Economics 2129A/B Lecture Notes - Lecture 13: Loss Leader, Budget Constraint, Price Discrimination
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Considering the demand side of a market for a good, it is reasonable to expect that:
i. demand curves for a given good are identical between consumers
ii. demand curves for a given good differ between consumers
iii. an individual has identical demand curves for different goods
iv. an individual has different demand curves for different goods
i |
ii |
iii |
iv |
i and iii |
ii and iv |
Suppose the market demand curve for a good is represented by the linear equation Q = 60 - 0.75P. If the market price were to increase from P = $20 to P = $40, then holding all other factors constant:
the quantity demanded would decrease by 10 units and total expenditures on the good would decrease by $400 |
the quantity demanded would decrease by 15 units and total expenditures on the good would increase by $300 |
the quantity demanded would decrease by 30 units and total expenditures on the good would increase by $1200 |
the quantity demanded would increase by 20 units and total expenditures on the good would decrease by $800 |
the quantity demanded would increase by 10 units and total expenditures on the good would increase by $100 |
the quantity demanded would increase by 25 units and total expenditures on the good would increase by $1000 |
A perfectly competitive firms supply curve for a good identifies the:
i. minimum quantity supplied at each price, holding all other factors constant
ii. firms minimum willingness to accept for each incremental unit of the good (e.g., the first unit, second unit, etc.), holding all other factors constant
iii. maximum quantity supplied at each price, holding all other factors constant
iv. firms maximum willingness to accept for each incremental unit of the good (e.g., the first unit, second unit, etc.), holding all other factors constant
i and ii |
i and iv |
ii and iii |
iii and iv |
Considering the supply side of a market for a good, if a firms supply curve were vertical, then:
the law of supply holds, and quantity supplied is completely insensitive to changes in price |
the law of supply holds, and quantity supplied is highly sensitive to changes in price |
the law of supply fails to hold, and quantity supplied is completely insensitive to changes in price |
the law of supply fails to hold, and quantity supplied is highly sensitive to changes in price |
none of the above |
The determinants of supply are:
i. factors other than price that will affect the quantity of a good or service a firm is willing and able to purchase
ii. factors that affect a producers maximum willingness-to-accept to produce various quantities of a good
iii. factors that affect a producers minimum willingness-to-accept to produce various quantities of a good
i |
ii |
iii |
i and ii |
i and iii |
The market supply curve for a good is derived by:
i. horizontally summing the supply curves of the individual firms in the market
ii. vertically summing the supply curves of the individual firms in the market
iii. summing the quantity supplied by each firm at a given price and then repeating this over the range of prices
i |
ii |
iii |
i and ii |
i and iii |
If the level of technology used in the production of a good improves, and assuming the quality of the good does not change, then:
i. more output may be obtained with a given amount of inputs compared to before the technological improvement
ii. a given amount of output may be obtained with fewer inputs compared to before the technological improvement
iii. the firm will increase its use of other inputs, such as the number of workers it employs
iv. market demand for the good will increase
i |
ii |
iii |
iv |
i and ii |
i, ii, and iii |
i, ii, and iv |
i, ii, iii, and iv |
Considering the market for gasoline, which of the following would result in an increase in market supply?
i. a decrease in the price of gasoline
ii. an improvement in oil extraction and refining technologies
iii. an increase in the wage rates paid to gasoline refinery workers
iv. a decrease in the price of crude oil, a key input used to produce gasoline
v. the imposition of a federal gasoline tax aimed a decreasing the emission of greenhouse gases
i |
ii |
iii |
iv |
v |
ii and iv |
i, ii, and iv |
i, ii, iii, and iv |
i, ii, iii, iv and v |
Suppose a market has two identical sellers. If each sellers supply function is given by P = 20 + Q, then the market supply function is:
P = 20 + 0.5Q |
P = 20 + 2Q |
P = 40 + Q |
P = 40 + 2Q |
From the market framework discussed in class and the readings, it may be concluded that in order for a good to be exchanged between a seller and a buyer, it must be that:
buyer maximum willingness-to-pay is greater than seller minimum willingness-to-accept |
buyer maximum willingness-to-pay is greater than or equal to seller minimum willingness-to-accept |
buyer minimum willingness-to-pay is greater than or equal to seller maximum willingness-to-accept |
buyer minimum willingness-to-pay is greater than seller maximum willingness-to-accept |
If the market demand function is given by P = 80 - 0.3Q and the market supply is given by P = 20 + 0.1Q, then the equilibrium price and quantity are:
P = $35 and Q = 150 |
P = $65 and Q = 150 |
P = $26 and Q = 60 |
P = $28 and Q = 80 |
Of concern are the affects of sustained summer droughts on the domestic supply of wheat. Noting that wheat is a primary ingredient in the production of bread and that potatoes are a substitute for bread, if the supply of wheat declines then it is reasonable to expect:
the price of wheat to fall, the supply of bread to increase, and the demand for potatoes to increase |
the price of wheat to fall, the supply of bread to increase, and the demand for potatoes to decrease |
the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to decrease |
the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to increase |
the price of wheat to rise, the supply of bread to increase, and the demand for potatoes to increase |
the price of wheat to rise, the supply of bread to increase, and the demand for potatoes to decrease |
Suppose a perfectly competitive market is initially in equilibrium. If market demand and supply decrease simultaneously, then equilibrium:
price will rise, but the equilibrium quantity may either rise, fall, or remain unchanged |
quantity will rise, but the equilibrium price may either rise, fall, or remain unchanged |
price will fall, but the equilibrium quantity may either rise, fall, or remain unchanged |
quantity will fall, but the equilibrium price may either rise, fall, or remain unchanged |
Considering the demand side of a market for a good, the consumer surplus derived by an individual:
i. is the difference between the maximum amount the consumer is willing to pay on each unit and the minimum prices that producers are willing to accept
ii. is the difference between the minimum amount the consumer is willing to pay on each unit and the price he/she
actually pays
iii. is the difference between the maximum amount the consumer is willing to pay on each unit and the price he/she actually pays
iv. will decrease if price increases
i |
ii |
iii |
i and iv |
ii and iv |
iii and iv |
Suppose the market demand for a good is described by the equation P = 120 - 2Q. If a change in market supply results in price decreasing from P0 = $80 to P1 = $70, then the resulting change in consumer surplus is:
$225 |
$400 |
$575 |
$625 |
$750 |
PLEASE ANSWER EACH QUESTION WITH A, B, C, and D. NOT ANSWERING ALL QUESTIONS OR INCORRECT ANSWERS WILL RESULT IN A THUMBS DOWN.
Question 1: Which of the following is not needed for price discrimination to be possible?
A. The firm must have market power. |
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B. The firm must be able to prevent resale and arbitrage. |
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C. The firm must eventually learn about its customers' demands. |
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D. The firm's customers must have different demand curves. |
Question 2: Relative to standard monopoly pricing, first-degree price discrimination results in:
A. |
higher consumer surplus, higher producer surplus, and higher total surplus. |
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B. |
lower consumer surplus, higher producer surplus, and higher total surplus. |
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C. |
lower consumer surplus, higher producer surplus, and lower total surplus. |
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D. |
lower consumer surplus, lower producer surplus, and lower total surplus. |
Question 3: Relative to perfect competition, first-degree price discrimination results in:
A. higher consumer surplus, higher producer surplus, and higher total surplus. |
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B. lower consumer surplus, higher producer surplus, and equal total surplus. |
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C. lower consumer surplus, higher producer surplus, and equal total surplus. |
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D. lower consumer surplus, lower producer surplus, and lower total surplus. |
Question 4: If market demand is P = 100 - Q and the firm has a constant marginal cost of 20, then with first-degree price discrimination, the firm's producer surplus will be:
A. |
$800. |
B. |
$1,600. |
C. |
$2,400. |
D. |
$3,200. |
Question 5: For third-degree discrimination to be possible, which of the following features is not required?
A. market power |
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B. prevention of resale |
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C. identification of each customer's demand before purchase |
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D. customers with different demand curves |
Question 6: A golf course has frequent players whose demand is Qf = 260 - 0.4P and infrequent players whose demand is Qi = 10 - 0.1P. The combined market demand is Q = 34 - 0.4P. The marginal cost and average total cost of providing a round of golf are $20. How much higher will the profit be if the golf course uses third-degree price discrimination instead of charging all golfers the same price?
A. |
$0 |
B. |
$7.50 |
C. |
$10 |
D. |
$110 |
Question 7: An airline sells seats on its flights to business travelers whose demand is QB = 300 - P and vacation travelers whose demand is QV = 150 - 0.5P. The combined market demand is Q = 450 - 1.5P. The marginal cost and average total cost of providing a seat on a flight are $200. How much higher will profit be if the airline uses third-degree price discrimination instead of charging all travelers the same price?
A. |
$0 |
B. |
$250 |
C. |
$400 |
D. |
$1,000 |
Question 8: If a firm practices third-degree price discrimination, the price charged should be higher in the market where demand is:
A. |
Higher. |
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B. |
Lower. |
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C. |
More price elastic. |
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D. |
Less price is elastic. |
Question 9: The key difference between markets where third-degree price discrimination is possible and markets where second-degree price discrimination is possible is whether:
A. resale is possible. |
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B. customers have the same demand curves. |
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C. firms have market power. |
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D. firms can identify customers' demand before the customers make a purchase. |
Question 10: For price discrimination via a quantity discount to work:
A. customers who purchase larger quantities must have relatively elastic demand. |
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B. customers who purchase larger quantities must have relatively inelastic demand. |
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C. customers who pay a relatively high price must have relatively elastic demand. |
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D. customers who pay a relatively low price must have relatively inelastic demand. |
Question 11: A firm wants to offer a quantity discount to price-discriminate between buyers who are relatively uninterested in the product and buyers who are obsessively interested in it. The uninterested customers have a demand of QU = 30 - 0.5P. The package offered to them contains 10 units of the good at a price of $40 each. Which of the following packages designed for obsessed customers is incentive compatible?
A. |
60 units at a price of $10 each |
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B. |
40 units at a price of $10 each |
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C. |
60 units at a price of $20 each |
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D. |
40 units at a price of $20 each |
Question 12: Which of the following conditions do not have to be met in order for indirect price discrimination by versioning to work?
A.The firm's customers must have different demand curves. |
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B. The marginal costs of producing each version of the product must be the same. |
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C. The firm must be able to prevent resale. |
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D. The firm must have market power. |
Willingness to pay (per month) |
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Weight machines |
Indoor pool |
|
Abe |
$60 |
$50 |
Betty |
50 |
125 |
Chris |
25 |
140 |
QUESTION 13
This table shows the willingness to pay off the only three potential customers of a firm that runs both a weight room and an indoor swimming pool. The weight room and pool each have a constant marginal cost of $20 per month. Which of the following pricing strategies yields the highest producer surplus?
A. $60 for the weight room, $140 for the pool, or $175 for both |
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B. $50 for the weight room, $125 for the pool, or $165 for both |
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C. $25 for the weight room, $50 for the pool, or $70 for both |
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D. $60 for the weight room, $130 for the pool, or $175 for both |
Question 14: Which of the following features is needed to make bundling a possible price discrimination strategy but is not required for any other price discrimination strategies?
A. Customers must have identical demand curves. |
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B. The firm does not learn about customer demand until after purchase. |
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C. Demand for two products must be negatively correlated. |
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D. The firm must not have market power. |
Question 15: Which of the following features is not needed for price discrimination using a two-part tariff to work?
A. The firm must have market power. |
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B. The firm must be able to prevent resale. |
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C. The firm must learn about its customers' demands before purchases are made. |
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D. The firm's customers must have different demand curves. |
Question 16: A firm faces a market demand curve P = 50 - 5Q. It has a constant marginal cost of $10. Relative to standard monopoly pricing, how would a block pricing strategy where the first four units can be purchased for a price of $30 each, but two more units can be purchased for an additional $20 each change consumer surplus and producer surplus?
A. Consumer surplus would decrease by $10, and producer surplus would increase by $20. |
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B. Consumer surplus would increase by $10, and producer surplus would increase by $20. |
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C. Consumer surplus would increase by $20, and producer surplus would increase by $10. |
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D. Consumer surplus would increase by $20, and producer surplus would increase by $20. |
Question 17: Relative to standard monopoly pricing, block pricing:
A. decreases consumer surplus, increases producer surplus, and increases total surplus. |
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B. increases consumer surplus, increases producer surplus, and increases total surplus. |
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C. decreases consumer surplus, increases producer surplus, and decreases total surplus. |
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D. decreases consumer surplus, decreases producer surplus, and decreases total surplus. |
Question 18: Which of the following results in the highest amount of producer surplus?
A. |
bundling |
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B. |
third-degree price discrimination |
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C. |
block pricing |
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D. |
two-part tariffs |
Question 19: Which of the following results in the highest amount of consumer surplus?
A. |
first-degree price discrimination |
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B. |
third-degree price discrimination |
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C. |
block pricing |
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D. |
two-part tariffs |
Question 20: Which of the following results in the highest amount of total surplus?
A. |
third-degree price discrimination |
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B. |
block pricing |
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C. |
first-degree price discrimination |
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D. |
bundling |