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ECON 201 Lecture Notes - Lecture 5: Economic Equilibrium, Cable Television, Substitute Good

67 views3 pages
pearreindeer197
13 Jan 2016
School
Northwestern University
Department
Economics
Course
ECON 201
Professor
David Berger

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Document Summary

Buyer"s willingness to pay is greater than actual price. Marginal benefit is not equal to marginal cost. Q low, pass up gains from making more. Q high, waste valuable resources to produce things of low value. A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. Social supply curve includes both private costs to producers plus externality costs to the rest of society. Deadweight loss, market produces less than efficient quantity. Ex: college education, research and development, vaccination, beautiful building. Social benefit includes private benefit plus externality of benefit to the rest of society. Outcome of perfectly competitive market is efficient as long as there are no externalities. Public goods: a commodity or service whose benefits are not depleted by an additional user and where it is very difficult or impossible to exclude people from enjoying these benefits.

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Related Questions

Efficiency in a market is achieved when

a. social planner intervenes and sets the quantity of output after evaluating buyers willingness to pay and sellers' costs

b. the sum of producer surplus and consumer surplus is maximized

c. all firms are producing the good at the same low cost per unit.

d. no buyer is willing to pay more than the equilibrium price for any unit of the good.

13. One of the limitations of Five Forces is that:

a. These tools reduce producer surplus

b. For one firm to increase profit, it takes it from other participants in the industry

c. Does not provide a firm with sustainable competitve advantage

d. both b & c.

15. All these are characterisctics of a monopoly except,

a. There is one seller of the product

b. Has few substitutes

c. Controls a large share of the market

d. Controls a small share of the market

22. Industries with high barriers to entry

a. Pushes profits to normal returns

b. increases the likelihood of firms entering the industry

c. help firms sustain profits

d. increases the number of competitors

14. How does Ebay differ from an economist's view of a perfect competitve market?

a. Ebay has few buyers whereas perfect competitve industry assumes many buyers

b. Ebay has few sellers whereas perfect competitve industry assumes many sellers

c. There is limited information in ebay whereas perfect competitive industry assumes full information for both buyers and sellers

d. There is no difference between these two markets

26. Low cost strategies are usually found in industries where

a. Products are not particularly differentiated

b. Price competion tends to be fierce

c. Both a and b

d. None of the above

Cigarettes - Price Elasticity of demand = - 0.67

A. Cigarettes

B. Alcohol

C. Sodas

D. None of the above

2. The demand for insulin will be ______________ than the demand for a Caribbean cruise in general

a. More elastic

b. More inelastic

c. Less elastic

d. Less inelastic

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?

Ā  Ā 

A. The firm must have market power.
Ā  Ā 

B. The firm must be able to prevent resale and arbitrage.
Ā  Ā 

C. The firm must eventually learn about its customers' demands.
Ā  Ā 

D. The firm's customers must have different demand curves.

Ā 

Question 2: Relative to standard monopoly pricing, first-degree price discrimination results in:

Ā  A.

higher consumer surplus, higher producer surplus, and higher total surplus.
Ā  B.

lower consumer surplus, higher producer surplus, and higher total surplus.
Ā  C.

lower consumer surplus, higher producer surplus, and lower total surplus.
Ā  D.

lower consumer surplus, lower producer surplus, and lower total surplus.

Ā 

Question 3: Relative to perfect competition, first-degree price discrimination results in:

Ā  Ā 

A. higher consumer surplus, higher producer surplus, and higher total surplus.
Ā  Ā 

B. lower consumer surplus, higher producer surplus, and equal total surplus.
Ā  Ā 

C. lower consumer surplus, higher producer surplus, and equal total surplus.
Ā  Ā 

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?

Ā  Ā 

A. market power
Ā  Ā 

B. prevention of resale
Ā  Ā 

C. identification of each customer's demand before purchase
Ā  Ā 

D. customers with different demand curves

Ā 

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

Ā 

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

Ā 

Question 8: If a firm practices third-degree price discrimination, the price charged should be higher in the market where demand is:

Ā  A.

Higher.
Ā  B.

Lower.
Ā  C.

More price elastic.
Ā  D.

Less price is elastic.

Ā 

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:

Ā  Ā 

A. resale is possible.
Ā  Ā 

B. customers have the same demand curves.
Ā  Ā 

C. firms have market power.
Ā  Ā 

D. firms can identify customers' demand before the customers make a purchase.

Ā 

Question 10: For price discrimination via a quantity discount to work:

Ā  Ā 

A. customers who purchase larger quantities must have relatively elastic demand.
Ā  Ā 

B. customers who purchase larger quantities must have relatively inelastic demand.
Ā  Ā 

C. customers who pay a relatively high price must have relatively elastic demand.
Ā  Ā 

D. customers who pay a relatively low price must have relatively inelastic demand.

Ā 

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?

Ā  A.Ā 

60 units at a price of $10 each
Ā  B.

40 units at a price of $10 each
Ā  C.

60 units at a price of $20 each
Ā  D.

40 units at a price of $20 each

Ā 

Question 12: Which of the following conditions do not have to be met in order for indirect price discrimination by versioning to work?

Ā  Ā 

A.The firm's customers must have different demand curves.
Ā  Ā 

B. The marginal costs of producing each version of the product must be the same.
Ā  Ā 

C. The firm must be able to prevent resale.
Ā  Ā 

D. The firm must have market power.

Ā 

Ā 

Willingness to pay (per month)
Ā 

Weight machines

Indoor pool

Abe

$60

$50

Betty

50

125

Chris

25

140

Ā 

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?

Ā  Ā 

A. $60 for the weight room, $140 for the pool, or $175 for both
Ā  Ā 

B. $50 for the weight room, $125 for the pool, or $165 for both
Ā  Ā 

C. $25 for the weight room, $50 for the pool, or $70 for both
Ā  Ā 

D. $60 for the weight room, $130 for the pool, or $175 for both

Ā 

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?

Ā  Ā 

A. Customers must have identical demand curves.
Ā  Ā 

B. The firm does not learn about customer demand until after purchase.
Ā  Ā 

C. Demand for two products must be negatively correlated.
Ā  Ā 

D. The firm must not have market power.

Ā 

Question 15: Which of the following features is not needed for price discrimination using a two-part tariff to work?

Ā  Ā 

A. The firm must have market power.
Ā  Ā 

B. The firm must be able to prevent resale.
Ā  Ā 

C. The firm must learn about its customers' demands before purchases are made.
Ā  Ā 

D. The firm's customers must have different demand curves.

Ā 

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?

Ā  Ā 

A. Consumer surplus would decrease by $10, and producer surplus would increase by $20.
Ā  Ā 

B. Consumer surplus would increase by $10, and producer surplus would increase by $20.
Ā  Ā 

C. Consumer surplus would increase by $20, and producer surplus would increase by $10.
Ā  Ā 

D. Consumer surplus would increase by $20, and producer surplus would increase by $20.

Ā 

Question 17: Relative to standard monopoly pricing, block pricing:

Ā  Ā 

A. decreases consumer surplus, increases producer surplus, and increases total surplus.
Ā  Ā 

B. increases consumer surplus, increases producer surplus, and increases total surplus.
Ā  Ā 

C. decreases consumer surplus, increases producer surplus, and decreases total surplus.
Ā  Ā 

D. decreases consumer surplus, decreases producer surplus, and decreases total surplus.

Ā 

Question 18: Which of the following results in the highest amount of producer surplus?

Ā  A.

bundling
Ā  B.

third-degree price discrimination
Ā  C.

block pricing
Ā  D.

two-part tariffs

Ā 

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

Ā  A.

first-degree price discrimination
Ā  B.

third-degree price discrimination
Ā  C.

block pricing
Ā  D.

two-part tariffs

Ā 

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

Ā  A.

third-degree price discrimination
Ā  B.

block pricing
Ā  C.

first-degree price discrimination
Ā  D.

bundling

Ā