Why Is It Important for Firms Practicing Price Discrimination to Prevent

question 120

Multiple Choice

Why is it important for firms practicing price discrimination to prevent arbitrage of their product?

• A) Arbitrage is unrelated to firms' profits since the products are still being sold.
• B) Smugglers alter product quality as they pass from market to market, hence harming the reputation and future profits of firms.
• C) Arbitrage reduces the profits from price discrimination for firms, and increases profits for smugglers.
• D) Arbitrage increases deadweight loss in the market.

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Definitions:

Debt-Equity Ratio

An economic indicator showing the comparative mix of owner's equity and loans in funding a company's assets.

External Financing

Funds raised from outside the business, typically through borrowing or the issuance of equity.

Flotation Cost

The total costs associated with issuing new stocks or bonds, including underwriting, legal, and registration fees.

Debt-Equity Ratio

A calculation of a corporation's financial risk, determined by dividing its overall liabilities by the equity of its shareholders.