ECON 1201 Lecture Notes - Lecture 14: Price Discrimination, Deadweight Loss, Economic Surplus

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30 Nov 2016

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You need some market power (monopoly) in order to be able to price discriminate. Incentive to do so is to maximize profits. Perfect price discrimination *** we will focus on this. Prices are set at exactly the people"s willingness to pay. Higher prices in markets that are inelastic. Lower prices in markets that are elastic. Total economic surplus = producer surplus (no consumer surplus) More information will be given to calculate all this. Set a price between price-x and price-y. Business (max 3 days, charged more, they have to travel) vs leisure (~ 7 days charged less, they don"t have to travel, and airline prices might influence if the traveller goes or not) What time are you booking the airline ticket. If there are seats available airlines might just want to cover marginal costs and lower prices. Charges students at price the student is willing to pay. Tying - tie one good with another.

Related Questions

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.
		B. The firm must be able to prevent resale and arbitrage.
		C. The firm must eventually learn about its customers' demands.
		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.
	B.	lower consumer surplus, higher producer surplus, and higher total surplus.
	C.	lower consumer surplus, higher producer surplus, and lower total surplus.
	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.
		B. lower consumer surplus, higher producer surplus, and equal total surplus.
		C. lower consumer surplus, higher producer surplus, and equal total surplus.
		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
		B. prevention of resale
		C. identification of each customer's demand before purchase
		D. customers with different demand curves

Question 6: A golf course has frequent players whose demand is Q_f = 260 - 0.4P and infrequent players whose demand is Q_i = 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 Q_B = 300 - P and vacation travelers whose demand is Q_V = 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.
	B.	Lower.
	C.	More price elastic.
	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.
		B. customers have the same demand curves.
		C. firms have market power.
		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.
		B. customers who purchase larger quantities must have relatively inelastic demand.
		C. customers who pay a relatively high price must have relatively elastic demand.
		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 Q_U = 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
	B.	40 units at a price of $10 each
	C.	60 units at a price of $20 each
	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.
		B. The marginal costs of producing each version of the product must be the same.
		C. The firm must be able to prevent resale.
		D. The firm must have market power.

	Willingness to pay (per month)
	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
		B. $50 for the weight room, $125 for the pool, or $165 for both
		C. $25 for the weight room, $50 for the pool, or $70 for both
		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.
		B. The firm does not learn about customer demand until after purchase.
		C. Demand for two products must be negatively correlated.
		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.
		B. The firm must be able to prevent resale.
		C. The firm must learn about its customers' demands before purchases are made.
		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.
		B. Consumer surplus would increase by $10, and producer surplus would increase by $20.
		C. Consumer surplus would increase by $20, and producer surplus would increase by $10.
		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.
		B. increases consumer surplus, increases producer surplus, and increases total surplus.
		C. decreases consumer surplus, increases producer surplus, and decreases total surplus.
		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
	B.	third-degree price discrimination
	C.	block pricing
	D.	two-part tariffs

Question 19: Which of the following results in the highest amount of consumer surplus?

	A.	first-degree price discrimination
	B.	third-degree price discrimination
	C.	block pricing
	D.	two-part tariffs

Question 20: Which of the following results in the highest amount of total surplus?

	A.	third-degree price discrimination
	B.	block pricing
	C.	first-degree price discrimination
	D.	bundling

crimsonbadger400

Question 1

The amount of profit that can be achieved using uniform pricing is __________ the profit that can be achieved from price discrimination because of _______.

Select one:

a. greater than; the cost of trying to determine every single consumer's individual demand (willingness to pay) is prohibitively expensive.

b. less than; uniform pricing is more costly so the ATC and AVC curves are higher than they are under price discrimination.

c. equal to; the TR and TC curves are equivalent under either pricing scheme, so there is no profit advantage to either scheme.

d. less than; total demand includes people who would be willing to pay more than, as well as less than, the uniform market price.

Question 2

A firm selling in two markets is practicing price discrimination:

Select one:

a. when it refuses to sell the good to some group of consumers.

b. anytime it charges different consumers different prices.

c. when it charges the same price to different consumers as long as they differ in their demand for the good.

d. when it is charging different consumers, different prices, and the price difference is not based upon cost differences.

Question 3

To successfully practice price discrimination:

Select one:

a. consumers in two separate markets must have identical demand.

b. the firm must possess market power.

c. it must be easy for consumers in one market to sell to consumers in the other market.

d. the firm must be a pure monopoly.

Question 4

If it could practice first-degree price discrimination, a firm with market power could earn:

Select one:

a. its typical monopoly profit as well as the area which, under uniform pricing, would represent the deadweight loss associated with market power.

b. an area half the size of its monopoly power under uniform pricing.

c. its typical monopoly profit as well as the area which, under uniform pricing, would represent consumer surplus.

d. its typical monopoly profit as well as the area which, under uniform pricing, would represent consumer surplus and the deadweight loss associated with market power.

erinant26

With two-part pricing

Select one:

A. consumers are required to buy two units of a good.

B. the consumer is limited in the number of units that can be purchased.

C. the average price paid varies with the number of units purchased.

D. the consumer puts down a deposit and then pays the rest when she picks up the goods purchased.

Which of the following sellers is most able to perfectly price discriminate?

Select one:

A. the post office

B. a clothing store

C. a grocery supermarket

D. a college or university

3.Consumers are better off with pricing in the following order: 1)________; 2)________; 3)________.

Select one:

A. competitive market; single-price monopoly; perfect price discrimination

B. single-price monopoly; competitive market; perfect price discrimination

C. competitive market; perfect price discrimination; single-price monopoly

D. Unable to determine.

4.Group price discrimination has ________ consumer surplus than under ________.

Select one:

A. more; an elastic demand curve

B. less; single-price monopoly

C. less; perfect competition

D. more; perfect competition

6. If a firm is to capture all consumer surplus with two-part pricing when customers are different

Select one:

A. it must be able to charge different access fees.

B. it must set unit price below marginal cost.

C. it must set unit price above marginal cost.

D. it cannot charge different prices for access fees.

7. All firms can increase profits using price discrimination.

Select one:

A. true, because firms can sell different versions of a product that is just right for an individual consumer

B. true, because market demand curves are downward sloping

C. false, because consumers aren't forced to buy a producer's products

D. false, because some firms are in competitive markets

For a perfect-price-discriminating monopoly, the marginal revenue curve

Select one:

A. varies for each consumer.

B. is the demand curve.

C. is the same as the monopolist's marginal revenue curve.

D. lies below the demand curve.

A good example of perfect price discrimination is

9. Select one:

A. buying a concert ticket on the street corner.

B. selling concert tickets to individuals on the street corner.

C. buying concert tickets at the ticket window.

D. selling concert tickets at the ticket window.

10. Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. The profit-maximizing two-part tariff yields total revenue of

Select one:

A. $32.

B. $40.

C. $24.

D. $16.

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ECON 1201 Lecture Notes - Lecture 14: Price Discrimination, Deadweight Loss, Economic Surplus

ECON 1201 Full Course Notes

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