Chapter 12

Multiple Choice Questions

1. After massive promotion of Rihanna’s latest music album, the producers reacted by raising prices for his
albums. This implies that promotion expenditures made the album demand D
a. More Elastic
b. Unitary elastic
c. The Change is due to psychological pricing
d. Less elastic

2. All the below choices are examples of promoting a firm’s product, except B
a. Advertising
b. Pricing
c. Discount coupons
d. End-of-aisle displays

3. A firm that acquires a substitute product can try and reduce inter-product cannibalization by B
a. Doing nothing
b. Repositioning its product or the substitute so that they do not directly compete with each other
c. Pricing each product at the same level
d. Raising prices on the low-margin products

4. A shoe-producing firm decides to acquire a firm that produces shoe laces. This implies that B
a. The firm’s aggregate demand will be less elastic than the individual demand
b. The firm’s aggregate demand will be more elastic than the individual demand
c. The firm’s aggregate demand will be of the same elasticity as the individual demand
d. None of the above

5. After firm A producing one good acquired another firm B producing another good, it raised the prices for
the bundle of goods. One can conclude that the goods were A
a. Substitutes
b. Complements
c. Not related
d. None of the above

6. Firms tend to raise the price of their goods after acquiring a firm that sells a substitute good because D
a. They lose market power
b. There is an increase in the overall demand for their products
c. The bundle has a more elastic demand than individual goods
d. The bundle has a more inelastic demand than individual goods
7. For products like parking lots and hotels, costs of building capacity are mostly fixed or sunk and firms in
this industry typically face capacity constraints. Therefore, A
a. If SRMR>SRMC at capacity, then the firms should price to fill capacity
b. If SRMR<SRMC at capacity, then the firms should price to fill capacity
c. If LRMR>LRMC at capacity, then the firms should price to fill capacity
d. If LRMR>LRMC at capacity, then the firms should price to fill capacity

8. A firm started advertising its product and this changed the product’s elasticity from -2 to -1.5. The firm
should A
a. Raise price from $10 to $15
b. Reduce price from $15 to $10
c. Raise price from $7.5 to $10
d. Reduce price from $10 to $7.5

9. After running a promotional campaign, the owners of a local shoe store decided to decrease the prices for
the shoes sold in their store. One can imply that A
a. The promotional expenditures made the demand for their shoes more elastic
b. The promotional expenditures made the demand for their shoes more inelastic
c. The promotional expenditures has no effect on the shoe demand elasticity
d. The owners got it wrong. To cover the promotional expenses, they should have raised the prices.

10. On average, if demand is unknown and costs of underpricing are _______ than the costs of overpricing,
then _________. B
a. Smaller; overprice
b. Smaller; underprice
c. Larger; underprice
d. None of the above