Question : Table 16-3 Potential Customer Willingness to Pay (dollars per hour) : 1387947

 

 

Table 16-3

 

Potential Customer

Willingness to Pay (dollars per hour)

Arun

$8

Bernice

9

Cara

10

Dawn

12

 

Julie plans to start a pet-sitting service. She surveyed her neighborhood to determine the demand for this service. Assume that each person surveyed demands only one hour of pet sitting services per period. Table 16-3 above shows a portion of her survey results.

 

 

 

99) Refer to Table 16-3.  Suppose Julie’s marginal cost of providing this service is constant at $7 and she decides to charge each customer according to his or her willingness to pay. What is the value of consumer surplus by her customers?

A) $39

B) $28

C) $11

D) $0

 

100) Refer to Table 16-3.  Suppose Julie’s marginal cost of providing this service is constant at $7 and she charges each customer according to his or her willingness to pay instead of a uniform price of $7. Which of the following statements is true?

A) Julie is worse off because the demand for her services is reduced.

B) Julie has converted the consumer surplus (from a uniform price) into economic profit.

C) Julie’s customers are better off because their consumer surplus has increased.

D) Julie has converted the producer surplus (from a uniform price) into consumer surplus.

 

 

101) One requirement for a firm pursuing a price-discrimination strategy is the ability to segment the market for its product. This means that

A) the firm must set different prices for different regions where the product is sold.

B) the firm must be willing to offer price discounts for senior citizens and children.

C) the firm must be able to divide the market in a way that makes arbitrage impossible.

D) the firm must choose a marketing strategy that appeals to different segments of the economy.

 

 

102) A perfectly competitive firm cannot practice price discrimination because

A) a firm that breaks even in the long run cannot afford to engage in yield management.

B) it does not advertise; this prevents the firm from marketing its product to different segments of the market.

C) each consumer in a perfectly competitive market has the same willingness to pay.

D) the firm can only charge the market price.

 

Article Summary

Brandeis University economist Benjamin Shiller has written a paper which explains how Netflix could combine demographic data with customers’ Web browsing habits to more accurately predict how much a customer would be willing to pay for a Netflix subscription, and how using this method of first-degree price discrimination would generate higher profits. Shiller explains that the more information a company has about its customers, the better it is at being able to set prices to increase profits. As he stated in his paper, “Using all variables to tailor prices, one can yield variable profits 1.39 percent higher than variable pro?ts obtained using non-tailored 2nd degree price-discrimination. Using demographics alone to tailor prices raises pro?ts by much less, yielding variable pro?ts only 0.14% higher than variable pro?ts attainable under 2nd degree [price discrimination].”

 

Source: Brian Fung, “How Netflix could use Big Data to make twice as much money off you,” Washington Post, September 4, 2013.

 

103) Refer to the Article Summary. The pricing method described in the article is referred to as first-degree price discrimination. First-degree price discrimination is also known as

A) arbitrage.

B) perfect price discrimination.

C) odd pricing.

D) two-part tariff pricing.

 

 

104) Refer to the Article Summary. If Netflix chose to use Shiller’s pricing method,

A) consumer surplus would be zero.

B) producer surplus would be zero.

C) deadweight loss would be maximized.

D) consumer surplus, producer surplus, and deadweight loss would all be equal.

 

105) If price discrimination occurs in a market,

A) the law of one price does not hold.

B) the firm earns arbitrage profits.

C) consumers whose demand for the product sold is more elastic pay higher prices than consumers whose demand is less elastic.

D) the marginal cost of production is constant.

 

 

106) When colleges use yield management techniques, they increase financial aid offers to students likely to be more price sensitive and they reduce financial aid offers to students likely to be less price sensitive.

 

 

107) Colleges offer merit awards to students who ordinarily would not qualify for financial help. Some have criticized this on grounds that merit awards disproportionately benefit students from wealthier communities with better school systems, siphoning resources away from lower-income students with greater financial need. A college’s decision to grant merit awards is motivated by economic efficiency.

 

 

108) To successfully price discriminate, a firm must ensure that there are no opportunities for arbitrage.