Podcast
Questions and Answers
What is first-degree price discrimination also known as?
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.
It is feasible for a monopolist to achieve perfect price discrimination in practice.
False (B)
What is the main purpose of second-degree price discrimination?
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 ______.
Consumers reveal their willingness to pay based on whether they choose to jump the ______.
Match the type of price discrimination with its example:
Match the type of price discrimination with its example:
What is a tactic used in second-degree price discrimination?
What is a tactic used in second-degree price discrimination?
In third-degree price discrimination, different groups are charged different prices based on their demand elasticity.
In third-degree price discrimination, different groups are charged different prices based on their demand elasticity.
What does the pricing rule imply when calculating the price where MR = MC?
What does the pricing rule imply when calculating the price where MR = MC?
Risk-averse individuals prefer uncertainty.
Risk-averse individuals prefer uncertainty.
What is one example of how risk preferences can be shifted?
What is one example of how risk preferences can be shifted?
According to Prospect Theory, people are generally risk _____ with gains and risk _____ with losses.
According to Prospect Theory, people are generally risk _____ with gains and risk _____ with losses.
What does Expected Utility (EU) of A represent in the context of decision-making?
What does Expected Utility (EU) of A represent in the context of decision-making?
According to prospect theory, people are more likely to prefer risky options with higher potential gains.
According to prospect theory, people are more likely to prefer risky options with higher potential gains.
What does the certainty effect imply in business decision making?
What does the certainty effect imply in business decision making?
According to prospect theory, individuals exhibit a tendency called ___________, which leads them to prefer avoiding losses over acquiring gains.
According to prospect theory, individuals exhibit a tendency called ___________, which leads them to prefer avoiding losses over acquiring gains.
Match the business strategies with their potential outcomes:
Match the business strategies with their potential outcomes:
In the context of ShopSmart's options, what is a key factor influencing the management's decision?
In the context of ShopSmart's options, what is a key factor influencing the management's decision?
Full information means that one person has more knowledge than another in a business context.
Full information means that one person has more knowledge than another in a business context.
What is the purpose of insurance in risk pooling?
What is the purpose of insurance in risk pooling?
What is adverse selection in the context of transactions?
What is adverse selection in the context of transactions?
Moral hazard arises when one party bears the full consequences of risk.
Moral hazard arises when one party bears the full consequences of risk.
What must a signal be in order for it to be credible?
What must a signal be in order for it to be credible?
The borrower might take on riskier projects knowing that the lender bears some of the ________.
The borrower might take on riskier projects knowing that the lender bears some of the ________.
Match the following terms with their definitions:
Match the following terms with their definitions:
Which of the following is a key characteristic of signaling?
Which of the following is a key characteristic of signaling?
What is the Nash Equilibrium in the context of the pricing war between Pepsi and Coca-Cola?
What is the Nash Equilibrium in the context of the pricing war between Pepsi and Coca-Cola?
Publicly traded companies can operate effectively without financial statements.
Publicly traded companies can operate effectively without financial statements.
What is a potential consequence of information asymmetry in the context of moral hazard?
What is a potential consequence of information asymmetry in the context of moral hazard?
Imposing regulation can help achieve coordination in the pricing war between Pepsi and Coca-Cola.
Imposing regulation can help achieve coordination in the pricing war between Pepsi and Coca-Cola.
What is a possible approach to attain coordination in competitive pricing environments?
What is a possible approach to attain coordination in competitive pricing environments?
Risk comes from not knowing what you're ______.
Risk comes from not knowing what you're ______.
Match the following strategies with their descriptions:
Match the following strategies with their descriptions:
What pricing is used in third-degree price discrimination based on the elasticity of different consumer groups?
What pricing is used in third-degree price discrimination based on the elasticity of different consumer groups?
Prospect Theory suggests that individuals are more likely to take risks after experiencing gains.
Prospect Theory suggests that individuals are more likely to take risks after experiencing gains.
What is an example of a situation that can shift a person's risk preferences?
What is an example of a situation that can shift a person's risk preferences?
Individuals who do not like uncertainty are classified as _____ risk preferences.
Individuals who do not like uncertainty are classified as _____ risk preferences.
Match the following concepts with their definitions:
Match the following concepts with their definitions:
Which statement is true regarding the efficiency losses from monopoly pricing?
Which statement is true regarding the efficiency losses from monopoly pricing?
In Prospect Theory, it is suggested that people are more conservative with potential gains than with losses.
In Prospect Theory, it is suggested that people are more conservative with potential gains than with losses.
According to the pricing rule, at what point does the price equal marginal cost (MC)?
According to the pricing rule, at what point does the price equal marginal cost (MC)?
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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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