ECON 1B03 Chapter 1: Lecture 3

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ECON 1B03 Full Course Notes

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Third degree price discrimination: (ordinary price discrimination) firms can distinguish between different markets for its good. And then charge different prices in each market. Much easier to do in practice than perfect price discrimination and we see it all the time. Examples of price discrimination movie tickets: bus fares, discount coupons, financial aid, quantity discounts, ladies" nights at bars. If a firm segments it"s market, it will charge a higher price in the market segment with more inelastic demand. Consumers are less flexible and less able to shop around and look for alternatives. Imperfect competition: refers to market structures to those market structures that fall between perfect competition and pure monopoly. Product differentiation: each firms product is at least slightly different from another firms. So each firm faces a downward sloping demand curve, like a monopolist. free entry and exit (no barriers to entry) firms are price setters to some degree.

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Consider the following market demand schedule and total costs for a monopoly.

Q	P	TR	TC	MR	MC	Profit
0	45		4
1	40		9
2	35		19
3	30		39
4	25		61
5	20		91
6	15		130
7	10		172

a) Fill in the blanks.

b) How is the relationship between price and MR different between monopolistic and perfectly competitive markets?

c) Would the demand curve facing a monopolistic competitive market be more or less elastic than the demand curve facing a monopolist, why? Do firms in a monopolistically competitive market make long-run economic profits, why or why not?

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Question 1 (1 point) Question 1 Unsaved In a competitive market the equilibrium price is determined: Question 1 options: at the intersection of the firmâs demand and the market supply curves. at the intersection of the market demand and supply curves. at the intersection of the firmâs demand and marginal cost curves. so as to cover the costs of the potential firms. so as to cover the costs of the firms currently in the industry. Save Question 2 (1 point) Question 2 Unsaved If the perfectly competitive market demand for gym shoes is given by QD = 100 â P and the market supply is given by QS = 10 + 2P, then the equilibrium price and quantity will be: Question 2 options: P = 50 and Q = 50. P = 40 and Q = 90. P = 40 and Q = 60. P = 30 and Q = 70. P = 25 and Q = 75. Save Question 3 (1 point) Question 3 Unsaved A constant-cost industry is one in which: Question 3 options: input prices do not change over time. technology does not change over time. input prices and technology do not change as firms enter or exit the industry. input prices and technology do not change over time. firms have reached the maturity phase of the industryâs life cycle. Save Question 4 (1 point) Question 4 Unsaved At the profit-maximizing level of output for the monopolist: Question 4 options: total revenue is equal to total cost. total costs are minimized. total revenue is maximized. marginal revenue is equal to marginal cost. average revenue is equal to average cost. Save Question 5 (1 point) Question 5 Unsaved Craigâs Red Sea Restaurant is the only restaurant in Columbia, South Carolina, that sells Ethiopian food. The demand for Ethiopian food is given by Q = 25 â P. Craigâs costs are given by TC = 25 + Q + 5Q2. Its maximum monopoly profit is: Question 5 options: â$1. $21. $22. $24. $26. Save Question 6 (1 point) Question 6 Unsaved So long as price exceeds average variable cost, in the model of monopolistic competition, a firm maximizes profits by producing where: Question 6 options: the difference between marginal revenue and marginal cost is maximized. marginal cost equals marginal revenue. marginal revenue equals price. the difference between price and marginal cost is maximized. price equals marginal cost. Save Question 7 (1 point) Question 7 Unsaved If a firm in a monopolistically competitive industry is profit maximizing, it should choose its level of advertising such that the marginal revenue of an additional dollar of advertising: Question 7 options: is equal to the elasticity of its demand curve minus 1. is exactly $1. increases revenues by $1. is equal to 1 plus the elasticity of its demand curve. is equal to the elasticity of its demand curve. Save Question 8 (1 point) Question 8 Unsaved Firms advertise in order to: Question 8 options: build brand loyalty. appeal to the price-sensitive consumers. increase the demand elasticities of their loyal customers. shift the market supply curve to the left. shift the market demand curve to the left. Save Question 9 (1 point) Question 9 Unsaved Firms offer promotions in order to: Question 9 options: build brand loyalty. appeal to the price-sensitive consumers. increase the demand elasticities of their loyal customers. shift the market supply curve to the left. shift the market demand curve to the left. Save Question 10 (1 point) Question 10 Unsaved If the demand increases for the product of a decreasing-cost industry: Question 10 options: short-run price goes up, but long-run price falls. long-run output goes up, but long-run price may go up or down. short-run output goes up, but long-run output may go up or down. long-run output goes up, but short-run price remains constant. long-run price goes up, but short-run price may go up or down. Save Question 11 (1 point) Question 11 Unsaved If the demand increases for the product of an increasing-cost industry: Question 11 options: short-run price goes up, but long-run price falls. long-run output goes up, but long-run price may go up or down. short-run output goes up, but long-run output may go up or down. long-run output goes up, but short-run price remains constant. short-run price goes up, and long-run price goes up. Save Question 12 (1 point) Question 12 Unsaved When Pan United Airlines gives a $400 fare discount to persons with student IDs, they are practicing: Question 12 options: first-degree price discrimination. second-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 13 (1 point) Question 13 Unsaved When a utility charges homeowners less than big industrial users, it is practicing: Question 13 options: first-degree price discrimination. fourth-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 14 (1 point) Question 14 Unsaved Cereal manufacturersâ use of coupons can be partially explained by: Question 14 options: first-degree price discrimination. second-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 15 (1 point) Question 15 Unsaved If a firm supplies separable markets with price elasticities h1 and h2, it should set prices P1 and P2 so that: Question 15 options: P1h1 = P2h2. P1 /h1 = P2 /h2. P1(1 + 1/h1) = P2 (1 + 1/h2). P1/(1 â 1 /h1) = P2 / (1 â 1/h2). P1 = 1 â 1/h1 and P2 = 1 â 1/h2. Save Question 16 (1 point) Question 16 Unsaved If a firm supplies separable markets with price elasticities h1 = â3 and h2 = â2, it should set prices P1 and P2 so that: Question 16 options: P1 = P2. 3P1 = 2P2. 2P1 = 3P2. 2/3P1 = 1/2P2. 2P1 = 2/3P2. Save Question 17 (1 point) Question 17 Unsaved Women are often charged more than men for haircuts performed by the same haircutter. This is not considered price discrimination because: Question 17 options: women receive more consumer surplus from haircuts than men receive. haircutters claim to spend more time on womenâs hair, raising the cost of the haircut to the firm. firms make up the extra cost to consumers by giving women free samples of products. men receive more consumer surplus from haircuts than women receive. women have a lower price elasticity of demand for haircuts. Save Question 18 (1 point) Question 18 Unsaved If price is above the average variable cost but below the average total cost of a representative firm in a competitive industry: Question 18 options: there will be entry to the industry over time. there will be exit from the industry over time. the firms in the industry are just earning a normal rate of return. the firms in the industry are earning a supranormal rate of return. the industry is in long-run equilibrium. Save Question 19 (1 point) Question 19 Unsaved Joeâs T-shirts has costs given by TC = $100 + 3Q, where Q is the number of shirts. If Joe charges $5 each, the percentage markup for 100 shirts is: Question 19 options: 20%. 25%. 33%. 50%. 67%. Save Question 20 (1 point) Question 20 Unsaved In the model of monopolistic competition, there can be short-run: Question 20 options: losses or profits, but there must be profits in long-run equilibrium. profits, but there must be losses in long-run equilibrium. losses or profits, but there must be losses in long-run equilibrium. losses or profits, but there must be neither profits nor losses in long-run equilibrium. losses, but there must be profits in long-run equilibrium.

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 1B03 Chapter 1: Lecture 3

ECON 1B03 Full Course Notes

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