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ECON 1000 Lecture Notes - Lecture 19: Price Discrimination, Oligopoly, Economic Surplus

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cerisegiraffe538
25 Nov 2015
School
York University
Department
Economics
Course
ECON 1000
Professor
Ardeshir Noordeh

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Document Summary

Econ1000 lecture 19 chapter 13: monopoly (pt. ii) Price discrimination is the practice of selling different units of a good or service for different prices. To be able to price discriminate, a monopoly must: Sell a product that cannot be resold. Price differences that arises from cost differences are not price discrimination. Price discrimination converts consumer surplus into economic profit. Types of discriminations: among units of a good. Quantity discounts are an example (but quantity discounts that reflect lower costs at higher volumes are not price discrimination): among groups of buyers. (advance purchase and other restrictions on airline tickets are an example. ) Perfect price discrimination extracts the entire potential consumer surplus and converts it to economic profit. Economic profit increases above that earned by a single-price monopoly. A single-price monopoly creates inefficiency and price discriminating monopoly captures consumer surplus and converts it into producer surplus and economic profit. And monopoly encourages rent-seeking, which wastes resources.

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Related Questions

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

8.

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.

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 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.
  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 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
  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

 

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.