Part -1:
QUESTION 1:
After acquiring a substitute product, a company should
Raise price on both products to eliminate price competition between them
Raise price more on the low-margin (more price elastic) product
Reposition the products so that there is less substitutability between them
All of the above
QUESTION 2:
After acquiring a complementary product, a company should
Discontinue the less profitable product
Raise prices on both products
Lower prices on both products
Raise price on the more price elastic product
QUESTION 3
When would a grocery store selling a product at MR < MC be a wise decision?
When the cost of the product increased suddenly
When demand for the dropped due to an economic recession
When it expected to attract customers with this "loss leader" who would buy many other products while they were in the store
None of the above
QUESTION 4
An investor built a luxury hotel that cost $1M per room to build. He is expecting to generate $100,000 per room annually in nightly room rental fees. That requires average net room fee (after discounts and promotions) of $342/night and 80% occupancy. A recession has driven his occupancy rate down to 40%. What should he do?
Close the hotel and wait for the recession to end.
Double his price to make up for the low occupancy
Keep the price where it is for those who are willing to pay it, but offer several promotions and deep discounts where the discounted price is somewhat above his marginal cost
Lower the list price of each room to $60/night, which is the marginal cost of renting one additional room in the hotel
QUESTION 5
When should a high-fixed cost business, such as an airline, hotel, or theatre, set its price at a level that will fill available capacity?
Always
Never
When MR > MC at capacity
When it has borrowed heavily to fund the business
QUESTION 6
How does a company's advertising interact with its pricing decision?
No interaction. They are independent.
The CEO determines the price the company needs to earn an economic profit and then tells the ad agency to advertise the product at that price
The company uses advertising to highlight unique qualities and features of the product, making demand for the product less price elastic; therefore it can raise the price on that product
None of the above
QUESTION 7
Product promotions focusing on your price relative to those of your competitors tend to make your product more price elastic, so you should lower price when you do these promotions.
True
False
QUESTION 8
Why does framing a price increase as a "gain" rather than a "loss" (e.g., raise airline ticket price and give discount if you don't eat snack, vs. leave ticket price same but charge for snack) result in happier customers?
It doesn't. Consumers are rational, so they realize the two are identical ways of saying the same thing.
Because consumers tend to feel "losses" more than gains, so it is better not to talk about losing something, such as your free snack.
Because consumers are greedy and selfish. They are always looking for the seller to give them something free, even if it would cause the company to go out of business.
None of the above.
QUESTION 9
What is price discrimination (as defined by economists)?
Practice of charging different people or groups different prices that are not based on different costs.
Charging a higher price to consumers you don't want representing your product
Charging such a high price that a large fraction of the population can't afford your product
All of the above
QUESTION 10
How can a term with such a negative connotation-discrimination-be good for both producers and consumers?
It can't. It is only good for producers.
Producers get higher profits and consumers get stronger by learning how to overcome the discrimination.
Producers earn higher profits while more consumers are served.
None of the above
QUESTION 11
Which of the following is NOT a pre-requisite for direct price discrimination to work?
Seller can identify at least two groups of consumers with different price elasticities of demand
The groups are willing to cooperate because they see the value of the price discrimination to everyone
Seller has a way to identify the different groups so that he can charge each a different price
Seller can prevent the low-priced consumer from reselling to the high-priced consumer
QUESTION 12
How does a business traveler benefit from having leisure travelers on the same plane who paid less than half what he paid for the ticket?
He doesn't. He's getting ripped off.
If everyone had to pay the same price, many leisure travelers wouldn't fly. That would reduce the number of flights airlines would schedule (bad for business traveler) or raise the price the remaining travelers had to pay to get the airline to fly its full schedule.
He gets to hear about exotic vacation spots that he may want to visit on his own vacation.
QUESTION 13
The price discriminating seller charges the group with more elastic demand a higher price than the group with less elastic demand.
True
False
QUESTION 14
Even with the Robinson-Patman Act's prohibition against giving discounts, companies have several ways to make use of the economist's concept of price discrimination without breaking this law. Which of the following is NOT one of those ways of practicing price discimination?
Offer discounts to buyers based on the lower cost of serving them.
Practice price discrimination only with final consumers; not other businesses.
Offer promotional allowances, such as to large retailers, which are similar to price discounts
Offer discounts only on services, not goods.
QUESTION 15
What are the distinguishing characteristics of indirect price discrimination?
Seller cannot identify in advance the different price elasticities of potential customers.
Seller cannot prevent high value (price inelastic) customers from taking advantage of the discount offer designed to attract low value (price elastic) customers.
Seller designs product or services that appeal differently to groups with different price elasticities of demand, and then depends on buyer behavior to sort out who buys what.
All of the above
QUESTION 16
Which of the following is NOT an example of the "metering" form of indirect price discrimination?
Printer manufacturers charging a low markup on printers and a high markup on replacement ink cartridges.
Razor manufacturers charging a low markup on razors and a high markup on blades.
Movie theatre prohibiting customers from bringing food and then charging high price for big bowl of popcorn.
Barbie doll company charging low markup for doll and high markup for doll outfits.
QUESTION 17
How are grocery coupons an example of indirect price discrimination?
Anyone can use them, but price inelastic shoppers are willing to pay full price rather than take the time to clip coupons
They aren't indirect. Each coupon is tied to a specific product.
Some have expiration dates
Manufacturers authorize and redeem the coupons, but they administer them indirectly--third parties print them and grocery stores collect them apply the discounts.
QUESTION 18
Which of the following cases of pricing for performance (i.e., the more performance a product/service provides, the higher the price) is an example of indirect price discrimination?
GM charges more for its Z06 650hp Corvette than the standard 450hp model
MINITAB disables features of its $1,195 MINITAB statistical software package and sells it for $50
The hair salon charges you more for its best stylist whose haircut is better and faster than any other stylist in that shop.
None of the above
QUESTION 19
When pricing for an individual customer, which should you NOT do?
Offer volume discounts
Bargain over unit price
Use two-part pricing-fixed price + unit price
Offer a bundle containing a number of units
QUESTION 20
Bundling different goods together can allow a seller to extract more consumer surplus if willingness to pay for the bundle is more homogenous (among customers) than willingness to pay for the separate items in the bundle.
True
False
Part -2:
QUESTION 1
You are taking a multiple-choice test that awards you one point for a correct answer and penalizes you ¼ point for an incorrect answer. If you have to make a random guess and there are four possible answers, what is the expected value of guessing?
QUESTION 2
Your company has a customer list that includes 200 people. Of those 200, your market research indicates that 140 hate receiving coupon offers, whereas the remainder really likes them. If you send a coupon mailer to one person at random, what is the probability that he or she will value receiving the coupon?
0.3
0.6
0.70
QUESTION 3
You just decided to add a new line to your manufacturing plant. Compute the expected loss/profit from the new line based on the following estimates: 70% chance profit will increase by $100,000; 20% chance profit will remain unchanged; 10% chance profit will decrease by $15,000. What is the expected profit of the new line?
$100,000
$71,500
-$15,000
$68,500
QUESTION 4
You have two types of buyers for your product. The first type values your product at $10; the second at $6. Forty percent of buyers are the first type ($10 value); 60% are the second type ($6 value). What price maximizes your expected profit contribution?
$10
$6
$7.60
$8
QUESTION 5
Maritime Insurance Company offers insurance policies for recreational boats. A typical policy for a boat worth more than $25,000, will pay $25,000 if the damage is $25,000 or more. If the boat suffers damage greater than $10,000, but less than $25,000, the policy pays $5,000. If the damage is $10,000 or less, the policy pays nothing. The company estimates the following probabilities: no damage (.6); some damage up to $10,000 (.25); damage between $10,000 and $25,000 (.12). What price should the company charge for this policy in order to make a $200 contribution to company profit (i.e., price minus expect cost of payments equals $200)?
$5,450
$2,250
$1,550
$800
QUESTION 6
1. Fig. 17-2 in Froeb & McCann shows a decision tree for deciding whether to enter a new market. Because the expected value of entering ($1) was greater than the expected value of not entering ($0), the decision was to enter. Why might the decision maker decide not to enter even though the expected value of entering was greater than that of not entering?
He's not confident in the estimated probabilities of his competitor's pricing behavior.
Entering the market requires a big investment in specialized capital with no alternative uses.
Even if successful, the new market will add only 2% to company profits. The decision maker needs to spend his scare managerial time on projects with more substantial growth potential.
All of the above
QUESTION 7
Risk is the probability that various bad things will happen. Uncertainty is lack of precision about those probabilities.
True
False
QUESTION 8
Some risks can be avoided. Those that can't be avoided can be managed. Which of the following is NOT a valid method for dealing with unavoidable risks?
Control
Embrace
Transfer
Insure
QUESTION 9
The CEO of a trucking company tells his insurance agent that he can predict almost exactly what the total damage to his trucks will be next year due to driver error, but he can't afford to cover those damages out of operating funds; therefore, he wants to get insurance to cover all the damages. What is wrong with this manager's reasoning?
No one can predict all the inadvertent dents and scrapes that each of the company's truck drivers will put on the company's trucks next year.
The insurance company will price its insurance to cover all the expected damage plus its administrative costs plus a profit margin; therefore the annual insurance premium will be 20-30% more than the annual cost for the company to self-insure. If the company can't afford to pay for the damages out of operating funds, it certainly can't afford to pay the insurance premiums.
The CEO shouldn't have told the insurance agent his company's confidential information about damages. He should have made the insurance company do its own prediction and hoped that they underestimated the damage.
None of the above.
QUESTION 10
A company with 100 employees decides to offer its employees medical insurance administered by a major health company, but funded totally by the employer-i.e., it self-insurance. The next year, five employees were diagnosed with major medical issues that cost several hundred thousand dollars each, which when combined with everyone else's expenses, cost the company $2M for the year. The CEO is furious with his HR director who told him that, given their history of medical expenses, he could expect no more than $1M in total costs for the year. What is the best way to avoid this problem in the future?
Lay off old, sickly workers and hire only young, healthy workers
Set a limit of $10,000 on medical expense payments from the employer. Employees must take care of anything over that themselves.
Employer buy insurance that kicks in when medical expenditures exceed what the company expected or is willing to cover.
All of the above
QUESTION 11
A homeowner hired a contractor to remodel his house. The contractor found asbestos in the walls. He is worried about the risk of asbestos exposure to his workers and the homeowner, and all of the legal problems that could tie him up for years if something goes wrong. What is the best solution to this problem?
Tell the workers to wear gloves and masks and put the asbestos in garbage bags.
Seal up the wall and get out of there.
Transfer the risk to a company that specializes in asbestos removal.
Transfer the risk to the homeowner by getting him to sign a release from any asbestos-related liability.
QUESTION 12
Which of the following is NOT an example of controlling risk?
Training employees in safety so they don't have as many accidents
Selling your company so you don't have to deal with all the risks associated with it
Maintaining regular communication with customers so they don't switch to your competitor
Providing incentives for your employees to exercise regularly in order to maintain or improve their health.
QUESTION 13
Which of the following is NOT an example of adverse selection
A business bets the proceeds of a bank loan on the over/under of the next NFL game
An accident-prone driver buys auto insurance
A patient with a terminal illness buys life insurance
A hungry person goes to the all-you-can-eat buffet
QUESTION 14
If a life insurance company knows that smoking increases the risk of death but is unable to determine which applicants smoke, the problem of _________________ refers to _______________ being more likely to buy insurance.
Adverse selection, nonsmokers
Screening, nonsmokers
Adverse selection, smokers
Screening, smokers
QUESTION 15
To combat the problem of adverse selection, __________ informed parties can employ ___________ techniques.
More; signaling
Less; signaling
Equally; screening
Equally; signaling
QUESTION 16
To overcome the problem of adverse selection, employers can use ____________ techniques, such as _____________
Signaling; monitoring employee performance
Screening; monitoring employee performance
Screening; checking employee references
Signaling; checking employee references
QUESTION 17
To overcome adverse selection, owners of a private company contemplating an IPO (sale of stock to the public) should release lots of company information to the public rather than keep it to themselves.
True
False
QUESTION 18
Which of the following is NOT an example of a process designed to combat moral hazard problems?
Banks include restrictive covenants in load agreements that prevent the borrower from using the loan proceeds for purposes other than those agreed to in the loan
The rate the employer pays per employee for coverage in the unemployment compensation system increases if the employer experiences above average layoffs.
Insurance companies require applicants to provide medical history information as part of the application process
Employers regularly monitor employee performance
QUESTION 19
Due to problems associated with __________, one would expect a doctor to spend _____________ time with patients after buying malpractice insurance.
Moral hazard; more
Adverse selection; more
Adverse selection; less
Moral hazard; less
QUESTION 20
A GPS system attached to each insured vehicle allows insurance companies to charge "usage-based insurance rates" that depend on how much, when and where the vehicle is driven. The average usage-based policy holder saved 25% on insurance fees in Houston. What could explain the savings?
It reduces the moral hazard by imposing costs on some risky behavior-e.g., driving more miles in bad areas at times when more accidents occur.
It reduces adverse selection by rewarding lower risk vehicle owners with lower rates based on their behavior
The usage-based system gets drivers thinking about their driving habits. Once they are more aware of what they are doing, they adjust to become less risky and lower their rates.
All of the above