MCE CHAPTER 5 QUESTION BANK 1 2 both of the above If supply equals demand then a the observed price is the equilibrium price b excess rents equal zero c In a perfect competition shopping on price is equivalent to shopping on value This is occurs because a prices are equilibrium prices and products are homogeneous b both sellers and buyers are small c entry and exit in perfect competition is costless d long term profits in a perfect competition 0 d none of the above 3 Over the past several years the University has increased tuition and observed an increase in students and an increase in the quality of these students Based on this observation we can reasonably conclude that a Pitt uses a entry barrier pricing objective b a Pitt education is apparently price inelastic over the range observed c high school seniors and their parents shop on price d all of the above 4 Assume two pizza parlors engaged in such extreme price competition that neither generates a profit One owner increases price out of desperation making the changes on signs and menus inside his shop A day later the other owner also raises prices Given just this information we can reasonably conclude a that explicit collusion has likely occurred b that the parties agreed before hand to raise prices c both parties seek excess rents Excess rents are typically observed for premium pricers but not for discounters a true d all of the above b false 5 6 Assume that iTunes sells songs for 99 Further assume it drops the price to 89 and observes an increase in quantity sold Given just this information we would expect that a the new price policy is revenue enhancing b the new price policy would decrease net income both of the above c Excess rents usually imply that firms have a engaged in explicit collusion c both of the above d none of the above b escaped perfect competition d none of the above 8 Assume firm A sets its price at P1 and generates demand of Q1 It then changes its policy dropping price to P2 generating a greater demand Q2 From this we can reasonably conclude a the two price policies are revenue neutral b the firm uses a competition based pricing strategy c the firm has an entry barrier pricing objective Pricing below competition is an appropriate means to achieve market share objectives a true d none of the above b false 7 9 10 Assume AT T drops the price of breaking a mobile phone contract from 175 to 150 and a few days later T mobile announces an identical move This is an example of a defensive pricing c If a firm reaches breakeven we can reasonably conclude that contribution margin 0 a true b signaling d none of the above both of the above b false 11 12 13 If a firm reaches breakeven we can reasonably conclude that breakeven quantity capacity a true b false If price decreases direct labor costs decrease and direct material costs decrease then contribution margin must also decrease a true b false 14 A standard assumption of breakeven analysis is that worker productivity changes 15 17 linearly over the time period considered a true If CM 0 then the product is probably in its growth phase a true b false b false 16 Other things equal the contribution margin increases if both of the above a fixed cost decreases c In cost plus pricing the seller s profit is independent of increases in raw material costs a true b breakeven quantity decreases d none of the above b false 18 Assume A and B are head to head rivals Also assume both regularly earn excess rent Given just this information our best guess is that both firms are competing in an oligopoly a true b false 19 Assume firm A has tried two pricing policies and determined that they are revenue neutral From this we can reasonably conclude that the profit generated by both policies is more or less equal a true b false 20 Assume you are a brand manager You know from experience that the market is very price sensitive and all rivals are fighting to increase share Your boss has challenged you to increase contribution margin by 4 5 over the next year Your first move is most like to consider a increasing price c b decreasing fixed costs d all three are equally appropriate decreasing variable costs 21 Assume you are a brand manager You know from experience that the market is very price sensitive and all rivals are fighting to increase share Your boss has challenged you to decrease breakeven quantity by 4 5 over the next year Which of the following could achieve this outcome a c b decreasing fixed costs d all three can help achieve this outcome 22 Many restaurants in the Pittsburgh area routinely price wine at 2 5 times the cost increasing price decreasing variable costs of the wine This is an example of a competition based pricing c both of the above 23 Prices in oligopoly b mark up pricing d none of the above a are virtually identical over firms since the product is homogenous b often appear to be collusive c both of the above d none of the above 24 Explicit collusion is most likely to occur in b oligopoly d equally likely in all three a perfect competition d monopoly In theory and in practice there are no constraints on the pricing policy of a monopolists e b first movers d none of the above both of the above 25 26 Firms prefer excess rents in all markets in which they participate b true b false 27 Tuition at Pitt increases more or less each year yet the number and quality of applicants generally goes up From this we can conclude a annual increase in tuition is generally revenue enhancing b over the range observed tuition is price elastic c both of the above d none of the above 28 Recent data observes that compared to February 2007 US sales of existing not brand new houses in February 2008 were down by 23 8 From this we can conclude that house prices have most likely increased a true b false 29 Consider two pricing policies P1 and P2 If we know they are revenue neutral then we can reasonably conclude both produce the same NI a true In the airline industry we have seen many firms add fuel surcharges and fees for a second piece of luggage This is probably the result of signaling a true b false b false 31 Price skimming can be used to achieve profitability pricing objectives b false b the buyer both of the above d none of the above a true In simple auctions such as e Bay the price is set by a the seller d In the mature phase of the product life cycle we generally often flat demand suggesting that firms would be highly likely to use status quo pricing a true b false If price direct