Deck 10: Pricing With Market Power

Question 1

Resale is difficult when

A)the good is light-weight.
B)the good is expensive.
C)transaction costs are high.
D)transaction costs are negligible.

Answer 1

transaction costs are high.

Question 2

Which of the following is likely hardest to resell?

A)An Apple iPod
B)A discount airline ticket you bought with your frequent flyer miles
C)A used car
D)The free spa treatment you won at a raffle

Answer 2

A discount airline ticket you bought with your frequent flyer miles

Question 3

Why might luxury-goods retailers limit purchases on a good by consumers "due to popular demand"?

A)Because they are worried about running out of supply, leaving some of their customers unhappy that they can't buy the good.
B)Because they are trying to use scarcity as a way to improve the brand image of the good.
C)Because they are limiting the possibility of arbitrage, where consumers buy in a low price area and resell in a higher price area.
D)Because they are worried that they'll run out of the good during the all-important holiday season.

Answer 3

Because they are limiting the possibility of arbitrage, where consumers buy in a low price area and resell in a higher price area.

Question 4

Price discrimination

A)is a type of nonuniform pricing.
B)is a way to legally charge a higher price to people you don't like.
C)forces producers to make a tradeoff between charging low prices or high prices.
D)works because consumers are ignorant about the practice.

Question 5

When firms price discriminate they

A)get additional surplus from consumers who would have bought at the profit-maximizing uniform price but lose sales because of the higher prices.
B)maintain surplus from existing consumers but pick up additional consumers that would not have bought at the profit-maximizing uniform price.
C)get additional surplus from consumers who would have bought at the profit-maximizing uniform price.
D)None of the above.

Question 6

Which of the following conditions must be TRUE so that a firm can profitably price discriminate?

A)The firm must have market power.
B)The firm must be able to identify how its consumers' demand curves differ.
C)The firm must be able to limit or prevent resale.
D)All of the above.

Question 7

Which of the following conditions must be TRUE so that a firm can profitably price discriminate?

A)The firm must be able to identify individual or groups of consumers with different demand curves.
B)The firm must be able to identify how its consumers' demand curves differ.
C)The good cannot be easily resold.
D)All of the above.

Question 8

Firms price discriminate to maximize total revenue.

Question 9

Price discrimination

A)is illegal in the U.S.
B)is a form of pricing where consumers pay different prices for a good.
C)allows firms to set a single intermediate price between consumers' low and high willingness to pay.
D)is when consumers use prices to discriminate between different quality products.

Question 10

Which of the following conditions must be TRUE so that a firm can profitably price discriminate?

A)There are no other firms in the market.
B)The good is a non-durable.
C)The good cannot be easily resold.
D)All of the above.

Question 11

At many municipal golf courses, local residents pay a lower fee to play than other golfers do. One necessary condition for the golf course to be able to successfully price discriminate according to residency is that

A)they can check the identification cards of golfers.
B)local resident golfers and other golfers have the same price elasticity of demand to play at the municipal course.
C)there are many golf courses nearby from which golfers can choose.
D)they require all golfers to rent a cart.

Question 12

When firms price discriminate they turn ________ into ________.

A)producer surplus, revenue
B)consumer surplus, profit
C)revenue, producer surplus
D)producer surplus, consumer surplus

Question 13

Why do firms engage in price discrimination?

A)to decrease cost
B)to increase profits
C)to increase consumer surplus
D)to prohibit the resale of their products

Question 14

Charging a higher price for a motel room to customers with dogs or cats than to customers with no pets is most likely an example of

A)first-degree price discrimination.
B)second-degree price discrimination.
C)third-degree price discrimination.
D)actual cost differences.

Question 15

When firms price discriminate they

A)sell to new consumers who would not have bought at the profit-maximizing uniform price but lose sales to existing consumers because of the higher prices.
B)sell to new consumers that would not have bought at the profit-maximizing uniform price.
C)lose surplus from consumers who would have bought at the profit-maximizing uniform price.
D)None of the above.

Question 16

Without price discrimination, a firm

A)faces a tradeoff when pricing a good that has customers with different willingness to pay.
B)cannot maximize profit.
C)has no market power.
D)does not get any producer surplus, with all of the surplus going to consumers.

Question 17

All firms can increase profits using price discrimination.

A)True, because market demand curves are downward sloping
B)True, because firms can sell different versions of a product that is just right for an individual consumer
C)False, because consumers aren't forced to buy a firm's products
D)False, because some firms are in competitive markets

Question 18

Disneyland price discriminates because

A)everyone loves going to The Happiest Place on Earth, so they'll pay whatever Disneyland wants to charge.
B)children are cheaper to service, so Disneyland can charge lower prices for a children's ticket.
C)only a certain number of people can get into Disneyland at any given time, limiting supply, and the market demand curve is nearly completely inelastic.
D)local residents likely wouldn't go to the park at prices Disneyland can charge for tourists, which would reduce Disneyland's profits.

Question 19

If resale is easy, then

A)price discrimination won't work, because then only low-priced goods are sold.
B)consumers' demand curves will shift to the low-priced good.
C)firms will stop providing the good.
D)price discrimination results in lower consumer surplus.

Question 20

If a firm faces a flat demand curve

A)it cannot engage in price discrimination.
B)it can only engage in two-part tariffs.
C)it can only engage in perfect price discrimination.
D)None of the above.

Question 21

A perfect price discriminating equilibrium maximizes

A)consumer surplus.
B)the associated deadweight loss.
C)the market inefficiency.
D)total welfare.

Question 22

The above figure shows the market for a particular good. If the market is controlled by a perfect-price-discriminating monopoly, the deadweight loss equals

A)C + E.
B)A + B + C.
C)C.
D)zero.

Question 23

Explain why a firm can earn more profit by price discrimination than from setting a uniform price.

Question 24

A consumer's reservation price is the

A)amount she will pay for a hotel or airline reservation.
B)minimum amount she will pay for a good or service.
C)price that maximizes her surplus.
D)maximum amount she will pay for a good or service.

Question 25

The above figure shows the market for a particular good. If the market is controlled by a perfect-price-discriminating monopoly, social welfare equals

A)A.
B)A + B + C.
C)A + B + C + D + E.
D)zero.

Question 26

A difference between a perfectly competitive market equilibrium and a perfect price discrimination equilibrium is that in a competitive market ________, whereas in perfect price discrimination ________.

A)all units are sold where P = MC; only the last unit sold is at P = MC
B)deadweight loss varies depending on the shape of the MC curve; deadweight loss increases
C)consumers are better off; producers lose some sales due to high prices.
D)All of the above.

Question 27

The above figure shows the market for a particular good. If the market is controlled by a perfect-price-discriminating monopoly, producer surplus equals

A)A + B + C + D + E.
B)D + E.
C)E.
D)zero.

Question 28

Consumers are better off with pricing in the following order: 1)________; 2)________; 3)________.

A)competitive market; perfect price discrimination; single-price monopoly
B)competitive market; single-price monopoly; perfect price discrimination
C)single-price monopoly; competitive market; perfect price discrimination
D)Unable to determine.

Question 29

A perfect price discriminating monopoly

A)captures all consumer surplus.
B)creates deadweight loss.
C)increases market inefficiency.
D)decreases total welfare.

Question 30

The above figure shows the market for a particular good. If the market is controlled by a perfect-price-discriminating monopoly, consumer surplus equals

A)A.
B)A + B + C.
C)C.
D)zero.

Question 31

If a market is controlled by a perfect-price-discriminating monopoly, then

A)a deadweight loss is generated.
B)there is no consumer surplus.
C)consumer surplus is the same as under perfect competition.
D)output is less than that of a single-price monopoly.

Question 32

A perfect price discriminator

A)charges each buyer her reservation price.
B)charges different prices to each customer based upon different costs of delivery.
C)generates a deadweight loss to society.
D)charges lower prices to customers who buy greater quantities.

Question 33

For a perfect-price-discriminating monopoly, the marginal revenue curve

A)lies below the demand curve.
B)is the demand curve.
C)varies for each consumer.
D)is the same as the monopolist's marginal revenue curve.

Question 34

Assume you have four tickets to a U2 concert. You decide to sell each of them separately on an auction site such as eBay. Your auctions represent

A)price differentiation.
B)perfect price discrimination amongst those who bid for your tickets.
C)perfect price discrimination amongst all people who buy tickets for the concert.
D)maximization of U2's producer surplus.

Question 35

The deadweight loss generated by a perfect-price-discriminating monopoly

A)equals the deadweight loss of a single-price monopoly.
B)is greater than the deadweight loss of a single-price monopoly.
C)equals zero.
D)equals the sum of all lost consumer surplus.

Question 36

Consumers who put a high value on a service

A)are better off with perfect price discrimination.
B)are better off under a single-price monopoly.
C)are indifferent between perfect price discrimination and a single-price monopoly.
D)incur deadweight loss under either single-price monopoly or perfect price discrimination.

Question 37

A good example of perfect price discrimination is

A)selling concert tickets to individuals on the street corner.
B)buying concert tickets at the ticket window.
C)selling concert tickets at the ticket window.
D)buying a concert ticket on the street corner.

Question 38

Consumers who place a high value on a good are better off with pricing in the following order: 1)________; 2)________; 3)________.

A)competitive market; perfect price discrimination; single-price monopoly
B)competitive market; single-price monopoly; perfect price discrimination
C)single-price monopoly; competitive market; perfect price discrimination
D)Unable to determine.

Question 39

A difference between a perfectly competitive market equilibrium and a perfect price discrimination equilibrium is that in a competitive market ________, whereas in perfect price discrimination ________.

A)all units are sold where p = MC; only the last unit sold is at p = MC
B)consumers receive some surplus; producers take all the surplus
C)consumers are better off; income is redistributed away from consumers to producers
D)All of the above.

Question 40

When a firm has a monopoly in a market and also perfectly price discriminates, total welfare

A)is maximized.
B)is lower than in a perfectly competitive market.
C)is higher than in a perfectly competitive market.
D)is minimized.

Question 41

A monopoly will NOT be able to perfectly price discriminate if

A)obtaining information about each buyer's reservation price is too costly.
B)demand is very elastic.
C)demand is very inelastic.
D)resale is impossible.

Question 42

Price discrimination reveals

A)the inherent greed of Western culture.
B)the inability for regulators to stop unethical practices.
C)that individuals have different willingness to pay.
D)that individuals have the same willingness to pay.

Question 43

What is one reason online prices might be considerably lower than brick-and-mortar prices?

A)Online retailers engage in more price discrimination.
B)Brick-and-mortar retailers engage in more price discrimination.
C)Brick and mortar retailers may have higher costs.
D)Online retailers are more likely to have steep demand curves.

Question 44

Bob is the only carpet installer in a small isolated town. The above figure shows the demand curves of two distinct groups of customers-residential and business. If the marginal cost of installing carpet is a constant $1 per sq yard, what price does Bob charge each segment?

A)$1 in each market
B)$5.50 in the residential market and $8 in the business market
C)$1 in the residential market and $5 in the business market
D)$10 in the residential market and $15 in the business market

Question 45

What is one reason car dealerships might move away from perfect price discrimination to uniform pricing?

A)Perfect price discrimination doesn't work.
B)Transaction costs erode the profit of perfect price discrimination.
C)Consumers are ill-informed and tend to complain too much.
D)Uniform pricing is always more profitable and more fair as well.

Question 46

Explain using welfare measures whether consumers prefer a single price monopoly or a perfectly price discriminating monopoly.

Question 47

Airlines offer lower prices to vacationers than to business travelers because

A)of government regulations requiring them to do so.
B)business travelers do not care at all about costs.
C)business travelers are less flexible in their travel plans than vacationers are.
D)airlines know that business travelers enjoy flying more than vacationers do.

Question 48

Which of the following sellers is most able to perfectly price discriminate?

A)a college or university
B)the post office
C)a clothing store
D)a grocery supermarket

Question 49

Which of the following is an example for group price discrimination?

A)a BMW selling for more than a VW
B)local residents receiving a discount at the local golf course
C)the fact that a razor is cheap and blades are expensive
D)a hotel charging more for a room if the customers bring pets

Question 50

Pizza joints often offer substantially lower prices for pizza picked up at the shop than for delivered pizzas even though they charge a delivery fee. This may be an attempt at

A)perfect price discrimination.
B)group price discrimination.
C)quantity discrimination.
D)second-degree price discrimination.

Question 51

A monopoly will NOT be able to perfectly price discriminate if

A)each consumer does not reveal her reservation price.
B)demand is very elastic.
C)the firm's marginal cost curve is upward sloping.
D)All of the above.

Question 52

The above figure shows the market for a given product. Defining welfare as consumer surplus plus producer surplus, calculate the social welfare associated with perfect competition, single-price monopoly, and a perfect-price-discriminating monopoly. Which market structure(s)maximize social welfare?

Question 53

Individual price discrimination is used when

A)firms are dealing with individual consumers, such as in a line at the coffee shop.
B)firms cannot easily determine consumers' reservation prices.
C)firms are selling to non-local buyers.
D)salespeople are in a difficult industry, such as auto sales.

Question 54

Unlike perfect price discrimination, group price discrimination does NOT require

A)firms to have market power.
B)the ability to distinguish between groups with different reservation prices.
C)the ability to limit or prevent resale.
D)None of the above.

Question 55

Which of the following helps a monopoly perfectly price discriminate?

A)Product demand by each consumer
B)The product is perishable
C)The product is personalizable
D)All of the above.

Question 56

A firm practicing group price discrimination that has constant marginal cost will

A)maximize total profit by maximizing profit for each group separately.
B)will charge the same price to all groups.
C)will act like a monopoly and treat all groups the same.
D)sets p = MC.

Question 57

If people posing as a vacationers were able to purchase large numbers of airline tickets from the airlines and later resell them to business travelers

A)group price discrimination on the part of airlines would no longer be profitable.
B)group price discrimination on the part of airlines would no longer be profit maximizing.
C)the airlines would respond by raising further the price charged to business flyers.
D)the people reselling would not earn any economic profit.

Question 58

Why doesn't a firm price discriminate based on income levels?

A)It would be nearly impossible to conveniently confirm any individual's income level.
B)It is illegal to ask someone their income levels.
C)It is immoral to price discriminate based on income levels.
D)They do: It is common practice for firms to price discriminate based on income.

Question 59

A firm engaging in group price discrimination

A)divides customers into groups and then charges each customer within each group a different price, similar to perfect price discrimination.
B)divides customers into groups and then charges each group a different price.
C)bundles products into groups and sells the groups at different prices.
D)finds the average reservation price for a group of customers and sell its goods at that price.

Question 60

A firm practicing group price discrimination across two countries sets MR = common MC and therefore

A)price will be the same in both countries.
B)price will be twice MR.
C)profit will be the same in both countries.
D)price will likely be different in each country.

Question 61

Suppose group price discrimination is possible but a firm chooses not to and sets the same price in each market. As a result

A)price elasticity of demand is the same in each market.
B)the price-inelastic market will buy zero units.
C)marginal revenue in the more price-elastic market exceeds marginal revenue in the less price-elastic market.
D)the deadweight loss is less than if the firm price discriminated.

Question 62

Bob is the only carpet installer in a small isolated town. The above figure shows the demand curves of two distinct groups of customers-residential and business. Bob is likely to price discriminate because

A)elasticities differ across markets.
B)the installation of carpets cannot be resold.
C)Bob can probably identify which consumers belong to which segment.
D)All of the above.

Question 63

A primary difference between rebates and coupons?

A)Coupons allow individuals to sort themselves into the high-elasticity group after the sale.
B)Neither coupons or rebates are redeemed in high numbers.
C)Rebates allow individuals to sort themselves into the high-elasticity group after the sale.
D)Coupons are legal and rebates are illegal.

Question 64

If the price of business broadband is greater than that of residential broadband, all else equal

A)business has greater price elasticity than residential.
B)residential has greater price elasticity than business.
C)both have inelastic demand curves.
D)generally speaking, broadband is equally priced.

Question 65

If the demand for air travel were to change so that business travelers and vacationers have the same price elasticity of demand for air travel

A)airlines would charge the same price to each type of flyer.
B)airlines would still charge business flyers a higher fare since the traveler's employer pays anyway.
C)airlines would be driven out of business.
D)airlines would counter by charging vacationers a higher fare.

Question 66

Suppose a profit-maximizing monopoly is able to employ group price discrimination. The marginal cost of providing the good is constant and the same in both markets. The marginal revenue the firm earns on the last unit sold in the market with the lower price will be

A)greater than the marginal revenue the firm earns on the last unit sold in the market with the higher price.
B)less than the marginal revenue the firm earns on the last unit sold in the market with the higher price.
C)equal to the marginal revenue the firm earns on the last unit sold in the market with the higher price.
D)greater than the marginal cost of the last unit.

Question 67

Coupons represent a form of price discrimination because they offer a low-cost way for firms to

A)identify customers with apparently more elastic demand and offer them a lower price.
B)retain loyal customers who are not price sensitive.
C)offer discounts to consumers who buy larger quantities.
D)perfectly price discriminate.

Question 68

Reverse auctions

A)require customers to fly at unpopular times.
B)allow firms to identify customers that have very elastic demand curves.
C)Both A and B.
D)are used to keep high paying customers from spending too little money.

Question 69

Relative to a single-price monopoly, the effect of group price discrimination on social welfare is

A)beneficial.
B)detrimental.
C)neutral.
D)ambiguous.

Question 70

Textbook publishers often sell the same or essentially identical books in different countries for different prices. Is this an effective form of group price discrimination?

A)Yes, because the first sale doctrine does not apply to overseas sales
B)No, because poor foreign students can't afford the books
C)No, because people are allowed to buy the books in one country and sell them in another, making money on the arbitrage opportunity
D)Yes, because the textbooks are actually different since they have a different cover and an "international" label on them

Question 71

A firm that practices group price discrimination will set the lower price in the market that has the most elastic demand.

Question 72

Firms use various methods for identifying customers such as ________ and ________.

A)observable characteristics such as willingness to wait in long lines; their actions such as whether or not they live a long time
B)observable characteristics such as age; their actions such as willingness to wait in long lines
C)the color of their hair; whether or not they roll their eyes at high prices
D)None of the above.

Question 73

If a firm offers a senior citizen discount

A)the firm expects the average senior citizen to have a lower price elasticity of demand.
B)the firm expects the average senior citizen to have a higher price elasticity of demand.
C)senior citizens may be offended.
D)it may be prosecuted for discrimination.

Question 74

If two identifiable markets differ with respect to their price elasticity of demand and resale is impossible, a firm with market power will

A)set a higher price in the market that is more price elastic.
B)set a lower price in the market that is more price elastic.
C)set price so as to equate the elasticity of demand across markets.
D)set price equal to marginal cost in both markets.

Question 75

Group price discrimination results in social welfare that ________ under a single-price monopoly.

A)is greater than
B)is lower than
C)is the same as
D)might be greater or might be lower than

Question 76

Firms are better off using rebates rather than just lowering the price of a good because

A)people view the firm in a positive light because now poorer people will be able to afford their good.
B)customers overestimate the value of the rebate and so buy more of the good, making profits higher than if they just lowered the price.
C)only those who place a low value on their time or are price sensitive actually redeem the rebate, making profits higher than if they just lowered the price.
D)lowering the price is inefficient and creates additional deadweight loss.

Question 77

Group price discrimination has ________ consumer surplus than under ________.

A)more; perfect competition
B)less; perfect competition
C)more; an elastic demand curve
D)less; single-price monopoly

Question 78

The case on textbook publishers shows that

A)if imports are allowed, price discrimination is difficult or impossible.
B)if imports are allowed, price discrimination is possible.
C)publishers have a difficult time identifying the groups involved.
D)publishers should not migrate to electronic textbooks.

Question 79

A group price discriminator sells its product in Florida for three times the price it sets in New York. Assuming the firm faces the same constant marginal cost in each market and the price elasticity of demand in New York is -2.0, the demand in Florida

A)has an elasticity of -6.0.
B)is more price elastic than the demand in New York.
C)has an elasticity of -1.2.
D)has an elasticity of -0.67.

Question 80

If two identifiable markets differ with respect to their price elasticity of demand and resale is impossible, a firm with market power will

A)set a higher price in the market that is more price inelastic.
B)set a lower price in the market that is more price inelastic.
C)set price so as to equate the elasticity of demand across markets.
D)set price equal to marginal cost in both markets.