a TOPICS: Section 2: Sources of Economic Profit 50. The five forces model is a framework a. For increasing buyer power in the market b. For improving competition in the industry c. For analyzing the attractiveness of an industry d. For increasing supplier power in the market ANSWER: c TOPICS: Section 2: Sources of Economic Profit 51. Attractive industries have all the following attributes, except a. High supplier power b. Low buyer power c. High entry barriers d. Low rivalry ANSWER: a TOPICS: Section 2: Sources of Economic Profit 52. Firms have a competitive advantage when a. They can deliver the same product benefits as their competitors but at a lower cost b. They can deliver superior product at a similar cost c. Both of the above d. None of the above ANSWER: c TOPICS: Section 3: The Three Basic Strategies 53. If a customer values good A at $15, and it costs the firm $10 to produce, the firm can increase its profits if a. Redesign the product such that it delivers $16 in customer value b. Redesign the production process so that the costs fall to $9 c. One or both of the above d. None of the above ANSWER: c TOPICS: Section 3: The Three Basic Strategies 54. Having a competitive advantage emanates from a. Increased price b. Decreased cost c. One or both of the above d. None of the above ANSWER: c TOPICS: Section 3: The Three Basic Strategies 55. For a resource to be able to generate temporary competitive advantage over rivals, it must be a. Valuable b. Rare c. Valuable and rare d. Not valuable but rare ANSWER: c TOPICS: Section 3: The Three Basic Strategies 56. For a resource to be able to generate sustained competitive advantage over rivals, it must be a. Valuable b. Rare c. Difficult to imitate or substitute away from d. All of the above ANSWER: d TOPICS: Section 3: The Three Basic Strategies 57. Which of the following makes a firm’s resources hard to imitate? a. They flow from the firm’s unique history b. The link between resources and advantage is simple c. They aren’t socially complex d. All of the above ANSWER: a TOPICS: Section 3: The Three Basic Strategies 58. Which of the following makes a firm’s resources hard to imitate? a. They don’t flow from the firm’s unique history b. The link between resources and advantages is difficult to discern c. They aren’t socially complex d. All of the above ANSWER: b TOPICS: Section 3: The Three Basic Strategies 59. Which of the following makes a firm’s resources hard to imitate? a. Do not use resources that flow from the firm’s unique history b. Keep the link between resources and advantage simple c. Resources emanate from a socially complex organizational structure d. All of the above ANSWER: c TOPICS: Section 3: The Three Basic Strategies 60. Which of the following makes a firm’s resources hard to imitate? a. They flow from the firm’s unique history b. The link between resources and advantages is difficult to discern c. Resources emanate from a socially complex organizational structure d. All of the above ANSWER: d TOPICS: Section 3: The Three Basic Strategies 61. One should be wary of consultants peddling best practices or secrets to success because a. They have different incentives than you do b. Such best practices are public knowledge and easily duplicated c. These best practices can at best only provide temporary profitability d. All of the above ANSWER: d TOPICS: Section 3: The Three Basic Strategies 62. If the stock price of a company is higher than the discounted value of its future earnings, a. Buy the stock only if the company has a sustained competitive advantage b. Don’t buy the stock, even if the company has a sustained competitive advantage c. Always buy the stock d. None of the above ANSWER: b TOPICS: Section 3: The Three Basic Strategies 63. Apple has continued to be innovative to ensure that the demand for its products stays or becomes a. More inelastic b. More elastic c. Unitary elastic d. None of the above ANSWER: a TOPICS: Section 3: The Three Basic Strategies 64. All of these allow a firm to differentiate its product, except a. Product branding b. Reducing quality c. Advertising d. Limiting availability ANSWER: b TOPICS: Section 3: The Three Basic Strategies 65. Which of the following can a firm use to reduce competition in the market? a. Locking in customers to long term contracts b. Seek an exclusive government contract c. Acquire patents d. All the above ANSWER: d TOPICS: Section 3: The Three Basic Strategies 66. To stay one step ahead of the forces of competition, a firm can adopt any one of these strategies except a. Cost reduction b. Product differentiation c. Operating where marginal benefits equal marginal costs d. Develop non-fungible valuable resources ANSWER: c TOPICS: Section 3: The Three Basic Strategies 67. Low cost strategies are usually found in industries where a. Products are not particularly differentiated b. Price competition tends to be fierce c. Both a and b d. None of the above ANSWER: c TOPICS: Section 3: The Three Basic Strategies 68. Cost-reduction generates a. Increases in long-run profitability b. Increases in long-run profitability only if the cost reduction is difficult to imitate c. Decreases in long run profitability d. No change in profitability ANSWER: b TOPICS: Section 3: The Three Basic Strategies 69. Buyer Power Nora’s Nicest Knick Knacks has sold a variety of products to hundreds of small retailers. Over time, she has added distributers who have a talent for finding more retailers for Nora. Now, over half of her sales go through just two of these distributers. Rather than making periodic orders as stock gets low, these distributers make only a few large purchases each year. How can these aspects of her buyer relationships affect how much of the value she creates that she gets to capture? ANSWER: Nora’s sales are increasingly being concentrated to a few large buyers and into a few large orders. These buyers have increasing more leverage to demand better terms. Nora can no longer afford to not come to terms and lose these distributers as customers. This means she will tend to capture less of the value her firm creates. 70. Supplier Power Nora’s Nicest Knick Knacks has produces a variety of products sold as souvenirs. She started out printing local sayings on tee-shirts, e.g., FDNY, and purchased plain tee-shirts from a single supplier. Since then, she has added coffee mugs, key chains, souvenirs spoons and many other items. For each of these, she has lined up one or more suppliers. How does the change in the sourcing of her inputs affect how much of the value she creates that she gets to capture? ANSWER: Nora’s purchases used to be concentrated with a single supplier. This means she had to take whatever deal they were offering or go out of business. But over time, she has added more suppliers and is less dependent on any one. This means she can still have sales and production of some items even while she is negotiating with suppliers for another. This means she will tend to capture more of the value her firm creates. 71. Mutual Fund Products Amplitude Investments offers a variety of mutual fund products for investors with different preferences. When they develop a new product for an under-served niche, they find out that their competitors will imitate them within a few months. Is investigating and developing new products going to be profitable for Amplitude? ANSWER: These new products are creating value as the under-served niche customers do value them. However, they are not able to capture this value for very long as competitors can copy them quickly. This is only likely to be profitable if the cost of developing a new product is trivially low. CH 11 1. When interest rates go up, people are a. More likely to borrow b. Less likely to borrow c. Does not affect a person’s consumption d. None of the above ANSWER: b TOPICS: Section 1: The Market for Foreign Exchange 2. When interest rates fall, people are a. More likely to borrow b. Less likely to borrow c. Not likely to change borrowing patterns d. None of the above ANSWER: a TOPICS: Section 1: The Market for Foreign Exchange 3. Holding other things constant, a depreciation of the US Dollar relative to the Kenyan Shilling would cause the demand for the Shilling to and the supply for Shilling to . a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 4. Holding other things constant, a decrease in the inflation rate in the US compared to the Canadian economy may cause the demand for the US dollar to and the supply to . a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease ANSWER: a TOPICS: Section 1: The Market for Foreign Exchange 5. Holding other things constant, a decrease in the inflation rate in the US compared to the Canadian economy will cause the demand for the Canadian dollar to and the supply to . a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 6. The term to describe one currency in terms of another is called a. The interest rates b. The market price c. The inflation rate d. The exchange rate ANSWER: d TOPICS: Section 1: The Market for Foreign Exchange 7. An individual in the US wants to buy a car from England which costs 12,000 pounds. If the exchange rate is 1 pound = $1.75, how much would the car cost him in dollars? a. $21,000 b. $6,800 c. $12,000 d. Need more information ANSWER: a TOPICS: Section 1: The Market for Foreign Exchange 8. The demand for dollars is downward sloping because when dollar appreciates, a. Foreigners demand more US goods and services b. Foreigners demand fewer US goods and services c. Foreigners demand more dollars d. Foreigners do not change their demand for US goods and services ANSWER: b TOPICS: Section 1: The Market for Foreign Exchange 9. Holding other things constant, an appreciation of the US Dollar relative to the Chinese Yuan causes the demand for the Yuan to and the supply for Yuan to . a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease ANSWER: a TOPICS: Section 1: The Market for Foreign Exchange 10. Holding other things constant, an increase in the inflation rate in the US compared to China may cause the demand for dollar to and the supply for dollar to . a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 11. An individual in the US wants to buy office equipment from England which costs 2,000 pounds. If the exchange rate is 1pound=$1.9, how much will the office equipment cost him in dollar terms? a. $2,000 b. $2,800 c. $3,800 d. $1052 ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 12. An individual in the England wants to buy office equipment from England which costs $2,000. If the exchange rate is 1pound=$1.9, how much will the office equipment cost him in pounds? a. 2,000 pounds b. 1,800 pounds c. 3,800 pounds d. 1,053 pounds ANSWER: d TOPICS: Section 1: The Market for Foreign Exchange 13. When interest rates go down, people are a. more likely to borrow b. less likely to borrow c. does not affect a person’s consumption d. None of the above ANSWER: a TOPICS: Section 1: The Market for Foreign Exchange 14. The equilibrium price in the market for foreign currencies is called a. The price b. The market price c. The exchange rate d. The going rate ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 15. In the market for Canadian dollars measured in US dollars, the supply of US dollars is a. The supply of Canadian dollars b. The demand for Canadian Dollars c. The demand for US dollars d. None of the above ANSWER: b TOPICS: Section 1: The Market for Foreign Exchange 16. In the market for Canadian dollars measured in US dollars, the demand for US dollars is a. The supply of Canadian dollars b. The demand for Canadian Dollars c. The supply of US dollars d. None of the above ANSWER: a TOPICS: Section 1: The Market for Foreign Exchange 17. In the market for Canadian dollars measured in US dollars, the demand for Canadian dollars is a. The supply of Canadian dollars b. The demand for US Dollars c. The supply of US dollars d. None of the above ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 18. In the market for Canadian dollars measured in US dollars, the supply of Canadian dollars is a. The demand for Canadian dollars b. The demand for US Dollars c. The supply of US dollars d. None of the above ANSWER: b TOPICS: Section 1: The Market for Foreign Exchange 19. In the market for Canadian dollars measured in US dollars, if the price of a Canadian dollar is 0.90 cents US, a US dollar is a. 0.90 cents Canadian b. 1 Canadian dollar c. 1.11 Canadian dollars d. 1.05 Canadian dollars ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 20. In the market for Canadian dollars measured in US dollars, if the price of a US dollar is 1.10 Canadian dollars, a Canadian dollar is a. 1.10 US dollars b. 1 US dollar c. 0.91 cents US d. 0.99 cents US ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 21. If a panic causes Indian depositors to withdraw their money from Japanese banks, it would cause the Japanese Yen to depreciate, since the supply of Yen has a. Not changed b. Decreased c. Increased d. None of the above ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 22. If a panic causes Indian depositors to withdraw their money from Japanese banks, it would cause the Japanese Yen to , since the supply of Yen has increased a. Appreciate b. Depreciate c. Not change in value d. None of the above ANSWER: b TOPICS: Section 1: The Market for Foreign Exchange 23. If a panic causes Indian depositors to withdraw their money from Japanese banks, it would cause the Japanese Yen to , since the supply of Yen has a. Appreciate; Decrease b. Depreciate; Decrease c. Appreciate, Increase d. Depreciate; Increase ANSWER: d TOPICS: Section 1: The Market for Foreign Exchange 24. In the case where interest rates are lower in Japan, which of the following is an example of a “carry trade” a. Increase borrowing in the US, convert to Yuan and invest in financial assets in Japan b. Increase borrowing in Japan and invest in Japan c. Increase borrowing in Japan, convert to Dollars and invest in the US d. Increase borrowing in the US and invest in the US ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 25. In the case where interest rates are higher in Canada, which of the following is an example of a “carry trade” a. Increase borrowing in the US, convert to Canadian dollars and invest in Canada b. Increase borrowing in the US and invest in the US c. Increase borrowing in Canada, convert to dollars and invest in the US d. Increase borrowing in Canada and invest in Canada ANSWER: a TOPICS: Section 1: The Market for Foreign Exchange 26. An American consumer wants to buy a Swiss watch. The exchange rate is 1USD=0.89 CHF(Swiss Francs). The watch costs 100 Swiss Francs. How much would it cost him in dollars? a. $89 b. $112.36 c. $100 d. $160.82 ANSWER: b TOPICS: Section 1: The Market for Foreign Exchange 27. A Swiss consumer wants to buy an American car. The exchange rate is 1USD=0.89CHF (Swiss Francs). The car costs $10,000. How much would the car cost him in Swiss Francs? a. 12,000 Francs b. 11,600Francs c. 8,900 Francs d. 7,500 Francs ANSWER: c TOPICS: Section 1: The Market for Foreign Exchange 28. A Swiss consumer wants to buy an American laptop. The exchange rate is 1USD=0.89CHF (Swiss Francs). The laptop costs $800. How much would the laptop cost him in Swiss Francs? a. 1200 Francs b. 1160Francs c. 890Francs d. 712 Francs ANSWER: d TOPICS: Section 1: The Market for Foreign Exchange 29. If Chinese consumers want to buy US goods, they will a. Buy Yuan and sell US Dollars b. Sell Yuan and buy US Dollars c. Neither buy nor sell Yuan d. Neither buy nor sell dollars ANSWER: b TOPICS: Section 1: The Market for Foreign Exchange 30. If US consumers want to buy Chinese goods, they will a. Buy Yuan and sell US Dollars b. Sell Yuan and buy US Dollars c. Neither buy nor sell Yuan d. Neither buy nor sell dollars ANSWER: a TOPICS: Section 1: The Market for Foreign Exchange 31. For foreigners, the intersection of the demand for US dollars and the supply of US dollar is known as the a. Inflation rate b. Exchange rate c. Price d. Quantity ANSWER: b TOPICS: Section 1: The Market for Foreign Exchange 32. Holding other things constant, decreases in the price level in the US will a. Cause the dollar to appreciate b. Cause the dollar to depreciate c. Cause no change in dollar value d. None of the above ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 33. Holding other things constant, if the US dollar appreciates, it makes the US exports a. Less attractive to foreigners b. More attractive to foreigners c. Neither more nor less attractive to foreigners d. None of the above ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 34. Holding other things constant, if the US dollar depreciates, it makes the US exports a. Less attractive to foreigners b. More attractive to foreigners c. Neither more nor less attractive to foreigners d. None of the above ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 35. Holding other things constant, if the Japanese Yen, depreciates, it makes the Japanese products a. Less attractive to US customers b. More attractive to US customers c. Neither more nor less attractive to US customers d. None of the above ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 36. Holding other things constant, if the Japanese Yen, appreciates, it makes the Japanese products a. Less attractive to US customers b. More attractive to US customers c. Neither more nor less attractive to US customers d. None of the above ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 37. Holding other things constant, if the Japanese Yen, depreciates, it makes the imports to Japan a. More expensive for Japanese customer b. Less expensive for Japanese customers c. Neither more or less expensive for importers d. None of the above ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 38. Holding other things constant, if the Japanese Yen, appreciates, it makes the imports to Japan a. More expensive for Japanese customer b. Less expensive for Japanese customers c. Neither more or less expensive for importers d. None of the above ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 39. If the Canadian dollar appreciates, holding other things constant, it makes Canadian imports a. More expensive for Canadian customers b. Less expensive for Canadian customers c. Neither more or less expensive for importers d. None of the above ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 40. If the Canadian dollar depreciates, holding other things constant, it makes Canadian imports a. More expensive for Canadian customers b. Less expensive for Canadian customers c. Neither more or less expensive for importers d. None of the above ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 41. If the price of a Canadian dollar went from 0.95 US dollars to 0.98 US dollars, we would say that the Canadian dollar has a. Appreciated b. Depreciated c. Not changed in value d. None of the above ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 42. If the price of a Canadian dollar went from 0.95 US dollars to 0.98 US dollars, we would say that the US dollar has a. Appreciated b. Depreciated c. Not changed in value d. None of the above ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 43. Currency devaluation export producers because a. Helps; exports are more expensive b. Hurts; exports are more expensive c. Helps; exports are less expensive d. Hurts; exports are less expensive ANSWER: c TOPICS: Section 2: The Effects of Currency Devaluation 44. Currency devaluation import consumers because a. Helps; imports are more expensive b. Hurts; imports are more expensive c. Helps; imports are less expensive d. Hurts; imports are less expensive ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 45. A weaker peso, relative to the US dollar, causes the demand for US exports to Mexico to and the demand for US imports from Mexico to a. Increase; Decrease b. Decrease; Increase c. Increase; Increase d. Decrease; Decrease ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 46. A weaker peso, relative to the US dollar, causes the demand for US exports to and the demand of Mexican imports to a. Increase; Decrease b. Decrease; Increase c. Increase; Increase d. Decrease; Decrease ANSWER: d TOPICS: Section 2: The Effects of Currency Devaluation 47. A weaker peso, relative to the US dollar, causes the demand for Mexican exports to and US imports to a. Increase; Decrease b. Decrease; Increase c. Increase; Increase d. Decrease; Decrease ANSWER: c TOPICS: Section 2: The Effects of Currency Devaluation 48. A weaker peso, relative to the US dollar, causes the demand for US imports from Mexico to and the demand for US exports to Mexico to a. Increase; Decrease b. Decrease; Increase c. Increase; Increase d. Decrease; Decrease ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 49. If the Chinese Yuan devalues against the US dollar, then a. Both the US exporters and Chinese importers would benefit b. The US exporters would benefit while the Chinese importers would be hurt c. The US exporters would be hurt while the Chinese consumers would benefit d. Both the US exporters and Chinese importers would be hurt ANSWER: d TOPICS: Section 2: The Effects of Currency Devaluation 50. If the Chinese Yuan devalues against the US dollar, then a. Both the US exporters and Chinese exporters would benefit b. The US exporters would benefit while the Chinese exporters would be hurt c. The US exporters would be hurt while the Chinese exporters would benefit d. Both the US exporters and Chinese exporters would be hurt ANSWER: c TOPICS: Section 2: The Effects of Currency Devaluation 51. If the Chinese Yuan devalues against the US dollar, then a. Both the US importers and Chinese importers would benefit b. The US importers would benefit while the Chinese importers would be hurt c. The US importers would be hurt while the Chinese importers would benefit d. Both the US importers and Chinese importers would be hurt ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 52. Holding other things constant, increases in the price level in the US will a. Cause the dollar to appreciate b. Cause the dollar to depreciate c. Does not affect the dollar value d. None of the above ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 53. Holding other things constant, decreases in the price level in the US will a. Cause the dollar to appreciate b. Cause the dollar to depreciate c. Does not affect the dollar value d. None of the above ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 54. According to the purchasing power parity, if the price level in the US rises relative to Mexico a. The dollar will appreciate relative to the peso b. The dollar will depreciate relative to the peso c. There is no effect on either currency d. None of the above ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 55. The US is experiencing a technological boom. Relative to the other countries with lower technological growth, we expect to see the dollar a. Appreciate b. Depreciate c. Stay constant in value d. None of the above ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 56. Currency devaluations hurt a. Consumers but help suppliers b. Suppliers c. Suppliers but help consumers d. None of the above ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 57. An increase in the US demand for British pounds causes a. An appreciation of the pound b. Depreciation of the dollar c. None of the above d. Both a and b ANSWER: d TOPICS: Section 2: The Effects of Currency Devaluation 58. Currency devaluations help suppliers because they make exports expensive a. Less b. More c. All of the above d. None of the above ANSWER: a TOPICS: Section 2: The Effects of Currency Devaluation 59. Currency devaluations hurt consumers because they make imports expensive a. Less b. More c. All of the above d. None of the above ANSWER: b TOPICS: Section 2: The Effects of Currency Devaluation 60. A financial market panic that causes US depositors to withdraw their funds from Chinese banks, would cause a(n) in the demand of US dollars and a(n) in the supply of the Chinese Yuan. a. Increase; Increase b. Increase; Decrease c. Decrease; Increase d. Decrease; Decrease ANSWER: a TOPICS: Section 3: Bubbles 61. A financial market panic that causes US depositors to withdraw their funds from Chinese banks, would cause a(n) in the demand of US dollars and a(n) in the demand of the Chinese Yuan. a. Increase; Increase b. Increase; Decrease c. Decrease; Increase d. Decrease; Decrease ANSWER: b TOPICS: Section 3: Bubbles 62. Due to a recession in the US, the average rate of return on investments is likely to fall causing the US dollar to a. Appreciate b. Depreciate c. Not change in value d. None of the above ANSWER: b TOPICS: Section 3: Bubbles 63. Due to a recession in the US, the average rate of return on investments is likely to fall causing the demand for US dollar to a. Increase b. Decrease c. Not change d. None of the above ANSWER: b TOPICS: Section 3: Bubbles 64. Due to a boom in the US, the average rate of return on investments is likely to rise causing the US dollar to a. Appreciate b. Depreciate c. Not change in value d. None of the above ANSWER: a TOPICS: Section 3: Bubbles 65. Due to a boom in the US, the average rate of return on investments is likely to rise causing the demand for US dollar to a. Increase b. Decrease c. Not change d. None of the above ANSWER: a TOPICS: Section 3: Bubbles 66. An expectation of a price increase in the future would cause consumers to and producers to a. Delay consumption; delay production b. Delay production; accelerate production c. Accelerate consumption; delay production d. Accelerate consumption; accelerate production ANSWER: c TOPICS: Section 3: Bubbles 67. In order for bubbles to occur, expectations of a price increase usually demand and supply a. Increases; Increases b. Increases; Decreases c. Decreases; Increases d. Decreases; Decreases ANSWER: b TOPICS: Section 3: Bubbles 68. If buyers expect future price increase, they will their purchases while sellers will production a. Accelerate; accelerate b. Accelerate; delay c. Delay; accelerate d. Delay; delay ANSWER: b TOPICS: Section 3: Bubbles 69. Which of the following is(are) the characteristics of a bubble a. Bubbles emerge when investors disagree about the particular economic importance of an event b. Bubbles involve very large increases in trading volume c. Bubbles may continue even when many expect a bubble and doesn’t pop until a sufficient number of skeptical investors act simultaneously d. All of the above ANSWER: d TOPICS: Section 4: How Can We Recognize Bubbles? 70. Purchasing power parity suggests that a. Given fixed prices, interest rates adjust so that a good costs the same across two countries b. Given fixed exchange rates, prices adjust such that a good costs the same across two countries c. All of the above d. None of the above ANSWER: c TOPICS: Section 5: Purchasing Power Parity 71. A widget costs $50 in the US and CAD$53 in Canada. The current exchange rate is 1USD=1.09CAD. At this rate, a. The good costs more in the US b. The good costs more in Canada c. The good costs the same across the two countries d. None of the above ANSWER: a TOPICS: Section 5: Purchasing Power Parity 72. A widget costs $1000 in the US and CAD$1200 in Canada. The current exchange rate is 1USD=1.09CAD. At this rate, a. The good costs more in the US b. The good costs more in Canada c. The good costs the same across the two countries d. None of the above ANSWER: b TOPICS: Section 5: Purchasing Power Parity 73. A lawn mower costs $500 in the US and 5188 Mexican Pesos in Mexico. The current exchange rate is 1USD=12.97MXN. At this rate, a. The good costs more in the US b. The good costs more in Mexico c. The good costs the same across the two countries d. None of the above ANSWER: a TOPICS: Section 5: Purchasing Power Parity 74. A lawn mower costs $500 in the US and 8188 Mexican Pesos in Mexico. The current exchange rate is 1USD=12.97MXN. At this rate, a. The good costs more in the US b. The good costs more in Mexico c. The good costs the same across the two countries d. None of the above ANSWER: b TOPICS: Section 5: Purchasing Power Parity 75. John wants to buy a new lawn mower. He can either buy it in the US and pay $500 or buy it in Mexico and pay 8188 Mexican Pesos. At the exchange rate of 1 Mexican Peso=0.771US$, ignoring any other costs, he would a. Prefer buying in the US b. Prefer buying in Mexico c. Be indifferent about where he buys his television d. None of the above ANSWER: a TOPICS: Section 5: Purchasing Power Parity 76. John wants to buy a new lawn mower. He can either buy it in the US and pay $500 or buy it in Mexico and pay 6188 Mexican Pesos. At the exchange rate of 1 Mexican Peso=0.771US$, ignoring any other costs, he would a. Prefer buying in the US b. Prefer buying in Mexico c. Be indifferent about where he buys his television d. None of the above ANSWER: b TOPICS: Section 5: Purchasing Power Parity 77. John wants to buy a new television set. He can either buy it in the US and pay $1200 or buy it in Canada and pay CAD$1300. At the exchange rate of 1CA$=US$0.92, ignoring any other costs, he would a. Prefer buying in the US b. Prefer buying in Canada c. Be indifferent about where he buys his television d. None of the above ANSWER: b TOPICS: Section 5: Purchasing Power Parity 78. A widget costs $50 in the US and CAD$53 in Canada. The current exchange rate is 1USD=1.09CAD. Given purchasing power parity, the Canadian dollar would to equilibrate prices a. Appreciate b. Depreciate c. Not change d. None of the above ANSWER: a TOPICS: Section 5: Purchasing Power Parity 79. A widget costs $1000 in the US and CAD$1200 in Canada. The current exchange rate is 1USD=1.09CAD. Given purchasing power parity, the Canadian dollar would to equilibrate prices a. Appreciate b. Depreciate c. Not change d. None of the above ANSWER: b TOPICS: Section 5: Purchasing Power Parity 80. The purchasing power parity predicts that if the price level in the US falls relative to Mexico, a. The dollar will appreciate relative to the peso b. The dollar will depreciate relative to the peso c. There is no effect on either currency d. PPP predicts price level will normalize in the long-run ANSWER: a TOPICS: Section 5: Purchasing Power Parity 81. Russian Rubles Because of sanctions over their involvement in Ukraine in 2014, the Bank of Russia has raised its benchmark interest rate from 8% to 9.5%. What affect does this have on the exchange rate for the Russian Rubble versus the Euro? ANSWER: This would make investing in Russia more attractive. To the extent that they can, Europeans would seek to invest more in Russia. Of course, the sanctions attempt to limit these additional investments but they may not be perfectly enforced. This means converting more Euros for Rubbles and driving up the price of Rubbles. Likewise, this makes borrowing in Russia more expensive. 82. European Vacation After staying around 1.35 US dollars per Euro for years, the exchange rate fell below 1.25 US dollars to a euro during the summer of 2014. What affect does this have on tourism in Europe? ANSWER: The demand for European vacations by Americans will increase because it takes fewer dollars to convert into a given number of euros. Likewise, Europeans considering coming to the US now have to convert more euros into dollars if they wish to visit the US. Some will opt to stay in Europe instead. Both effects increase the demand for hotels in Europe during holidays. Since supply of hotels is relatively fixed, this increases the hotel rates expressed in euros. 83. US Exports After staying around 1.35 US dollars per Euro for years, the exchange rate fell below 1.25 US dollars to a euro during the summer of 2014. What affect does this have US exports to Europe? ANSWER: The demand for American goods by Europeans will fall because it takes more euros to convert into a given number of dollars to make a purchase. Likewise, Americans considering European goods now have to convert less dollars into euros to make purchases there. Both effects decrease US exports. CH 12 1. Acquiring a firm that sells a substitute good would make the demand curve for your original product a. More inelastic b. More elastic c. Unchanged d. None of the above ANSWER: a TOPICS: Section 1: Pricing Commonly Owned Products 2. You own two different energy drink brands: “Blue Cow” and “600 minute energy.” If you reduce the price on “Blue Cow”, a. Sales of “Blue Cow” would increase, without any changes in sales for “600 minute energy.” b. Sales of both “Blue Cow” and “600 minute energy.” would increase c. Sales of “Blue Cow” would increase, but the sales of “600 minute energy” would be cannibalized d. Neither “Blue Cow” nor “600 minute energy” would see an increase in sales. ANSWER: c TOPICS: Section 1: Pricing Commonly Owned Products 3. You own two different energy drink brands: “Blue Cow” and “600 minute energy.” If you reduce the price on “Blue Cow”, sales of “600 minute energy” would a. Increase b. Decrease c. Not change d. None of the above ANSWER: b TOPICS: Section 1: Pricing Commonly Owned Products 4. You own two different energy drink brands with similar elasticities: “Blue Cow” and “600 minute energy.” If you reduce the price on “Blue Cow”, you can only increase your total sales if a. Prices for “600 minute energy” are increased b. Prices for “600 minute energy” are reduced c. Prices for “600 minute energy” stay constant d. None of the above ANSWER: b TOPICS: Section 1: Pricing Commonly Owned Products 5. The general rule to increase profits when two close substitute brands are jointly owned is a. Increase prices for both brands b. Decrease prices for both brands c. Increase prices on one brand, decreasing it for the other d. Increase prices on one brand, keeping the prices of the second brand constant ANSWER: a TOPICS: Section 1: Pricing Commonly Owned Products 6. After acquiring closely substitutable product brands, a firm can successfully raise prices on both of the brands without losing much of its total sales because a. Customers are insensitive to price changes b. None of these sales would be captured by its other brand c. Some of these sales lost by one brand would be captured by the other d. All of the above ANSWER: c TOPICS: Section 1: Pricing Commonly Owned Products 7. After acquiring a close substitute, to increase profits the firm must Raise prices on all the products equally a. b. Raise the prices only on products with high margins, while reducing prices on products with low margins c. Raise prices only on products with high margins, while keeping prices constant on products with low margins d. Raise prices on both the products, but raise the prices more for products with higher margins ANSWER: d TOPICS: Section 1: Pricing Commonly Owned Products 8. In a multi-product firm, cannibalization is a. An increase in the quality of both the brand’s products b. A decrease in the quality of both the brands products c. An increase in both the brand’s sales d. An increase in one of the brand’s sales due to the decrease in sales of the other. ANSWER: d TOPICS: Section 1: Pricing Commonly Owned Products 9. If an ice-cream manufacturer acquires a frozen yogurt producer, you would likely see a. Lower prices for both the ice cream and the frozen yogurt b. Higher prices for both the ice cream and the frozen yogurt c. Higher prices for ice cream, but lower prices for frozen yogurt d. Higher prices for frozen yogurt but lower prices for ice cream ANSWER: b TOPICS: Section 1: Pricing Commonly Owned Products 10. If a hot dog manufacturer acquires a bakery that primarily bakes hot dog buns, you would likely see a. Higher prices for the hot dogs but lower prices for the buns b. Higher prices for the buns but lower prices for the hot dogs c. Higher prices for both the hot dogs and the buns d. Lower prices for both the hot dogs and the buns ANSWER: d TOPICS: Section 1: Pricing Commonly Owned Products 11. Which of the following is true? a. To reduce cannibalization among products, reposition a product so that it does not directly compete with the other b. After acquiring a substitute product, raise prices on both the products c. After acquiring a complementary product, lower prices on both the products d. All of the above ANSWER: d TOPICS: Section 1: Pricing Commonly Owned Products 12. Which of the following is true? a. To reduce cannibalization among products, reposition a product so that it does not directly compete with the other b. After acquiring a substitute product, lower prices on both the products c. After acquiring a complementary product, raise prices on both the products d. All of the above ANSWER: a TOPICS: Section 1: Pricing Commonly Owned Products 13. Which of the following is FALSE? a. To reduce cannibalization among products, reposition a product so that it does not directly compete with the other b. After acquiring a substitute product, raise prices on both the products c. After acquiring a complementary product, raise prices on both the products d. All of the above ANSWER: c TOPICS: Section 1: Pricing Commonly Owned Products 14. Which of the following is FALSE? a. To reduce cannibalization among products, reposition a product so that it does not directly compete with the other b. After acquiring a substitute product, lower prices on both the products c. After acquiring a complementary product, lower prices on both the products d. All of the above ANSWER: b TOPICS: Section 1: Pricing Commonly Owned Products 15. Which of the following is FALSE? a. To reduce cannibalization among products, make the products more homogenous b. After acquiring a substitute product, raise prices on both the products c. After acquiring a complementary product, lower prices on both the products d. All of the above ANSWER: a TOPICS: Section 1: Pricing Commonly Owned Products 16. Which of the following is TRUE? a. To reduce cannibalization among products, reposition a product so that it does not directly compete with the other b. After acquiring a substitute product, lower prices on both the products c. After acquiring a complementary product, raise prices on both the products d. None of the above ANSWER: a TOPICS: Section 1: Pricing Commonly Owned Products 17. For jointly owned substitute products, cannibalization leads to MR MC a. Being higher than b. Being lower than c. Equaling d. None of the above ANSWER: b TOPICS: Section 1: Pricing Commonly Owned Products 18. Upon acquiring a complement the inter-relatedness of demand leads to, MR a. Rising b. Falling c. Staying constant d. None of the above ANSWER: a TOPICS: Section 1: Pricing Commonly Owned Products 19. The general rule to increase profits when two close complementary brands are jointly owned is a. Increase prices for both brands b. Decrease prices for both brands c. Increase prices on one brand, decreasing it for the other d. Increase prices on one brand, keeping the prices of the second brand constant ANSWER: b TOPICS: Section 1: Pricing Commonly Owned Products 20. Firm A owns produces both toothpaste and toothbrushes. In order to increase profits the firm must a. Increase prices for both toothbrushes and toothpaste b. Decrease prices for both toothbrushes and toothpaste c. Increase prices on toothbrushes and increase the price on toothpaste d. Increase prices on toothbrushes but keep the price on toothpaste constant ANSWER: b TOPICS: Section 1: Pricing Commonly Owned Products 21. You are the owner of an art supply store, selling both paint and paintbrushes. In order to maximize total sales you should a. Decrease the price on the paint only b. Decrease the price on paintbrushes only c. Decrease the price on both the paint and the paintbrushes d. Increase the price on both the paint and the paintbrushes ANSWER: c TOPICS: Section 1: Pricing Commonly Owned Products 22. Firm X owns both a grocery store and the parking lot outside the grocery store. In order to increase the traffic at the store it must a. Decrease the prices on the goods sold in the store b. Decrease the parking rates c. All of the above d. None of the above ANSWER: c TOPICS: Section 1: Pricing Commonly Owned Products 23. Brenda’s Bakery started selling coffee along with pastries. In order to increase total sales she should a. Increase the prices on coffee b. Decrease the price on pastries c. Increase the price of pastries d. Shut down ANSWER: b TOPICS: Section 1: Pricing Commonly Owned Products 24. Firm X owns both a grocery store and the parking lot outside the grocery store. In order to increase the traffic at the store the owners of the store should a. Increase the prices on the goods sold in the store b. Increase the parking rates c. All of the above d. None of the above ANSWER: d TOPICS: Section 1: Pricing Commonly Owned Products 25. Firm X owns both a grocery store and the parking lot outside the grocery store. In order to increase the traffic at the store, the store should a. Decrease the prices on the goods sold in the store b. Increase the parking rates c. All of the above d. None of the above ANSWER: a TOPICS: Section 1: Pricing Commonly Owned Products 26. Firms tend to raise the price of their goods after acquiring a firm that sells a substitute because a. They lose market power b. There is an increase in the overall demand for their products c. The bundle has a more elastic demand than individual goods d. The bundle has a more inelastic demand than individual goods ANSWER: d TOPICS: Section 1: Pricing Commonly Owned Products 27. A firm that acquires a substitute product can try to reduce inter-product cannibalization by a. Doing nothing b. Repositioning its product or the substitute so that they do not directly compete with each other c. Pricing each product at the same level d. Lowering the prices on both the products ANSWER: b TOPICS: Section 1: Pricing Commonly Owned Products 28. After firm A acquired firm B, it raised the prices for the goods produced by both firms. This can increase profits if those goods are a. Substitutes b. Complements c. Not related d. None of the above ANSWER: a TOPICS: Section 1: Pricing Commonly Owned Products 29. After firm A acquired firm B, it lowered the prices for the goods produced by both firms. This can increase profits if the goods are a. Substitutes b. Complements c. Not related d. None of the above ANSWER: b TOPICS: Section 1: Pricing Commonly Owned Products 30. On average, if demand is unknown and costs of underpricing are than the costs of overpricing, then err on the side of . a. Smaller; overpricing b. Smaller; underpricing c. Larger; underpricing d. None of the above ANSWER: b TOPICS: Section 2: Revenue or Yield Management 31. The pricing rule MR=MC holds for a. All firms b. Single product firms c. Multiple product firms d. None of the above ANSWER: b TOPICS: Section 2: Revenue or Yield Management 32. Firms that face capacity constraints can increase output only up to the capacity, but no further. Therefore, firms a. Should price to capacity as long as MR > MC b. Should price to capacity as long as MR = MC c. Should price to capacity as long as MR < MC d. Should not take capacity into consideration in pricing decisions ANSWER: a TOPICS: Section 2: Revenue or Yield Management 33. For products like parking lots and hotels, the relevant costs and benefits to determine how much capacity to build are a. LRMR and LRMC b. LRMR and SRMC c. SRMR and SRMC d. SRMR and LRMC ANSWER: a TOPICS: Section 2: Revenue or Yield Management 34. For products like parking lots and hotels, costs of building capacity are mostly fixed or sunk and firms in this industry typically face capacity constraints. Therefore, a. If SRMR>SRMC at capacity, then the firms should price to fill capacity b. If SRMRLRMC at capacity, then the firms should price to fill capacity d. If LRMR>LRMC at capacity, then the firms should price to fill capacity ANSWER: a TOPICS: Section 2: Revenue or Yield Management 35. All of the following are true, except a. Some consumers may infer high quality from high price b. Low prices can indicate lower quality given that no other information is available c. Promotional campaigns do not affect consumer’s perception on quality d. It makes more sense to raise price when advertising makes demand less elastic ANSWER: c TOPICS: Section 2: Revenue or Yield Management 36. Owners of a parking lot are deciding whether or not to add more parking spaces to the lot. The owners should increase parking spaces as long as: a. LRMR=LRMC b. LRMR>LRMC c. LRMRLRMC c. LRMRMC, price to fill capacity d. Both A&C ANSWER: d TOPICS: Section 2: Revenue or Yield Management 39. A football stadium has a fixed number of seats. Given this, how should stadium management determine ticket prices? a. When MRMC, price to fill capacity d. Both A&C ANSWER: d TOPICS: Section 2: Revenue or Yield Management 40. A parking lot in a busy downtown district is experimenting with its pricing strategy to figure out where it should price its spaces. Which of the following strategies should it implement? a. Increase parking rates if the lot fills up much earlier than 9am b. Decrease parking rates if the lot doesn’t fill up until much after 9am c. If the lot fills up right around 9am the price is right d. All of the above ANSWER: d TOPICS: Section 2: Revenue or Yield Management 41. A parking lot in a busy downtown district is experimenting with its pricing strategy to figure out where it should price its spaces. Which of the following strategies should it implement? a. Decrease parking rates if the lot fills up much earlier than 9am b. Increase parking rates if the lot doesn’t fill up until much after 9am c. If the lot fills up right around 9am the price is right d. All of the above ANSWER: c TOPICS: Section 2: Revenue or Yield Management 42. For a cruise liner deciding how to price its rooms, if the cost of overpricing is higher than the cost of underpricing, then the management of the cruise liner should a. Price lower than what they expect would fill capacity b. Price higher than what they expect would fill capacity c. Price such that they would expect to just fill capacity d. None of the above ANSWER: a TOPICS: Section 2: Revenue or Yield Management 43. For a cruise liner deciding how to price its rooms, if the cost of overpricing is lower than the cost of underpricing, then the management of the cruise liner should a. Price lower than what they expect would fill capacity b. Price higher than what they expect would fill capacity c. Price such that they would expect to just fill capacity d. None of the above ANSWER: b TOPICS: Section 2: Revenue or Yield Management 44. After a massive promotional campaign of Justin Bieber’s latest music album, the producers decided to raise the prices on the album. This implies that the producers expect the promotion to have made the demand for the album a. More elastic b. Unitary elastic c. Perfectly elastic d. More inelastic ANSWER: d TOPICS: Section 3: Advertising and Promotional Pricing 45. If advertising makes demand of a product less elastic, it makes sense for a firm to a. Decrease the price of the product b. Increase the price of the product c. Leave the price unchanged d. None of the above ANSWER: b TOPICS: Section 3: Advertising and Promotional Pricing 46. If advertising makes demand of a product more elastic, it makes sense for a firm to a. Decrease the price of the product b. Increase the price of the product c. Leave the price unchanged d. None of the above ANSWER: a TOPICS: Section 3: Advertising and Promotional Pricing 47. Firms should raise the prices on their goods a. If the demand for the product is elastic b. If it acquires a firm selling a complement good c. If it acquires a firm selling a substitute good d. Both a and c ANSWER: c TOPICS: Section 3: Advertising and Promotional Pricing 48. Firms should lower the prices on their goods a. If the demand for the product is elastic b. If it acquires a firm selling a complement good c. If it acquires a firm selling a substitute good d. Both a and b ANSWER: d TOPICS: Section 3: Advertising and Promotional Pricing 49. A local restaurant increases the prices on its burgers as soon as it begins a promotional campaign. Which of the following is most likely to be true? a. The promotional campaign featured how much better their burgers are b. The promotional campaign focused on the value per dollar c. The promotional campaign made demand more elastic d. All of the above ANSWER: a TOPICS: Section 3: Advertising and Promotional Pricing 50. A Swiss watch company advertises its history of superior craftsmanship. The company thinks that this would a. Make the demand for the product less elastic b. Make the customers less sensitive to the price c. Assist them with differentiating their product d. All of the above ANSWER: d TOPICS: Section 3: Advertising and Promotional Pricing 51. A Swiss watch company advertises its history of superior craftsmanship. The company thinks that this will a. Make the demand for the product more elastic b. Make the customers more sensitive to the price c. Not impact the demand for their product d. None of the above ANSWER: c TOPICS: Section 3: Advertising and Promotional Pricing 52. A discount shoe manufacturer’s advertisement suggests that they are almost as good as the name brands but better value. The shoe manufacturer believes that the advertisement will a. Make the demand for its product more elastic b. Make his customers more price sensitive c. Cause people to directly compare his product to the name brands d. All of the above ANSWER: d TOPICS: Section 3: Advertising and Promotional Pricing 53. A discount shoe manufacturer’s advertisement suggests that they are almost as good as the name brands but better value. The shoe manufacturer believes that the advertisement will make a. The demand for its product less elastic b. His customers less price sensitive c. Him able to raise prices d. None of the above ANSWER: d TOPICS: Section 3: Advertising and Promotional Pricing 54. Advertising claiming superior quality of a product makes its demand a. More elastic b. Less elastic c. Perfectly elastic d. None of the above ANSWER: b TOPICS: Section 3: Advertising and Promotional Pricing 55. By focusing the customers on the price of a product, you make the demand for the product a. More elastic b. Less elastic c. Perfectly inelastic d. None of the above ANSWER: a TOPICS: Section 3: Advertising and Promotional Pricing 56. By focusing the customers on the price of a product, you a. Increase your chances of engaging in a price war with your competitors b. Make the customers more price sensitive to the product c. Make the demand for the product more elastic d. All of the above ANSWER: d TOPICS: Section 3: Advertising and Promotional Pricing 57. By focusing the customers on the price of a product, you make a. The demand for the product more inelastic b. The customers less price sensitive to the product c. The demand for the product more elastic d. Only B&C ANSWER: c TOPICS: Section 3: Advertising and Promotional Pricing 58. By focusing the customers on the price of a product, you make a. The demand for the product more inelastic b. The customers less price sensitive to the product c. Both A & B d. None of the above ANSWER: d TOPICS: Section 3: Advertising and Promotional Pricing 59. Which of the following are ways of promoting a firm’s product a. Advertising b. Discount coupons c. End-of-aisle displays d. All of the above ANSWER: d TOPICS: Section 3: Advertising and Promotional Pricing 60. Given that you observe nothing but the high price of the product, you are more likely to infer that a. The product is low quality b. The product is high quality c. The product is the lowest quality possible d. The product is defective ANSWER: b TOPICS: Section 4: Psychological Pricing 61. Given that you observe nothing but the low price of the product, you are more likely to infer that a. The product is high quality b. The product is the highest quality possible c. The product is low quality d. None of the above ANSWER: c TOPICS: Section 4: Psychological Pricing 62. Many wines are priced high in order to a. Indicate low quality b. Indicate high quality c. Indicate a bargain brand d. None of the above ANSWER: b TOPICS: Section 4: Psychological Pricing 63. In order to increase sales the firm can a. Increase the reference price for the product b. Decrease prices c. Differentiate their product d. All of the above ANSWER: d TOPICS: Section 4: Psychological Pricing 64. Prospect theory implies that consumers are motivated by a. The actual price level b. The distance of the price from the reference price c. All of the above d. None of the above ANSWER: b TOPICS: Section 4: Psychological Pricing 65. An airline wants to introduce a charge for snacks on flights. Why would it not be such a good idea? a. Passengers would be less likely to buy snacks b. Passengers would be more likely to carry their own snacks onboard c. Passengers would feel nickel-and-dimed and would switch airlines d. All of the above ANSWER: d TOPICS: Section 4: Psychological Pricing 66. Why would large department stores such as Home Depot rather face shortages than increase the prices of basic food and repair items in cases of natural disasters such as Hurricanes? a. They do not want to increase sales b. They are maximizing sales c. They do not want to be viewed as unfair d. All of the above ANSWER: c TOPICS: Section 4: Psychological Pricing 67. An online shoe retailer wants to introduce handling charges for purchases less than $50. How should the retailer pose the charges to its customers to improve its chances of being well-received? a. Introduce it separately as handling b. Lump it together with shipping costs, but don’t let the customer know until they check out c. Introduce it as free above $50 d. Hide it from the customer ANSWER: c TOPICS: Section 4: Psychological Pricing 68. Large amusement parks charge entrance fees rather than fee per ride because a. Customers are more sensitive to paying a fee per ride b. Customers are less sensitive to paying a fee per ride c. Customers view paying per ride as a smaller cost d. None of the above ANSWER: a TOPICS: Section 4: Psychological Pricing 69. Viceroy Vacations is deciding on how to price its vacation packages. Which of the following strategies would you suggest? a. Price the flight, hotel and car separately b. Advertise it as an all-inclusive vacation c. Give them away as free vacations to everyone d. Close down your company. No one goes on vacations anymore ANSWER: b TOPICS: Section 4: Psychological Pricing 70. Beverage Merger Cott Corp. markets a portfolio of beverages, bottled waters, beverage, and coffee delivery systems for homes and offices. In November, 2014, it has agreed to merge with DS Services of America, a water and coffee direct-to-consumer services provider. What is the expected effect of this merger on price-cost margins? ANSWER: These two companies’ products are primarily substitutes for each other. A price increase for one company would both affect own profits but also would shift some demand to the other and thereby increase the other’s profits. Before the merger, the second effect would not have been captured by the firm raising prices. After the merger, it would. Therefore it is more willing to raise prices. 71. Wine Merger In October, 2014, Vintners Global Resource’s (VGR) agreed to purchase M.A. Silva. VGR is a leading manufacturer of glass bottles and packaging for wines and M.A. Silva is a manufacturer of premium natural corks. What is the expected effect of this merger on price-cost margins? ANSWER: These two companies’ products are complements for each other. A price decrease for one company would lower the cost of the final product, a bottle of wine, increasing the quantity demanded and so benefit the other. Before the merger, the second effect would not have been captured by the firm reducing prices. After the merger, it would. Therefore it is more willing to reduce prices. 72. Cover Charges Hank’s Honkytonk is a local bar and nightspot. On weekends, it requires a $5 cover charge to defray the costs of the live musical acts Hank brings in. This has worked wonderfully, as it generates capacity crowds and a long line of people waiting to enter. However, after the cost of the acts, he still loses money on the weekends. What is his marginal revenue and marginal cost of a patron on weekends and how should he attempt to fix his unprofitability problem? ANSWER: Hank is not engaging in yield management effectively. Once his club as at capacity, the marginal cost of another patron jumps up as he could get shut down by the fire marshal. In this case, he should set price so as to fill capacity. If he increased his cover charge he would discourage some patrons. He could increase it until the line forming outside decreases into just a few people. 73. New Phone ShorTech, is a smaller company that makes of knockoff consumer electronic devices including its Quadrant mobile phone. Sales had been doing okay for a number of months before ShorTech launched a massive advertising campaign in which it shows that its phone can do just about everything the industry leader phone can do. What change in pricing would you suggest for the Quadrant phone concurrent with the campaign? ANSWER: The advertising campaign will inform a lot more people about the product and so shift the demand out. But because of ShorTech’s history of making knockoffs and because its phone is only almost as good as the leading phone, it is likely to attract more demand elastic customers. In this case, the optimal price-cost margin falls. You should suggest a sale during the campaign. CH 13 AND 14 1. Which of the following is an example of price discrimination? a. Seniors paying a lower price for tickets at movie theatres b. Students paying discounted rates on travel c. Tourists paying higher prices on local attractions than locals d. All of the above 2. The practice of buying a firm’s good in one market at a low price and selling it in another market for a higher price in order to profit from the price difference is known as a. Predatory pricing b. Price collusion c. Arbitrage d. Mark-up pricing 3. The consequences of price discrimination are a. Consummate more transactions b. Extract more consumer surplus c. Increase producer surplus d. All of the above 4. Movie theatres offer seniors discounts because a. Seniors have a more inelastic demand for movie tickets b. Seniors have a more elastic demand for movie tickets c. Seniors have a higher opportunity cost of their time d. Only B&C 5. Movie theatres offer senior discounts because a. Seniors have a more elastic demand for movie tickets b. Seniors have lower incomes c. Seniors have a lower opportunity cost of time d. All of the above 6. Relative to simple pricing, price discrimination leads to a. Consumer surplus being converted to producer surplus b. Increased profits c. A simplified pricing schedule d. Both a and b 7. When a firm practices perfect price discrimination, a. Consumer surplus is maximized b. Producer surplus is minimized c. Producer surplus is maximized d. None of the above 8. The idea behind price discrimination is a. To be able to sell to high-value customers, who value the product most b. To be able to sell to the marginal customers, who are indifferent about the purchase c. To be able to sell to the low-value customers, who would otherwise not buy the product d. To be able to sell to both high and low value customers at different prices 9. Price discrimination is a. The practice of charging different prices to different individual buyers or customer groups b. The practice of differentiating the product to make demand less elastic c. The practice of deciding a single price to be charged to customers d. Always illegal 10. Many bars close to campuses have started offering cheaper beer to consumers with a student ID. These bars a. Assume students have an inelastic demand curve b. Assume students have an elastic demand curve c. Are practicing price discrimination d. Both b and c 11. Many bars close to campuses have started offering cheaper beer to consumers with a student IDs. These bars are using a. Direct price discrimination b. Indirect price discrimination c. Decreasing returns to scale d. None of the above 12. For direct price discrimination to work effectively a. The low-valued customers should not be able to engage in arbitrage b. You need to charge the same price to the different groups c. Both groups should have the same elasticity of demand d. None of the above 13. Amusement parks often offer discounts to locals with IDs. This is an example of a. A direct discrimination scheme b. An indirect discrimination scheme c. Diminishing marginal returns d. Vertical integration 14. Public transit offers discounted monthly passes to students, which can only be bought and used with valid student IDs. The transit system is using a. A direct discrimination scheme b. An indirect discrimination scheme c. The Robinson-Patman act d. None of the above 15. A firm practicing direct price discrimination will charge a higher price to a. Consumers known to have an elastic demand b. All consumers c. Consumers known to have an inelastic demand d. Consumers known to have a unitary elastic demand 16. A firm practicing direct price discrimination will charge lower prices to a. Consumers with an elastic demand b. All consumers c. Consumers known to have an inelastic demand d. Consumers known to have a unitary elastic demand 17. For direct price discrimination to work, the firm a. Must be able to identify members of the low value group b. Charge the low-value group lower prices than the rest c. Prevent the low-value group from reselling their low priced goods to higher-valued group d. All of the above 18. For direct price discrimination to work, a. The firm need not be able to identify members of the low-value group b. The firm must charge a single price to all its customers c. The firm need not worry about any arbitrage since all its customers are charged the same price d. None of the above 19. For direct price discrimination to work a. The firm must be able to identify the members of the low value group b. The firm must charge a single price to all its customers c. The firm need not worry about any arbitrage since all its customers are charged the same price d. The firm should charge a higher price to those customers with the most elastic demand 20. For direct price discrimination to work a. The firm need not be able to identify the members of the low-value group b. The firm be able to charge the low-value customers a lower price than the higher-value customers c. The firm need not worry about any arbitrage since all its customers are charged the same price d. It needs to be too complicated for the customers to understand 21. The Robinson-Patman act a. Is a part of the antitrust laws b. Makes it illegal to give a price discount on a good sold to another business c. Is also known as the Anti-Chain-store Act d. All of the above 22. It is illegal for a business to price discriminate when selling goods to other businesses unless Both A & B are true a. Price discounts are cost-justified b. Discounts are offered to meet competitors’ price c. Either A or B is true d. 23. The Robinson-Patman act a. Is a part of the antitrust laws b. Makes it illegal to give a price discount on a good sold to another business c. Makes it illegal to give a price discount on a good sold to final customers d. Both A&B 24. Which of the following is FALSE? a. The Robinson-Patman act is a part of the antitrust laws b. Under the Robinson-Patman act it is illegal to give a price discount on goods sold to another business c. Under the Robinson-Patman act, it is illegal to give a price discount on goods sold to final customers d. Under the Robinson-Patman act, the only discount allowed is the one based on difference in servicing costs of different groups 25. In which of the following cases does the Robinson-Patman act not apply? a. There are no cost differences to serving different groups b. Discounts are never offered to meet competition c. The industry does not engage in promotional allowances d. All of the above 26. The declared that some forms of price discrimination is illegal, especially when it decreases competition. a. Robinson-Patman Act b. Sherman Antitrust Act of 1890. c. Merger Act d. Federal Trade Commission Act. 27. Criticisms of the Robinson-Patman act a. It can reduces consumer surplus b. It can reduces producer surplus c. It can creates inefficiency through unconsummated transactions d. All of the above 28. Which of the following would not be illegal according to the Robinson-Patman Act a. “Party Packers” getting 10cents off every pack of ribbon they buy after 1000 units b. “Fred’s Farms” offering 50 cents off a crate of strawberries to retailers to match other suppliers with similar rates c. “Sam’s Sandwiches” receiving 5 cents off per pound of cheese d. All of the above 29. Which of the following would be illegal according to the Robinson-Patman Act a. “Party Packers” getting 10cents off every pack of ribbon they buy after 1000 units b. “Sideline Superstore” receiving 50 cents off a crate of strawberries since it buys from many other suppliers c. “Sam’s Sandwiches” receiving 5 cents off per pound of cheese, since they are closer to the warehouse of the supplier d. None of the above 30. For a firm to maximize total profits through price discrimination, it should a. Charge a high price to consumers with an inelastic demand and low price to consumers with an elastic demand b. Charge a low price to consumers with an inelastic demand and high price to consumers with an elastic demand c. Charge the same price to both sets of consumers d. Charge nothing to both set of consumers-throw a party 31. Scenic Cinemas surveyed its audience and found that while most movie goers prefer weekends, seniors visit on weekdays. How should the theatre respond? a. Increase prices for the weekday shows, decrease the prices for the weekend shows b. Decrease both the weekday and weekend ticket prices c. Decrease prices for the weekday shows, increase prices on the weekends d. Increase both the weekday and weekend prices 32. An important lesson about pricing is a. Do not bargain with the customer b. When bargaining with the customer, do not bargain over the bundled price, bargain over unit price c. When bargaining with the customer, do not bargain over the unit price, bargain over the bundled price d. Bargain with the customer over everything 33. Senior Discounts The Doug’s Delicious Diner faces a demand curve for its daily special in which there are an equal number of potential buyers at every $0.20 price point between $8.00 and $6.00. If the marginal cost is $6.35, what price maximizes profits? Doug notices that at this price the unserved portion of demand are all senior citizens. If it offered a senior discount, how much should it be? ANSWER: Starting at $8.00, as the diner lowers the price in increments of $0.20, it earns another sale. Multiply this price times this quantity to get revenue and then take the difference from the last price point to get the MR. At a price of $7.20, MR > MC but at $7.00 MR < MC, so charge $7.20. Price Quantity Revenue MR MC $8.00 1 $8.00 $8.00 $6.35 $7.80 2 $15.60 $7.60 $6.35 $7.60 3 $22.80 $7.20 $6.35 $7.40 4 $29.60 $6.80 $6.35 $7.20 5 $36.00 $6.40 $6.35 $7.00 6 $42.00 $6.00 $6.35 $6.80 7 $47.60 $5.60 $6.35 $6.60 8 $52.80 $5.20 $6.35 $6.40 9 $57.60 $4.80 $6.35 $6.20 10 $62.00 $4.40 $6.35 $6.00 11 $66.00 $4.00 $6.35 At his price, no seniors are served and Doug can charge them a separate price if they show proper ID. The demand curve leftover for them is given by: Price Quantity Revenue MR MC $7.00 1 $7.00 $7.00 $6.35 $6.80 2 $13.60 $6.60 $6.35 $6.60 3 $19.80 $6.20 $6.35 $6.40 4 $25.60 $5.80 $6.35 $6.20 5 $31.00 $5.40 $6.35 $6.00 6 $36.00 $5.00 $6.35 For seniors, at a price of $6.80, MR > MC but at $6.60 MR < MC, so charge $6.80. So Doug can offer them a $0.40 discount. 34. Hardcover Books The marginal cost of printing a typical hard cover novel is $12.00 while the same book in paperback has a marginal cost of $2.00 lower. So why do publishers charge an average of $15 more for hard cover books? ANSWER: Hard cover versus paperback is used as a price discrimination scheme. Paperback versions usually come many months after the hard cover version. Customers who really like a particular author are more demand inelastic and tend to be impatient for the next book. This way the publishers can extract a higher price from the inelastic customers before they charge a lower price to the more elastic segment of demand. 35. Cowboy Hat Markets Cody’s Cowboy Hat Emporium has two stores Fort Worth, TX. One in the Stockyards area that caters to tourists and another a mile further north that caters to ranch hands. Why doesn’t Cody sell to both customer types out of one store? ANSWER: Two stores keep tourists from arbitraging away the price differences in Cody’s discrimination scheme. Since tourists do not have too many opportunities to buy cowboy hats, their demand rather inelastic. Ranch hands often replace their hats and are more aware of the different retailers and so are more elastic demanders. Cody takes advantage of this fact by charging higher prices at the Stockyards. It does not sell to ranch hands out of this store because tourists would try to arbitrage away the price differential. 36. Amusement Park / Cola Tie-in The Six Flags Over Texas amusement part in the middle of the Dallas-Fort Worth Metroplex has a tie-in marketing campaign with Coca-Cola during the summer. In local grocery stores, some Coke cans offer $5 off admission to the park. Why does Six Flags limit these cans so that none are sold further than 20 miles from the park? ANSWER: This is a price discrimination scheme trying to separate locals from tourists. Tourists do not get to go to the park as often as locals and so their demand is less elastic. Locals have many opportunities to visit the park and so their demand for additional visits over the summer is relatively elastic. The discount on the Coke can is an attempt to offer lower prices to the more elastic locals. Six Flags limits the distribution of the specially marked cans to just locals as a way to limit arbitrage. 37. Indirect price discrimination differs from direct price discrimination because a. In indirect price discrimination high value consumers can sometimes still get the low price b. In direct price discrimination firms do not have to worry about cannibalizing c. Direct price discrimination encourages rivals to enter but indirect discrimination does not d. There is no difference between the two 38. When deciding what price to charge customers, a firm may choose to charge different prices based on customers’ a. Age b. Willingness to pay c. Location d. All of the above 39. Which of the following is not an example of price discrimination? a. Senior citizen discount at the movies b. Grocery coupons c. Shipping a package further costs more d. Charging a higher price for ice-cream during the summer and a lower price in the winter 40. When a grocery store offers discount coupons in Sunday papers, it is trying to a. Price discriminate b. Undercut its competition c. Reward the frequent readers d. Provide a social service 41. For a firm to maximize total profits through price discrimination, it should a. charge a low price to high-value consumers and a high price to low-value consumers b. charge a high price to high-value consumers and a high price to low-value consumers c. charge a low price to high-value consumers and a low price to low-value consumers d. charge a high price to high-value consumers and a low price to low-value consumers 42. With no price discrimination, a. A firm sells every unit at different prices b. A firm sells every unit at same prices c. Low-value groups pay a lower price than the high-value groups d. Low-value groups pay a higher price than the high-value groups 43. Airlines charge a price to business travelers compared to leisure travelers because business travelers have a demand than leisure travelers. a. Higher; more elastic b. Higher; less elastic c. Lower; more elastic d. Lower; less elastic 44. Charging prices closer to what consumers are willing to pay for a good a. Reduces consumers surplus b. Increases producer surplus c. Both a and b d. None of the above 45. Arbitrage a. Is the act of to buying low in one market and selling high in another market b. Can force a seller to go back to uniform pricing c. Can offset the benefits of direct price discrimination d. All of the above 46. Which of the following is FALSE about indirect price discrimination a. The firm is able to identify each customer’s willingness to pay b. The firm is able to charge different prices to the different value customers c. The firm is be able to prevent arbitrage d. All of the above 47. Which of the following is FALSE about indirect price discrimination a. It requires identifying some feature that is correlated with different value customers b. The firm must be able to charge different prices to the different value customers c. The firm must be able to prevent arbitrage d. All of the above 48. Amusement parks often offer coupons to the local market that are not available to tourists. This is an example of a. Direct discrimination scheme b. Indirect discrimination scheme c. Both of the above d. None of the above 49. Advance-purchase discounts offered by airlines are an example of a. Direct price discrimination b. Indirect price discrimination c. All of the above d. None of the above Use the following table for questions 50-57 Cooking Wok Value to home users Value to professional Chefs No-name brand $50 $60 High-end professional series $70 $100 50. If the groups are equal size and the firm can only set one price, how should the firm price the high-end wok? a. Price low and sell to both the users b. Price high and sell only to the professional chefs c. Price low and sell only to the home users d. All of the above 51. Given an equal amount of users, if the firm can only set one price, how should the firm price the no-name brand wok? a. Price low and sell to both the users b. Price high and sell only to the professional chefs c. Price low and sell only to the home users d. All of the above 52. What is the maximum that the firm can charge for the no-name brand wok without losing customers? a. $50 b. $60 c. $70 d. $100 53. How much more do the Chefs value the high-end woks to the low-end woks? a. $20 b. $30 c. $40 d. $50 54. Given that the firm offers both the products, what is the maximum price it can charge for the high-end wok to have the chefs only buy the high-end wok? a. $70 b. $80 c. $90 d. $100 55. Given that the firm offers both the products would the chefs ever pay the full $100 for the high-end wok a. Yes, because they value it at $100 b. No, because they value it at $70 c. No, because they can get a positive consumer surplus buying the no-name brand d. All of the above 56. Given that the firm decides to only offer the high-end wok, what is the highest price it can charge the chefs? a. $70 b. $80 c. $90 d. $100 57. Given that the firm offers both the products, what prices can it offer to motivate the two groups to profitably self-sort into buying the correct brand a. No-name $60; High-end $100 b. No-name $50; High-end $100 c. No-name $50; High-end $90 d. No-name $60; High-end $90 Use the following table for questions 58-66 Carving knives Home users Professional Chefs No-name brand $40 $70 High-end professional series $60 $130 58. Given that the firm only chooses to sell the no-name brand, how should it price its product? a. Price low, sell to both users b. Price high, sell only to the professional chefs c. Price low, sell only to the professional chefs d. Price high, sell only to the home users 59. Given that the firm only chooses to sell the high-end professional series, how should it price its product? a. Price low, sell to both users b. Price high, sell only to the professional chefs c. Price low, sell only to the professional chefs d. Price high, sell only to the home users 60. Given that the firm wants to sell both the versions, how high can the no-name brand be priced? a. $30 b. $40 c. $60 d. $70 61. Given that the firm wants to sell both the versions, how much surplus does buying the no-name brand give the professional chefs? a. $30 b. $40 c. $50 d. $60 62. Given that the firm wants to sell both the versions, how high can the high-end professional knives be priced? a. $60 b. $70 c. $80 d. $100 63. Given that the firm wants to sell both the versions, how should it price its products to have the users self-sort themselves profitably? a. No-name $60; High-end $130 b. No-name $60; High-end $100 c. No-name $40; High-end $100 d. No-name $40; High end $130 64. How much would the firm make in revenue if it prices both its products successfully? a. $110 b. $120 c. $130 d. $140 65. How much would the firm make in revenue if it chooses to sell only the high-end professional series? a. $100 b. $110 c. $120 d. $130 66. In this case the firm should a. Produce both the versions and price discriminate since doing so gives a higher revenue b. Produce only the no-brand version c. Produce only the hi-end professional series d. Exit the marketplace 67. The “damaged goods” strategy refers to a. Trying to sell damaged goods to your customers b. Damaging the goods after they have been paid for but before the shipping c. Incurring additional costs to make the cheaper goods unattractive to high-value users d. Incurring additional costs to make the more expensive goods better quality 68. The “metering” scheme refers to a. Discriminating consumers through the amount of product bought b. Giving away core technology and making up for it through higher margins on secondary sales c. An indirect method of price discrimination d. All of the above 69. Metering is a. A form of indirect price discrimination b. A form of direct price discrimination c. An evaluation of a product d. An example of bundling 70. Firms can practice indirect price discrimination by a. Offering volume discounts b. Using two-part pricing c. Offering a bundle containing a number of units d. All of the above 71. The strategy of sorting customers into high or low value based on the amount of sales made is known as the a. Damaged goods strategy b. The willy-nilly strategy c. The Metering Strategy d. All of the above 72. Which of the following is an example of the “metering” strategy a. A doll company selling dolls at cost but charging high margins on doll accessories b. A cell phone company offers free locked in phones but charges high prices per call c. A catering company pays its chefs higher wages to make sure that the bargain meals are just slightly burnt d. Only A&B 73. Which of the following is an example of a “metering” strategy a. A supermarket offers free parking space but charges higher for grocery b. A television reseller spends time making sure that the picture quality of the bargain priced sets is fuzzy c. Razors are sold at unit cost while razor blades have large profit margins d. All of the above 74. Which of the following is an example of the “damaged goods” strategy a. A doll company selling dolls at cost but charging high margins on doll accessories b. A cell phone company offers free locked in phones but charges high prices per call c. A catering company pays its chefs higher wages to make sure that the bargain meals are just slightly burnt d. None of the Above 75. Which of the following is an example of a “damaged goods” strategy a. A supermarket offers free parking space but charges higher for groceries b. A television reseller spends time making sure that the picture quality of the bargain priced sets is fuzzy c. A gift store hikes up the prices on gift wrapping services during its seasonal sale d. All of the above 76. The difference between individual and aggregate demand is a. Individual demand is the total demand of all the individuals in a market b. In the aggregate demand, each point represents a single consumer’s different values for a single unit of the good c. In the aggregate demand, each point represents a consumer group’s value of the good d. All of the above 77. A supermarket sells you a pound of coffee on the condition that you buy a gallon of milk. This is an example of a. Bundling b. Tie in Sale c. Price Discounting d. Both a and b 78. One reason demand curves slope downwards is a. Marginal value increases with each purchase b. Marginal value declines with each purchase c. Total value declines with each purchase d. All of the above 79. For a retailer buying from a wholesaler, volume discounts do not violate the Robinson-Patman act because a. To sell larger volumes, the retailer himself has to offer discounts b. To sell larger volumes, the retailer has to incur costs in promoting the item c. To sell larger volumes, the retailer has to hold the items in inventory longer d. All of the above 80. Consumers demand different features from cough medications taken for daytime use versus nighttime use. Drug companies conveniently package both medications together. This strategy is designed to a. Allow consumers to buy the two together b. Stop consumers from buying each medicine separately c. Make the consumers more homogenous so that maximum consumer surplus can be extracted with a single price d. None of the above 81. Which of the following are ways to sell a customer additional units without dropping the price on previous purchases a. Offer quantity discounts b. Offer two-part pricing ex: membership fees c. Bundle the goods together d. All of the above 82. Buy Airline Tickets over the Weekend A recent study by economists Steven Puller and Lisa Taylor found that airline tickets purchased over the weekend were priced 5% lower on average. Why would airlines charge lower prices to customers making bookings on the weekend? ANSWER: This is a price discrimination scheme. Weekday bookings tend to be for business travel and weekend bookings tend to be for tourist travel. Tourists tend to be more flexible in their travel plans and so are more elastic customers. The weekend price is a way to offer them discounts while reducing the risk of arbitrage from the business customers. 83. Circle of Crust Pie Five Pizzas has a frequent purchaser program, called Circle of Crust, in which patrons earn points with every purchase. With enough points, the patron’s next purchase is free. How does this program alter customer decisions? ANSWER: This is a form of a volume discount. Under the program, customers face a lower marginal cost of future pizzas. This lowers the price for the pizzas and induces them to make more purchases than they would otherwise. 84. Dremel Tools Dremel sells a high speed rotary tool appropriate for many workshop projects. They have developed hundreds of accessories and bits for their tools for many different applications. Why is the markup on the accessories higher than the markup on the rotary tools? ANSWER: Dremel is engaging in a form of metering. Purchasers differ in their willingness to pay for the continued use of the system. Those who value it a lot will purchase many different accessories. Those who have lower willingness to pay are going only get the more basic bits. So, a higher margin for the accessories allows Dremel to extract more of the surplus from the high types without losing the low types.