Deck 12: Capturing Surplus

Question 1

A monopolist faces inverse demand $P = 400 - 4 Q ^ { d }$ and has constant marginal cost $M C = 80$ . If this monopolist engages in first-degree price discrimination, total output will equal

A) 20 units
B) 40 units
C) 60 units
D) 80 units

Answer 1

80 units

Question 2

Price discrimination

A) has been illegal in the United States since 1963.
B) is the practice of charging consumers different prices for the same good or service.
C) is customarily observed when the sales representative in a store charges each customer what he/she thinks is the highest price the customer will bear.
D) is most common in perfectly competitive industries.

Answer 2

B

Question 3

When a movie theater charges a lower ticket price for senior citizens and/or students, the movie theater is engaging in

A) price gouging.
B) third-degree price discrimination.
C) first-degree price discrimination.
D) second-degree price discrimination.

Answer 3

B

Question 4

With second-degree price discrimination

A) the firm tries to price each unit at the consumer's reservation price.
B) the firm offers consumers a quantity discount.
C) the firm charges different consumer groups or market segments a different price.
D) a buyer can only purchase one product by agreeing to purchase some other product as well.

Question 5

A monopolist faces inverse demand $P = 400 - 4 Q ^ { d }$ and has constant marginal cost $M C = 80$ . If this monopolist engages in first-degree price discrimination, producer surplus will be

A) 0
B) 1,600
C) 3,200
D) 12,800

Question 6

When a firm engages in __________, every unit of output is sold at the same price; when a firm engages in ___________, different consumers are charged different prices for the same good.

A) arbitrage; uniform pricing
B) price discrimination; uniform pricing
C) uniform pricing; price discrimination
D) surplus capturing; price discrimination

Question 7

Some of the theme parks in Orlando, Florida offer lower entry rates or annual passes for Florida residents. Although this is not illegal, it is an example of

A) price gouging.
B) first-degree price discrimination.
C) second-degree price discrimination.
D) third-degree price discrimination.

Question 8

Which of the following statements regarding a monopoly's first-degree price discrimination is correct?

A) With first-degree price discrimination, consumer surplus is small, yet still greater than zero.
B) With first-degree price discrimination, producer surplus is lower than with uniform pricing.
C) With first-degree price discrimination, deadweight loss is large.
D) With first-degree price discrimination, total surplus is greater than when the monopoly charges a uniform price.

Question 9

A monopolist faces inverse demand $P = 400 - 4 Q ^ { d }$ and has constant marginal cost $M C = 80$ . If this monopolist changes from a policy of uniform pricing to a policy of first-degree price discrimination, deadweight loss will decrease by:

A) 0
B) 1,600
C) 3,200
D) 12,800

Question 10

An example of second-degree price discrimination is

A) when you get an "early bird" discount by eating at a restaurant before 6:00 pm.
B) when you sell something illegally to an individual through the mail.
C) when you segment the market and charge individuals of different ages different prices for the same product or service.
D) when you order 12 of something online and you pay less per unit than if you had bought only one.

Question 11

Suppose that a firm faces a demand curve for its product of $P = 10 - Q ^ { d }$ . The corresponding marginal revenue curve is $M R = 10 - 2 Q$ . The firm has a constant marginal cost of $4 per unit. If the firm engages in uniform pricing, what price will the firm charge?

A) $7.
B) $5.
C) $4.
D) $3.

Question 12

A monopolist faces demand $P = 400 - 4 Q ^ { d }$ and has constant marginal cost $M C = 80$ . If this monopolist engages in first-degree price discrimination, consumer surplus will be

A) 0
B) 1,600
C) 3,200
D) 12,800

Question 13

An example of first-degree price discrimination would occur

A) if a sales agent illegally sold a commodity to a federal agent above the competitive market price.
B) when you sell something illegally to an individual through the mail.
C) if a car salesman could accurately guess the maximum amount each customer would be willing to pay for a vehicle and charge him/her that price.
D) when you order 12 of something online and you pay less per unit than if you had bought only one.

Question 14

The conditions for capturing more surplus from price discrimination include

A) an ability to determine which groups of people have the greatest wealth.
B) an ability to differentiate different market segments meaning that some groups of people are willing to pay more for a product than others.
C) an ability to prevent presales of products.
D) A perfectly competitive industry structure.

Question 15

Suppose that a firm faces a demand curve for its product of $P = 10 - Q ^ { d }$ . The corresponding marginal revenue curve is $M R = 10 - 2 Q$ . The firm has a constant marginal cost of $4 per unit. If the firm engages in first-degree price discrimination, how much producer surplus will it capture?

A) $21.
B) $18.
C) $9.
D) $4.50

Question 16

What is the difference between uniform pricing and price discrimination?

A) Uniform pricing and price discrimination are the same.
B) With uniform pricing firms charge different prices for the same good or service and with price discrimination firms charge the same price for the same good or service.
C) With uniform pricing firms charge the same price for the same good or service and with price discrimination the firms charge different prices for the same good or service.
D) The uniform price is always higher than the discriminated price.

Question 17

Which of the following statements regarding price discrimination is true?

A) In order to capture more surplus, the firm must have some market power.
B) Third-degree price discrimination is illegal.
C) Second-degree price discrimination refers to pricing differently for different market segments.
D) First-degree price discrimination is relatively easy to implement.

Question 18

Which of the following statements regarding price discrimination is false?

A) In order to capture more surplus, the firm must have some market power.
B) The firm must have some information about the different amounts people will pay for the product.
C) The firm must be able to prevent resale.
D) The firm must be able accurately forecast total sales.

Question 19

With ___________________, the firm tries to price each unit at the consumer's reservation price while with _____________________, the firm charges different uniform prices to different consumer groups or market segments.

A) first-degree price discrimination; third-degree price discrimination.
B) first-degree price discrimination; second-degree price discrimination.
C) third-degree price discrimination; first-degree price discrimination.
D) second-degree price discrimination; first-degree price discrimination.

Question 20

Which of the following is not necessary for a firm to be able to engage in price discrimination?

A) A firm must have some market power.
B) A firm must have some information about its consumers' willingness to pay.
C) A firm must be a price-taker.
D) A firm must be able to prevent arbitrage.

Question 21

Which of the following statements is not correct regarding a "damaged goods strategy"?

A) A damaged good strategy is an example of "versioning".
B) A damaged good strategy can be an example of third-degree price discrimination.
C) A damaged good strategy can be an example of "building fences".
D) A damaged good strategy is generally less profitable than a uniform pricing strategy for a high quality product.

Question 22

With first-degree price discrimination, the marginal revenue curve

A) is below the demand curve, with slope equal to twice the slope of demand.
B) is above the demand curve.
C) is the same as the demand curve.
D) is below the demand curve, with slope equal to one-half the slope of demand.

Question 23

Let the inverse demand curve for a monopolist's product be P = 100 - 2Q and the marginal cost of production be constant at MC = 10. Suppose that the firm considers moving from a uniform pricing strategy to a two-block tariff where the first block provides 15 units at a price of P₁ = $70 and the second block provides an additional 15 units at a price of P₂ = $40. How much does the monopolist's profit rise with this scheme?

A) $225
B) $337.50
C) $450.50
D) $512

Question 24

Which of the following is a real-world example of first-degree price discrimination?

A) A pizza parlor sells large and small pizzas. Although the large pizzas are twice as big as the small pizzas, they cost less than double the price of a small pizza.
B) An electric company sells "blocks" of power at different prices. Specifically, any customer who buys more that Q₁ units of electricity can purchase additional units at a lower block price.
C) Different prices are charged to different customers at a flea market.
D) A movie theater charges senior citizens a cheaper price for movie tickets than it charges non-senior citizens for the same movie ticket.

Question 25

A monopolist faces two consumer groups: old and young. The inverse demand of old clients for the output of the monopolist is P_o = 100 - 2Q_o. The inverse demand of young clients for the output of the monopolist is P_y = 80 - Q_y. The marginal cost of supplying any type of client is MC = 10. If the monopolist can price discriminate between the two groups (i.e., charge a different uniform price to each group), what price will old and young clients be charged?

A) P_o = $45; P_y = $55
B) P_o = $55; P_y = $45
C) P_o = $50; P_y = $50
D) P_o = $40; P_y = $60

Question 26

With block pricing the monopolist

A) charges each consumer her reservation price.
B) charges each consumer the same price.
C) sells the first number of units at one price and additional units at a second price.
D) requires the consumer to purchase minimum quantities.

Question 27

A block tariff is a form of

A) first-degree price discrimination
B) second-degree price discrimination
C) third-degree price discrimination
D) tying

Question 28

An expenditure schedule in which the average outlay changes with the number of units purchased is

A) Block tariff
B) Nonlinear outlay schedule
C) Average expenditure
D) Usage charges

Question 29

With ________ degree price discrimination, the firm identifies different consumer groups or segments in a market and charges each group a different price.

A) first
B) second
C) third
D) fourth

Question 30

Which of the following is not a real-world example of third-degree price discrimination?

A) A railroad charges more to haul 100 tons of coal than it does to haul 100 tons of grain.
B) An airline charges a lower price for a coach ticket purchased four weeks in advance than for the same type of ticket purchased three days in advance.
C) A movie theater charges senior citizens a cheaper price for movie tickets than it charges non-senior citizens for the same movie ticket.
D) Sam's Club® warehouses sell bulk quantities of macaroni and cheese for a cheaper per unit price than a grocery store, but the boxes are packaged together so that the customer must buy six boxes at a time.

Question 31

Identify the truthfulness of the following statements. I. If a seller engages in second-degree price discrimination, the seller captures more producer surplus than with uniform pricing.
II) The seller captures the maximum producer surplus by engaging in block pricing.

A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question 32

Let the inverse demand curve for a monopolist's product be P = 100 - 2Q and the marginal cost of production be constant at MC = 10. Which of the following is the optimal two-block tariff for the firm?

A) P₁ = $70; Q₁ = 15; P₂ = $40; Q₂ = 30
B) P₁ = $60; Q₁ = 20; P₂ = $30; Q₂ = 15
C) P₁ = $80; Q₁ = 10; P₂ = $40; Q₂ = 15
D) P₁ = $55; Q₁ = 22.5; P₂ = $55; Q₂ = 22.5

Question 33

During the winter months, the price of natural gas is high. During the summer months, the price of natural gas is low. This could be an example of

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) bundling.

Question 34

Let a monopolist face consumer group A with inverse demand P_A = 100 - 2Q_A and consumer group B with inverse demand P_B = 80 - Q_B?. The monopolist can conduct third degree price discrimination, but faces a capacity constraint that Q_A + Q_B ≤ 100. What will be the amount supplied to each of the customer groups?

A) Q_A = 50; Q_B = 50.
B) Q_A = 60; Q_B = 40.
C) Q_A = 33.67; Q_B = 66.33
D) Q_A = 36.67; Q_B = 63.33

Question 35

All consumers are alike and each has an inverse demand curve for a monopolist's product of P = 100 - 2Q. The marginal cost of production is constant at MC = $10. Let the monopolist charge a price of $10 per unit purchased and a subscription fee of $2025 that must be paid by each purchaser. What is the amount of consumer's surplus generated by this scheme?

A) 0
B) $2025
C) $2025 multiplied by the number of consumers in the market.
D) $90 multiplied by the number of units purchased.

Question 36

With ________ degree price discrimination, the firm tries to price each unit at the consumer's reservation price.

A) first
B) second
C) third
D) fourth

Question 37

With third-degree price discrimination

A) the firm tries to price each unit at the consumer's reservation price.
B) the firm offers consumers a quantity discount.
C) the firm charges different consumer groups or market segments a different price.
D) a buyer can only purchase one product by agreeing to purchase some other product as well.

Question 38

Which of the following is not a real-world example of second-degree price discrimination?

A) A pizza parlor sells large and small pizzas. Although the large pizzas are twice as big as the small pizzas, they cost less than double the price of a small pizza.
B) An electric company sells "blocks" of power at different prices. Specifically, any customer who buys more that Q₁ units of electricity can purchase additional units at a lower block price.
C) Sam's Club® warehouses sell bulk quantities of macaroni and cheese for a cheaper per unit price than a grocery store, but the boxes are packaged together so that the customer must buy six boxes at a time.
D) A movie theater charges senior citizens a cheaper price for movie tickets than it charges non-senior citizens for the same movie ticket.

Question 39

Let the inverse demand curve for a monopolist's product be P = 100 - 2Q and the marginal cost of production be constant at MC = 10. Suppose that the firm considers moving from a uniform pricing strategy to a two-block tariff where the first block provides 15 units at a price of P₁ = $70 and the second block provides an additional 15 units at a price of P₂ = $40. What is the average outlay schedule for the consumer?

A) $\frac { E } { Q } = \$ 70$ if Q?15 and $\frac { E } { Q } = 70 - 450 / Q$ if Q>15
B) $\frac { E } { Q } = \$ 70$ if Q?15 and $\frac { E } { Q } = 40 + 450 / Q$ if Q>15
C) $\frac { E } { Q } = \$ 70$ if Q?15 and $\frac { E } { Q } = 40$ if Q>15
D) $\frac { E } { Q } = \$ 70$ if Q?15 and $\frac { E } { Q } = 70 - 40 / Q$ if Q>15

Question 40

Suppose you sign-up for a membership at a video rental store. When you sign-up you are charged a subscription fee, and in addition you will be charged for each video you rent. This is an example of

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) bundling.

Question 41

Which of the following is a real-world example of tying?

A) A movie theater charges senior citizens a cheaper price for movie tickets than it charges non-senior citizens for the same movie ticket.
B) Sam's Club® warehouses sell bulk quantities of macaroni and cheese for a cheaper per unit price than a grocery store, but the boxes are packaged together so that the customer must buy six boxes at a time.
C) An airline charges more for a first-class ticket than for a coach ticket.
D) The manufacturer of an instant-prints camera is the only manufacturer of the film that the camera uses.

Question 42

Bundling, in economic terms, is demonstrated by which of the following statements?

A) Homemakers in the upper Midwest typically buy all of their families' winter clothing at the same time.
B) When an economics professor assigns numerous readings to a class, he/she is practicing bundling.
C) When you purchase a personal computer, it generally is already loaded with software and comes with a monitor, keyboard and mouse.
D) Performing multiple tasks simultaneously in a work environment is an example of bundling.

Question 43

Bundling is a form of

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) tying.

Question 44

Use the following table to answer the following questions
$$\begin{array} { | c | c | c | } \hline \text { Customer } & \begin{array} { c } \text { Product A } \\\text { Reservation Price }\end{array} & \begin{array} { c } \text { Product B } \\\text { Reservation Price }\end{array} \\\hline 1 & 1,000 & 200 \\\hline 2 & 800 & 400 \\\hline \text { Marginal Cost } & 500 & 100 \\\hline\end{array}$$

-If the firm bundles the products, what single price should the firm charge for the bundle to maximize profit?

A) 600
B) 800
C) 1,000
D) 1,200

Question 45

Mixed bundling is sometimes the most profitable strategy for a firm

A) because the firm can more accurately assess the reservation price of each consumer.
B) because consumers prefer to spend in binges and make multiple purchases at the same time.
C) when the firm has high delivery or shipping costs.
D) because this strategy discourages a customer from buying a component when his/her willingness to pay is less than the marginal cost of a component of the purchase.

Question 46

Electricity prices may be an example of ___________ as it often varies by the time of day, generally being set higher when demand is at its peak

A) Intemporal price discrimination
B) Tie-in-sales
C) First degree discrimination
D) Second degree discrimination

Question 47

Advertising is an example of a firm's

A) revenue-maximization strategy.
B) pricing strategy.
C) non-pricing strategy.
D) price-discrimination strategy.

Question 48

Suppose you own a business and your own price elasticity is -2. In addition, suppose your advertising elasticity of demand is 0.50. If your marginal cost per unit is $4, what is your optimal advertising-to-sales ratio?

A) 0.25
B) 0.375
C) 0.625
D) 1.25

Question 49

Bundling can increase the seller's profits when customers have different _______ for the two products and when the firm __________________.

A) supply curves; captures surplus.
B) supply curves; cannot price discriminate.
C) tastes; cannot price discriminate.
D) tastes; can price discriminate.

Question 50

You own a small bookstore. You have hired a marketing firm to calculate your own price elasticity of demand and your advertising elasticity of demand. The firm has provided you with the relevant numbers regardless of minor adjustments in price or advertising budget. Your own price elasticity of demand is around -1.7, and your advertising elasticity of demand is around 0.05. Interpret the advertising elasticity of demand.

A) A one-percent increase in advertising expenditures will stimulate demand by about five-hundredths of one percent.
B) A one-percent increase in advertising expenditures will stimulate demand by about five-tenths of one percent.
C) A one-percent increase in advertising expenditures will stimulate demand by about five percent.
D) A one-percent increase in advertising expenditures will stimulate demand by about one-fifth of one percent

Question 51

You own a small bookstore. You have hired a marketing firm to calculate your own price elasticity of demand and your advertising elasticity of demand. The firm has provided you with the relevant numbers regardless of minor adjustments in price or advertising budget. Your own price elasticity of demand is around -1.7, and your advertising elasticity of demand is around 0.05. What should your approximate advertising-to-sales ratio be?

A) of 1 percent.
B) 1 percent.
C) 3 percent.
D) 34 percent.

Question 52

With tying

A) the firm tries to price each unit at the consumer's reservation price.
B) the firm offers consumers a quantity discount.
C) the firm charges different consumer groups or market segments a different price.
D) a buyer can only purchase one product by agreeing to purchase some other product as well.

Question 53

A computer manufacturer sells computers and monitors separately. This manufacturer also allows consumers to choose any type of computer and any type of monitor and sells the two components as a package. This manufacturer is engaging in a ____________ pricing strategy.

A) tying
B) third-degree
C) mixed bundling
D) first-degree

Question 54

The reason that profit-maximizing firms willingly incur the added expense of advertising is that they hope that successful advertising will increase profits by

A) increasing average costs.
B) increasing marginal costs.
C) increasing supply.
D) increasing demand.

Question 55

You own a small bookstore. You have hired a marketing firm to calculate your own price elasticity of demand and your advertising elasticity of demand. The firm has provided you with the relevant numbers regardless of minor adjustments in price or advertising budget. Your own price elasticity of demand is around -1.7, and your advertising elasticity of demand is around 0.05. How much should you mark-up your price over your marginal cost for your books?

A) By approximately a factor of 0.41.
B) By approximately a factor of 2.43.
C) By approximately a factor of 37 percent.
D) By approximately a factor of 70 percent.

Question 56

Use the following table to answer the following questions
$$\begin{array} { | c | c | c | } \hline \text { Customer } & \begin{array} { c } \text { Product A } \\\text { Reservation Price }\end{array} & \begin{array} { c } \text { Product B } \\\text { Reservation Price }\end{array} \\\hline 1 & 1,000 & 200 \\\hline 2 & 800 & 400 \\\hline \text { Marginal Cost } & 500 & 100 \\\hline\end{array}$$

-If the firm does not bundle the products, what single price should the firm charge for product A to maximize profit?

A) 500
B) 800
C) 900
D) 1,000

Question 57

The firm's use of advertising is motivated

A) by its desire to capture more surplus through shifting the demand curve to the right for its products.
B) by a desire to position itself in the marketplace as a monopolist.
C) through media manipulation and really is not cost effective.
D) only when the firm is in a perfectly competitive industry.

Question 58

Use the following table to answer the following questions
$$\begin{array} { | c | c | c | } \hline \text { Customer } & \begin{array} { c } \text { Product A } \\\text { Reservation Price }\end{array} & \begin{array} { c } \text { Product B } \\\text { Reservation Price }\end{array} \\\hline 1 & 1,000 & 200 \\\hline 2 & 800 & 400 \\\hline \text { Marginal Cost } & 500 & 100 \\\hline\end{array}$$

-If the firm does not bundle the products, what single price should the firm charge for product B to maximize profit?

A) 100
B) 200
C) 300
D) 400