Price Discrimination and Risk Preferences
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Questions and Answers

What is first-degree price discrimination also known as?

  • Cost-based pricing
  • Perfect price discrimination (correct)
  • Value-based pricing
  • Dynamic pricing

    • It is feasible for a monopolist to achieve perfect price discrimination in practice.

    False

    What is the main purpose of second-degree price discrimination?

    To create a hurdle that consumers must overcome to receive lower pricing.

    Consumers reveal their willingness to pay based on whether they choose to jump the ______.

    <p>hurdle</p> Signup and view all the answers

    Match the type of price discrimination with its example:

    <p>First-degree = Charging each customer based on their maximum willingness to pay Second-degree = Coupons and rebates Third-degree = Different prices for students and faculty at a pizzeria None = Perfect price discrimination is achievable</p> Signup and view all the answers

    What is a tactic used in second-degree price discrimination?

    <p>Using coupons to lower prices</p> Signup and view all the answers

    In third-degree price discrimination, different groups are charged different prices based on their demand elasticity.

    <p>True</p> Signup and view all the answers

    What does the pricing rule imply when calculating the price where MR = MC?

    <p>The price can be adjusted based on elasticity.</p> Signup and view all the answers

    Risk-averse individuals prefer uncertainty.

    <p>False</p> Signup and view all the answers

    What is one example of how risk preferences can be shifted?

    <p>Changes in economic conditions or personal experiences.</p> Signup and view all the answers

    According to Prospect Theory, people are generally risk _____ with gains and risk _____ with losses.

    Signup and view all the answers

    What does Expected Utility (EU) of A represent in the context of decision-making?

    <p>The total monetary gain from uncertain outcomes.</p> Signup and view all the answers

    According to prospect theory, people are more likely to prefer risky options with higher potential gains.

    <p>False</p> Signup and view all the answers

    What does the certainty effect imply in business decision making?

    <p>People favor outcomes that are certain over those that are merely probable.</p> Signup and view all the answers

    According to prospect theory, individuals exhibit a tendency called ___________, which leads them to prefer avoiding losses over acquiring gains.

    <p>loss aversion</p> Signup and view all the answers

    Match the business strategies with their potential outcomes:

    <p>Option A = Guaranteed moderate increase in sales Option B = 50% chance of high discount Loss Aversion = Preference for avoiding losses Certainty Effect = Favoring certain outcomes over probable ones</p> Signup and view all the answers

    In the context of ShopSmart's options, what is a key factor influencing the management's decision?

    <p>The potential loss associated with each option.</p> Signup and view all the answers

    Full information means that one person has more knowledge than another in a business context.

    <p>False</p> Signup and view all the answers

    What is the purpose of insurance in risk pooling?

    <p>To allow individuals to incur small certain losses to avoid larger uncertain losses.</p> Signup and view all the answers

    What is adverse selection in the context of transactions?

    <p>It refers to buyers or sellers maximizing their outcomes at the expense of other parties.</p> Signup and view all the answers

    Moral hazard arises when one party bears the full consequences of risk.

    <p>False</p> Signup and view all the answers

    What must a signal be in order for it to be credible?

    <p>Costly to send</p> Signup and view all the answers

    The borrower might take on riskier projects knowing that the lender bears some of the ________.

    <p>risk</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Adverse Selection = Maximizing outcomes at others' expense Moral Hazard = Riskier behavior due to lack of information Signaling = Conveying information credibly Information Asymmetry = When one party has more information than the other</p> Signup and view all the answers

    Which of the following is a key characteristic of signaling?

    <p>It must be costly to send.</p> Signup and view all the answers

    What is the Nash Equilibrium in the context of the pricing war between Pepsi and Coca-Cola?

    <p>$10 Million for both companies</p> Signup and view all the answers

    Publicly traded companies can operate effectively without financial statements.

    <p>False</p> Signup and view all the answers

    What is a potential consequence of information asymmetry in the context of moral hazard?

    <p>Riskier behavior by the uninformed party</p> Signup and view all the answers

    Imposing regulation can help achieve coordination in the pricing war between Pepsi and Coca-Cola.

    <p>True</p> Signup and view all the answers

    What is a possible approach to attain coordination in competitive pricing environments?

    <p>Forming a cartel</p> Signup and view all the answers

    Risk comes from not knowing what you're ______.

    <p>doing</p> Signup and view all the answers

    Match the following strategies with their descriptions:

    <p>Impose Regulation = Legal framework to manage competition Commit to Retaliate = Ensuring future cooperation through fear of punishment Leverage Reputation = Using past performance to gain trust Establish Trust = Creating a reliable relationship among competitors</p> Signup and view all the answers

    What pricing is used in third-degree price discrimination based on the elasticity of different consumer groups?

    <p>$8 for students and $12 for faculty</p> Signup and view all the answers

    Prospect Theory suggests that individuals are more likely to take risks after experiencing gains.

    <p>False</p> Signup and view all the answers

    What is an example of a situation that can shift a person's risk preferences?

    <p>Experiencing significant financial loss or gain</p> Signup and view all the answers

    Individuals who do not like uncertainty are classified as _____ risk preferences.

    <p>risk averse</p> Signup and view all the answers

    Match the following concepts with their definitions:

    <p>Risk Averse = Prefers certainty over uncertain outcomes Risk Seeking = Welcomes uncertainty and potential higher gains Risk Neutral = Does not prefer either risk or certainty Prospect Theory = Explains behavior related to risk and loss</p> Signup and view all the answers

    Which statement is true regarding the efficiency losses from monopoly pricing?

    <p>Single-price monopoly has the highest efficiency loss.</p> Signup and view all the answers

    In Prospect Theory, it is suggested that people are more conservative with potential gains than with losses.

    <p>True</p> Signup and view all the answers

    According to the pricing rule, at what point does the price equal marginal cost (MC)?

    <p>When MR = MC</p> Signup and view all the answers

    Study Notes

    Price Discrimination

    • First-degree price discrimination (also known as perfect price discrimination) occurs when the same goods are sold at different prices.
    • Second-degree price discrimination is when the seller charges different prices based on the quantity purchased.
    • Third-degree price discrimination is when the seller charges different prices in different markets.
    • The hurdle model is a type of second-degree price discrimination where the seller sets up an "obstacle" that consumers must overcome to pay a lower price.
    • Students have a higher elasticity of demand for pizza than faculty members since they are more price-sensitive
    • Monopolies with fewer prices typically experience lower efficiency losses due to a smaller reduction in consumer surplus.

    Risk Preferences

    • People are risk averse when they do not like uncertainty.
    • People are risk seeking when they welcome uncertainty.
    • People are risk neutral when they don't consider uncertainty.
    • Prospect theory suggests that people become more risk averse after gains and more risk seeking after losses.

    Information Asymmetry & Moral Hazard

    • Information asymmetry occurs when one party has more information than the other.
    • Adverse selection is when one party uses their private information to maximize their outcome at the expense of the other party.
    • Moral hazard is when one party takes more risk because they do not bear the full consequences of that risk.
    • Signaling occurs when one party credibly conveys information about itself to another party.
    • Education is an example of a signal because it is costly to acquire, making it less likely for individuals with lower ability or motivation to send this signal.
    • Businesses can address the moral hazard problem by developing monitoring systems, creating incentives, and implementing insurance.

    Coordination Failure

    • Coordination failure occurs when individuals or firms fail to coordinate their actions effectively, resulting in suboptimal outcomes.
    • Possible solutions for coordination failure include establishing trust, leveraging reputation, and forming a cartel.

    Risk & Warren Buffett

    • Risk comes from not knowing what you're doing.
    • Warren Buffett is a renowned investor and CEO of Berkshire Hathaway.
    • He believes that risk is primarily associated with a lack of knowledge and understanding.

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    Related Documents

    FTMBA Fall 2024 Session 5 Slides PDF

    Description

    Explore the concepts of price discrimination and risk preferences in economics. This quiz covers first, second, and third-degree price discrimination as well as the characteristics of risk-averse, risk-seeking, and risk-neutral individuals. Test your understanding of how these concepts influence consumer behavior.

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