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ECO101H1 Lecture Notes - Lecture 10: Monopolistic Competition, Price Ceiling, Allocative Efficiency

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School
UTSG
Department
Economics
Course
ECO101H1
Professor
Jack Carr

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ECO101H1 Full Course Notes
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Document Summary

Firms face downward-sloping demand curves: have some degree of market power (ability to raise price without losing all clients, may try to price discriminate. Monopolist charges each consumer the maximum price the consumer is willing to pay: each customer pays reservation price . Producer surplus increases by consumer surplus + deadweight loss. Online sellers: use software that identifies customer"s level of income (from physical location, past browsing) and preferences (past purchases) to quote a price specific to that individual. Attempt at perfect price discrimination: if user is identified as high income, willing to buy expensive items, then user is quoted a high price, and conversely. The government imposes a price ceiling on a monopolist at the price that would prevail under perfect competition. As a result of this lower price, the profit-maximizing monopolist will increase its level of output to the perfectly competitive level.

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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?

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 

1.

In a perfectly competitive market, in the long run, the marginal cost of a firm becomes equal to its minimum average total cost.

A) True
B) False

2.

Generally, The price a firm charges for its product is equal to its total revenue divided by the number of units sold.

A) True
B) False

3.

In a perfectly competitive firm to maximize profit a firm must make sure that the price it charges does not exceed its marginal cost.

A) True
B) False

4.

Firms in a competitive market can never make economic profits while they may make biasness (accounting) profits.

A) True
B) False

5.

When a perfectly competitive firm is making a positive economic profit its average revenue must be greater than its average total cost.

A) True
B) False

6.

To maximize its profit a firm always produces at the quantity level where it can charge the highest price and earn the greatest revenue; this strategy is consistent with setting is MC equal to price.

A) True
B) False

7.

When a firm in a competitive market is making a positive economic profit its business profit may be positive or negative.

A) True
B) False

8.

In a perfectly competitive market new entries could result in increases in input prices thus making production costs go up.

A) True
B) False

9.

In a perfectly competitive market, in the long run, each firm produces the maximum amount it can produce and charges the lowest price possible. That is why we consider competitive markets efficient.

A) True
B) False

10.

A monopolist always under-produces and charges a price higher than its MC.

A) True
B) False

11.

As the only supplier in the market a monopolist can charge any price it wishes and buyers have no choice but to pay.

A) True
B) False

12.

The marginal revenue is the additional revenue generated by the last unit of labor hired.

A) True
B) False

13.

The price a monopolist charges may or may not be above its average cost but it is always above its MR.

A) True
B) False

14.

When demand curve is a downward-sloping straight line (linear) marginal revenue will be greater than MC at all output leveles.

A) True
B) False

15.

By setting its MR equal to its MC a monopolist determines the output that would maximize its profit.

A) True
B) False

16.

In the long run each competitive firm would produce at the quantity level where its MC is equal to its MR as well as its ATC.

A) True
B) False

17.

A monopoly always makes an economic profit.

A) True
B) False

18.

When a monopoly's ATC is equal to the price it charges it is making normal economic profits.

A) True
B) False

19.

When a monopoly is making a zero economic profit still its MR>ATC.

A) True
B) False

20.

An increase in demand would enable a monopolist to raise its price while reducing its output.

A) True
B) False

21.

The market supply curve in an increasing-cost industry is:

A) a. upward sloping
B) b. downward sloping
C) c. vertical
D) d. horizontal
E) e. none of the above

22.

The total producer surplus is measured by:

A) a. the area between supply and demand curves.
B) b. the difference between the price the consumer is willing and able to pay and the price suppliers wish to charge to maximize their profits.
C) c. the area between the price consumers actually pay and the demand curve.
D) d. the area between the equilibrium market price and the supply curve.
E) e. the consumer willingness to pay as reflected by the equilibrium market price.

23.

. Economists measure economic (social) welfare by the

A) a. net consumer surplus
B) b. sum of consumer and producer surplus
C) c. sum of the net profits made by the industry's competitive firms
D) d. price consumers are willing to pay for one additional unit of a good
E) e. difference between the total consumer surplus and total producer surplus