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ECON 101 Lecture Notes - Lecture 19: Price Discrimination, Deadweight Loss, Economic Surplus

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ivoryweasel182
6 Jun 2016
School
U of M
Department
Economics
Course
ECON 101
Professor
Chris Proulx

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ECON 101 Full Course Notes
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ECON 101 Full Course Notes
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Document Summary

Each person pays a price just equal to their marginal benefit: total profit is greater because the producer gets all of the economic surplus. Firms earn a higher profit when they are able to charge different prices for different customers based on what they are willing to pay. Consumer surplus decreases when firms are able to charge different prices for different customers based on what they are willing to pay. Companies usually do not have sufficient information to perfectly price discriminate. Can often determine who is more likely to have price inelastic demand for its product: can charge consumers with more price inelastic demand a higher price than consumers with more elastic demand. Third degree price discrimination a company sets prices for consumers with more inelastic demand at a higher price. Ex: business traveler pays more for plane tickets than vacationer, person who really likes.

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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?

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 

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.

Select the correct answer:

A (legal; natural) monopoly exists when one firm can meet the entire market demand at a lower average total cost than two or more firms could.

A monopoly that is able to sell different units of a good or service for different prices is a (natural-price; price-discriminating) monopoly.

The act of obtaining special treatment by the government to create an economic profit is called (government surplus; rent seeking).

Regulated firms have an incentive to inflate their costs under (rate of return; price cap) regulation.

The U.S. Postal Service has a (natural; legal) monopoly on first class mail delivery.

A (single-price; price discriminating) monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost and then charging the maximum price that consumers are willing to pay for that quantity.

The key idea behind price discrimination is to convert (consumer surplus; producer surplus) into economic profit.