Pepperdine University FINC 655 Chapter 14 Multiple Choice Questions 1)A software firm can offer a high-feature version of its software or a stripped down low-feature version, each with similar production costs

Question

Pepperdine University

FINC 655

Chapter 14

Multiple Choice Questions

1)A software firm can offer a high-feature version of its software or a stripped down low-feature version, each with similar production costs. Which of the following cannot be an optimal segmentation strategy?

1. Offer only the high-feature version aimed only at a high-value market segment. [This can be an optimal strategy if the risk of cannibalization is too great.]
2. Offer only the low-value version aimed at all market segments. [The high-feature version has the same production costs but can likely be sold at a higher price.]
3. Offer both versions targeted to different value segments. [This is a common form of indirect price discrimination.]
4. Offer only the high-feature version aimed at all market segments. [This can be an optimal strategy if the risk of cannibalization is too great.]

Which of the following conditions must be satisfied by a successful price discrimination scheme?
1. The seller must have a different product for each group of customers. [This is generally true for indirect price discrimination, but direct price discrimination schemes may charge different prices for the same product.]
2. The seller must be able to identify each customer as having a high or low value. [Indirect price discrimination schemes like versioning can work even if the seller does not the value of each customer.]
3. The seller must be able to prevent arbitrage between the two groups. [When offering different versions of products aimed at different market segments, arbitrage is not an issue.]
4. None of the above [Each of the above is necessary for a direct price discrimination scheme, but is not necessary for indirect price discrimination.]

Perfect price discrimination is when a firm can charge each customer exactly what they are willing to pay. In this case,
1. the demand curve is very inelastic. [successful price discrimination does not depend on the elasticity of demand.]
2. the marginal revenue is the demand curve [the revenue from each consumer is equal to each consumer’s willingness to pay, which is given by the demand curve.]
3. the demand curve is very elastic. [successful price discrimination does not depend on the elasticity of demand.]
4. the marginal cost curve is the average cost curve. [nothing in the problem suggests this. Price discrimination can occur for different cost structures.]

2

Use the following table to answer questions 4 – 6. Assume the cost of producing the goods is zero and that

Consumer B

each consumer will purchase each good as long as the price is less than or equal to value. Consumer values are entries in the table Consumer A

Good 1	$2,300	$2,800
Good 2	$1,700	$1,200

Suppose the monopolist only sold the goods separately. What price will the monopolist charge for Good 1 to maximize revenues for good 1?
1. $2,300 [this is more profitable than selling a single unit at $2,800.]
2. $2,800 [at this price, the monopolist would sell only one unit to Consumer B.]
3. $1,200 [this is not either consumer’s value of good 1.]
4. $1,700 [this is not either consumer’s value of good 1.]

What is the total profit to the monopolist from selling the goods separately?
1. $4,500 [the monopolist could increase profit by selling more than one unit of each good.]
2. $6,300 [the monopolist could increase profit by selling more than one unit of good 2.]
3. $7,000 [the monopolist maximizes profit by selling each good to each consumer.]
4. $6,200 [the monopolist can earn higher profit by setting prices optimally.]

What is a better pricing strategy for the monopolist? What is the resulting profit?
1. Bundle the goods at $2,800; Profits=$5,600 [Both consumers value the bundle at more than $2,8000.]
2. Bundle the goods at $4,000; Profits=$8,000 [this charges both consumers exactly what each is willing to pay for the bundle.]
3. Charge $2,800 for good 1 and charge $1,700 for good 2; Profits=$4,500 [bundling the two goods can increase profit in this case.]
4. Charge $2,300 for good 1 and charge $1,200 for good 2; Profits = $7,000 [this is the maximum profit from selling the two goods separately but bundling the two goods can increase profit in this case.]

Assume that the price elasticity of demand for movie theatres is -.85 during all evening shows but for all afternoon shows the price elasticity of demand is -2.28. For the theatre to maximize total revenue, it should
1. charge the same price for both shows, holding other things constant. [Since the two shows have very different elasticities of demand, they have different profit-maximizing prices.]
2. charge a higher price for the afternoon shows and lower price for the evening shows, holding other things constant. [prices should be lower when demand is more elastic.]

3

1. charge a lower price for the afternoon shows and higher price for the evening shows, holding other things constant

. [prices should be lower when demand is more elastic.]

1. Need more information [there is sufficient information as prices vary with elasticity of demand.]

Arbitrage
1. Is the act of buying low in one market and selling high in another market. [this is the definition of arbitrage, but is not the only correct answer.]
2. Can force a seller to go back to uniform pricing. [arbitrage can lead a seller to abandon price discrimination, but this is not the only correct answer.]
3. Can defeat direct price discrimination. [arbitrage can allow high-value consumers to purchase from low-value consumers, defeating the firm’s price discrimination. This is not the only correct answer.]
4. All of the above [the above both define arbitrage and identify its effects.]

Airlines charge a price to business travelers compared to leisure travelers because business travelers have a demand than leisure travelers.
1. higher; more elastic [customers with more elastic demand should be charged a lower price.]
2. higher; less elastic [customers with less elastic demand should be charged a higher price].
3. lower; more elastic [business travelers generally pay a higher price than leisure travelers]
4. lower; less elastic [business travelers generally pay a higher price than leisure travelers]

Metering is

A type of indirect price discrimination [metering identifies high-value customers by the intensity of their use of a related product such as paper for printers.]
A type of direct price discrimination [direct price discrimination requires identifying the value of each individual consumer.]
An evaluation of a product [metering is a type of price discrimination that identifies high-value customers by how intensely they use a product.]
An example of bundling [metering allows the purchase of individual products but identifies high-value customers by how many of them they buy.]