Deck 14: Price Discrimination

Question 1

Use the following to answer questions:
Figure: Monopolist
(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-through the process of price discrimination, how much profit is the monopolist making in Market B?

A) $260
B) $780
C) $1,040
D) $520

Answer 1

$520

Question 2

Use the following to answer questions:
Figure: Monopolist
(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-if the monopolist were to charge a uniform price of $10 in both markets, how much profit would the monopolist lose?

A) $234.75
B) $146.25
C) $48.75
D) $97.50

Answer 2

$48.75

Question 3

Economists call selling the same product at different prices to different customers:

A) price racism.
B) price discrimination.
C) arbitrage.
D) bundling.

Answer 3

price discrimination.

Question 4

Use the following to answer questions:
Figure: Price-Discriminating Monopolist
(Figure: Price-Discriminating Monopolist) Refer to the figure. In order to maximize profits, the monopolist should charge a:

A) price of $16 in Market A and $10 in Market B.
B) uniform price of $6 in both markets.
C) price of $14 in Market A and $9 in Market B.
D) price of $16 in Market A and $6 in Market B.

Question 5

Use the following to answer questions:
Figure: Monopolist
(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-through the process of price discrimination, how much profit is the monopolist making in Market A?

A) $270
B) $450
C) $830
D) $627.50

Question 6

Pfizer sells Atgam in New Zealand for $14 per pill and in Brazil for $8 per pill. This implies that the demand curve in New Zealand must be ________ than in Brazil.

A) more inelastic
B) less inelastic
C) more elastic
D) closer to perfectly elastic

Question 7

Use the following to answer questions:
Figure: Monopolist
(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-if the monopolist were to charge a uniform price P_U between the two markets, in which range would the price fall?

A) $5 < P_U < $9
B) $5 < P_U < $10
C) $9 < P_U < $10
D) $7 < P_U < $10

Question 8

Price discrimination can be defined as:

A) selling different products to the same consumers in the same market.
B) selling the same product in two different markets.
C) selling the same product at two different prices in two different markets.
D) exporting goods to foreign countries.

Question 9

An important lesson of price discrimination is that:

A) price discrimination will always lead to lower profits in one of the two markets.
B) firms can increase profits by differentiating their product attributes.
C) all firms can perfectly price discriminate.
D) it only increases profits when the demand curves in two different markets are not the same.

Question 10

Arbitrage is ________ in one market and ________ in another market.

A) selling low; buying higher
B) selling high; buying higher
C) buying high; selling lower
D) buying low; selling higher

Question 11

Which of the following statements is FALSE?
I. If the demand curves are different, it is more profitable to set a single price than different prices in markets.
II. To maximize profit the firm should set a lower price in markets with more elastic demand.
III. The presence of arbitrage makes it easy for a firm to price discriminate.

A) I and II only
B) II only
C) III only
D) I and III only

Question 12

Use the following to answer questions:
Figure: Monopolist
(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-what price should the monopolist charge in Market A?

A) $5
B) $10
C) $7
D) any price higher than $10

Question 13

A museum in Russia has two entrances: one for locals (written in Russian) and one for tourists (written in English). People who enter through the entrance written in Russian will end up paying 81.93 Rubles ($3.00). English-speaking tourists will use the entrance written in English, but they will end up paying 409.67 Rubles ($15.00). This practice is an example of:

A) price manipulation.
B) price exploitation.
C) international price mediation.
D) price discrimination.

Question 14

After a severe hurricane in South Carolina, the price of electric generators quadrupled. People living outside of South Carolina purchased electric generators in their home states and drove them to South Carolina to sell at a much higher price. What is this an example of?

A) arbitrage
B) perfect price discrimination
C) price gouging
D) marginal-price geography

Question 15

Price discrimination is used when a seller faces different demand curves in different markets because:

A) no other pricing methods are feasible.
B) the practice eliminated waste.
C) profits are greater than selling at a single price.
D) profits are less than when selling at monopoly prices.

Question 16

Use the following to answer questions:
Figure: Monopolist
(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-what price should the monopolist charge in Market B?

A) $9
B) $5
C) $7
D) any price higher than $5

Question 17

Figure: Market for Lithotripters Refer to the figure. Suppose that a German manufacturer can sell its kidney lithotripter in two markets: Country X and Country Y. If this firm is interested in maximizing profits, it should set a price of ________ in Country X and ________ in Country Y.

A) d; z
B) b; d
C) b; z
D) a; d

Question 18

Which of the following is NOT a principle of price discrimination?

A) It is more profitable to set different prices in markets with different demand curves than a single price that covers all markets.
B) To maximize profit the firm should set a higher price in markets with more elastic demand.
C) To maximize profit the firm should set a higher price in markets with more inelastic demand.
D) Arbitrage makes it difficult for a firm to set different prices in different markets thereby reducing the profit from price discrimination.

Question 19

Use the following to answer questions:
Figure: Price-Discriminating Monopolist
(Figure: Price-Discriminating Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-if the monopolist were to charge a uniform price P_U between the two markets, in which range would the price fall?

A) $6 < P_U < $14
B) $6 < P_U < $10
C) $10 < P_U < $16
D) $10 < P_U < $14

Question 20

The chapter opens with a story about GlaxoSmithKline (GSK) and Combivir, the anti-AIDS drug. What was one of the reasons that GSK was selling Combivir for such low prices in Africa as compared to Europe?

A) It is much cheaper to produce the drug in Africa than in Europe.
B) Government regulations in Europe forced it to charge higher prices.
C) African governments imposed price ceilings.
D) Lower prices were charged for humanitarian reasons.

Question 21

To maximize profit GlaxoSmithKline sets a higher price for Combivir in Europe than in Africa because the demand curve in Africa is:

A) lower and more inelastic.
B) lower and more elastic.
C) higher and more inelastic.
D) higher and more elastic.

Question 22

Which of the following conditions would prevent a firm from setting different prices in different markets?

A) possibility of arbitrage for buyers between different markets
B) law enforcement preventing smuggling from occurring
C) government intervention forcing the firm to reduce the level of output
D) government imposition of a price ceiling

Question 23

A monopolist facing different demand curves in two separate markets maximizes profit by:

A) setting marginal revenue equal to marginal cost for the combined demand curve and charging the maximum price for that quantity on the combined demand curve.
B) completely ignoring the market with lower demand.
C) completely ignoring the market with higher demand.
D) setting marginal revenue equal to marginal cost and charging the maximum price that demand will bear in each market.

Question 24

Haircuts for men are often cheaper than haircuts for women, even when they are offered by the same stylist. Why might this be price discrimination?

A) Everyone has the same demand for haircuts.
B) The marginal cost of supplying a haircut may be lower for male than for female customers, and haircutting is a competitive industry with few fixed costs.
C) Stylists are misogynists.
D) Demand for haircuts for women might be more inelastic than demand for haircuts for men, and haircuts are impossible to arbitrage.

Question 25

Women tend to pay more for haircuts than men. One possible explanation is price discrimination. Another possible explanation is that:

A) women, on average, make less money than men.
B) women are more likely to be more demanding about their hair than men.
C) women are less likely to be bald, which pushes up demand.
D) women tend to take better care of their hair than men.

Question 26

Which of the following statements is TRUE?

A) Arbitrage makes it easier for firms to set different prices in different markets.
B) To maximize profits, monopolists will always set a higher price in markets with more inelastic demand curves.
C) Monopolists typically prefer not to segment markets.
D) Even if demand curves are identical, it is still typically profit maximizing for monopolists to charge different prices in different markets.

Question 27

Price discrimination is defined as selling:

A) the same products at the same prices to the same customers.
B) different products at the different prices to the same customers.
C) the same product at different prices to different customers.
D) different products at the same prices to different customers.

Question 28

If the demand curve for Pfizer's Norvasc, a blood pressure medication, is more elastic in Mexico than it is in the United States, how could Pfizer use this information to maximize their profits?

A) They could segment the markets and charge a lower price for Norvasc in Mexico than in the United States.
B) They could segment the markets and charge a higher price for Norvasc in Mexico than in the United States.
C) Since Mexico is a poorer country than the United States, in this situation it makes more sense for Pfizer to charge only one price in both countries.
D) They could choose to sell Norvasc only in the United States.

Question 29

Taking advantage of price differences for the same good by buying low in one market and selling high in another market is called:

A) sabotage.
B) fuselage.
C) arbitrage.
D) seigniorage.

Question 30

Segmenting a market allows monopolists to:

A) prevent entry.
B) have different average total costs.
C) engage in arbitrage.
D) sell to different demand curves.

Question 31

On Black Fridays, most retail outlets have major storewide sales. Yet, as one of the busiest shopping days in the United States, one would expect prices to increase, not decrease. Price discrimination explains the answer to this question because price:

A) sensitive shoppers are more likely to notice tying and bundling tricks.
B) sensitive shoppers are more likely to want to stay away from Black Friday.
C) insensitive shoppers will stay away to avoid the crowds.
D) insensitive shoppers tend to wait until the last minute for Christmas shopping.

Question 32

Adults have more money than teenagers and perhaps more inelastic demand for video games than teenage video gamers. Why might it be difficult to price discriminate based on this fact?

A) Teenage gamers could exploit arbitrage opportunities, buy games at the low price, and re-sell them to adult gamers.
B) It is impossible to tell who is a teenager and who is an adult.
C) It is not true that adults have more money than teenagers.
D) The monopolist might not want to segment the market.

Question 33

Which of the following is the fundamental condition that would allow a firm to practice price discrimination?

A) All customers possess identical willingness to pay for the product.
B) The good can be purchased at one market and resold at another market.
C) There are two or more different demand curves for the good.
D) Demand for the good is high.

Question 34

Writing in 1849, Jules Dupuit observed why the rail companies actively made third-class accommodations terrible, including removing the roof from the car and having nonupholstered seats:
"It is not because of the several thousand francs which they would have to spend to cover the third-class wagons or to upholster the benches that a particular railway has uncovered carriages and wooden benches; it would happily sacrifice this for the sake of its popularity. . . It hurts the poor not because it wants them to personally suffer, but to scare the rich."
How does "scaring the rich" illustrate price discrimination?

A) It creates profit opportunities by bundling services.
B) It deters those who are willing to pay more from going to third class.
C) It uses tying to charge more for people who ride the train a lot.
D) It encourages consumers with a low willingness to not travel at all.

Question 35

To maximize profit the monopolist should set a:

A) lower price in markets with less elastic demand.
B) lower price in markets with more inelastic demand.
C) higher price in markets with more elastic demand.
D) higher price in markets with more inelastic demand.

Question 36

The optimal price for a monopolist facing different demand curves in two separate markets will be:

A) higher in the market with more elastic demand.
B) higher in the market with less elastic demand.
C) the same in both markets.
D) equal to marginal cost in each markets.

Question 37

Even when gas stations and grocery stores are close enough to share a parking lot, gas stations will typically charge much more for candy bars. This kind of price discrimination occurs because grocery store patrons have a:

A) higher demand curve.
B) lower demand curve.
C) more elastic demand curve.
D) less elastic demand curve.

Question 38

Two months after Apple introduced the iPhone in 2007, the company reduced the price from $600 to $400. How is this drop of price an example of price discrimination?

A) Early adopters are less sensitive to price than late adopters.
B) Early adopters have a higher demand than late adopters.
C) Early adopters have a more elastic demand curve than late adopters.
D) It's not an example of price discrimination.

Question 39

A sales manager at a car dealership revealed that he considers how much the customer appears to know about the car when he's negotiating a price. Ignorant people tend to pay a premium on their car. Price discrimination explains this "ignorance premium" since people who:

A) don't bother to research probably don't want a car that much.
B) do research probably know that gas is very expensive and thus require a cheaper car.
C) don't bother to research are probably less sensitive to price.
D) do research are probably wealthier and thus less sensitive to price.

Question 40

Which of the following is the main principle behind price discrimination?

A) If the demand curves are different, it is more profitable to set different prices in different markets than a single price that covers all markets.
B) To maximize profit the firm should set a higher price in markets with more inelastic demand.
C) Arbitrage makes it difficult for a firm to set different prices in different markets thereby reducing the profit from price discrimination.
D) All of the answers are correct.

Question 41

Arbitrage prevention is:

A) always easy to achieve.
B) not necessary to practice price discrimination.
C) easier in the case of selling services.
D) easier in the case of selling goods.

Question 42

Which of the following lists of products and services would be the most resistant to arbitrage?

A) gasoline, movie tickets, consumer bleach
B) dental root canals, haircuts, and cosmetic surgery
C) third-party car stereos, full-service restaurant meals, and novels
D) computer software, computer hardware, and tickets to sporting events

Question 43

If demand curves are different in two markets, it is ______ to set different prices in each market than to set a single price.

A) less profitable
B) equally profitable
C) more profitable
D) unprofitable

Question 44

If arbitrage becomes extensive, a price-discriminating monopolist selling its patented drug in two markets will:

A) quit selling the product in the market with the inelastic demand.
B) begin to charge the same price in both markets.
C) increase the price in the inelastic market and lower the price in the elastic market.
D) raise the price in both markets.

Question 45

Which of the following would be an effective method for firms to ensure profit from price discrimination when the possibility of arbitrage exists?

A) set a single price for all markets
B) supply products only to one market
C) make products sold to each market have an exclusive feature
D) request law enforcement to eliminate the possibility of arbitrage

Question 46

In the case of a perfectly price-discriminating monopolist, the price of the last unit sold:

A) is greater than marginal cost.
B) is equal to marginal cost.
C) is less than marginal cost.
D) and marginal cost cannot be compared.

Question 47

Why is it harder to price discriminate with shampoo than with haircuts?

A) Haircuts are harder to resell.
B) There are more substitutes for shampoo.
C) Haircuts are a bundle of goods: location of the salon, quality of the stylist, etc.
D) There is less competition for selling shampoo.

Question 48

Price discrimination is:

A) rare in markets.
B) common in markets.
C) undocumented in markets.
D) always present in markets.

Question 49

Figure: Two Demand Curves A monopolist sells its output in two markets, each with different demand curves as shown in this figure. If the marginal cost is identical in both markets, the monopolist should charge a ______ price in the inelastic market, represented by the demand curve ______.

A) higher; D₂
B) higher; D₁
C) lower; D₂
D) lower; D₁

Question 50

Figure: Canada & Europe
A monopolist sells its output in two markets: Canada and Europe, as shown in these figures. To maximize profits, the monopolist should:

A) set a price of $10 in both markets.
B) set a price of $10 in Canada and $7.50 in Europe.
C) set a price equal to $5, or marginal cost, in Canada and Europe.
D) sell 20 units in Canada and 10 units in Europe.

Question 51

Which of the following would be most difficult to arbitrage?

A) pharmaceutical drugs
B) automobiles
C) aluminum
D) tax preparation services

Question 52

A perfectly price-discriminating monopoly causes:

A) no social surplus.
B) maximum social surplus.
C) as much social surplus as in the case of a standard monopoly.
D) as much social surplus as in the case of monopolistic competition.

Question 53

To maximize profits, the monopolist should set a higher price in a market with ______ demand.

A) more elastic
B) unit elastic
C) more inelastic
D) weaker

Question 54

Why is it important for firms practicing price discrimination to prevent arbitrage of their product?

A) Arbitrage is unrelated to firms' profits since the products are still being sold.
B) Smugglers alter product quality as they pass from market to market, hence harming the reputation and future profits of firms.
C) Arbitrage reduces the profits from price discrimination for firms, and it increases profits for smugglers.
D) Arbitrage increases deadweight loss in the market.

Question 55

In the case of a perfectly price-discriminating monopolist, the demand curve lies:

A) above the marginal revenue curve.
B) below the marginal revenue curve.
C) with the marginal revenue curve.
D) tangent to the marginal revenue curve at the equilibrium point.

Question 56

Which of the following statements is TRUE regarding arbitrage?

A) It is easier to prevent arbitrage for some products than for others.
B) The U.S. Constitution prevents the government from engaging in arbitrage prevention.
C) Arbitrage may increase the profits for firms, depending on the elasticity of demand in the market.
D) Firms will still be able to price discriminate across markets even when arbitrage is present.

Question 57

In the case of a perfectly price-discriminating monopoly, there is:

A) zero consumer surplus.
B) as much consumer surplus as in the case of perfect competition.
C) as much consumer surplus as in the case of a standard monopoly.
D) as much consumer surplus as in the case of monopolistic competition.

Question 58

In the case of a perfectly price-discriminating monopoly, there is:

A) some deadweight loss.
B) no deadweight loss.
C) as much deadweight loss as in the case of a standard monopoly.
D) as much deadweight loss as in the case of monopolistic competition.

Question 59

Rohm and Haas were considering:

A) putting arsenic in its plastics to prevent it from being resold to dentists.
B) dyeing all of its women's underwear pink so that fewer men would buy it.
C) charging the Pentagon 500 times the going market price for Styrofoam cups.
D) declaring bankruptcy to sell its granite countertops below the government mandated minimum price.

Question 60

One would expect more arbitrage to occur between two markets if:

A) the products are differentiated in terms of their fundamental characteristics.
B) the products have built-in tracking mechanisms that enable the discovery of the distributors.
C) the demand curves in the two markets are essentially the same.
D) products are non-differentiated and the different markets have good transportation networks between them.

Question 61

A subtle form of price discrimination is for firms to offer:

A) the same version of a product for the purpose of separating customers into different markets.
B) the same version of a product for the purpose of separating customers into the same market.
C) different versions of a product for the purpose of separating customers into different markets.
D) different versions of a product for the purpose of separating customers into the same market.

Question 62

Airlines price discriminate by offering both business-class and economy-class service on flights (it's not just the cost of the service that varies; the markup is higher on business class). If they wanted to ensure that everyone who could afford to travel business class did so, what might they do?

A) lower the price of traveling economy class
B) make the seats in business class extra small and cramped, and serve terrible food
C) make the seats in economy class extra small and cramped, and serve terrible food
D) hire more attractive flight attendants for all classes

Question 63

Which of the following best explains why people booking airline tickets just prior to their departure dates tend to pay a higher price than those that book a long time in advance?

A) Individuals booking tickets just a few days in advance tend to have a lower opportunity cost of their time.
B) Individuals booking tickets just a few days in advance tend to have a more inelastic demand for airline tickets.
C) Individuals that book tickets a long time in advance tend to have a lower demand for airline tickets.
D) Individuals booking tickets just a few days in advance tend to be businessmen whose firms are paying for their tickets so they are not concerned about the price.

Question 64

Which of the following is an example of price discrimination?

A) You pay less for a movie ticket if you show your student ID.
B) Business travelers pay more for airline tickets.
C) Faculty members pay less for computers they order on Apple's Web site.
D) All of the answers are correct.

Question 65

Insurance companies charge men a higher price for automobile insurance than women. The costs of insuring men are higher because they get into more accidents than do women. Which of the following statements is TRUE?

A) The insurance companies are practicing price discrimination.
B) The insurance companies are not practicing price discrimination.
C) The insurance companies are practicing inter-temporal price discrimination.
D) The insurance companies are using a bundling/tying strategy.

Question 66

Which of the following is an example of price discrimination?

A) value meals at fast-food restaurants
B) senior citizen discounts
C) tax-exempt status for nonprofit organizations
D) holiday sales at retail stores

Question 67

Which of the following is the main principle of price discrimination?
I. It is more profitable to set different prices in markets with different demand curves than charge the same price in all markets.
II. To maximize profits, firms should charge lower prices in markets with more elastic demands.
III. Arbitrage increases the profit opportunities of price discrimination.

A) I and III only
B) II only
C) I and II only
D) I, II, and III

Question 68

In general, price discrimination exists because:

A) higher prices are required when costs are higher.
B) lower prices are possible when profits are not a goal of the entrepreneur.
C) higher prices are charged because some customers are willing to pay more.
D) lower prices encourage arbitrage.

Question 69

To maximize profit using the practice of price discrimination, firms set different prices according to the characteristics that are correlated with buyers':

A) age.
B) purpose of consumption.
C) income.
D) willingness to pay.

Question 70

Which of the following is a real example of price discrimination?

A) Airlines set different prices for business people and vacationers.
B) Publishers charge high prices on hardback and low price on paperback books.
C) IBM's regular version of a printer that prints at 10 pages per minute is more expensive than the Series E that prints five pages per minute.
D) All of these examples are real.

Question 71

Which of the following statements is TRUE?

A) It is easier to practice arbitrage for services than for goods.
B) A monopolist prefers markets that are not segmented.
C) The government requires that ethanol fuel be poisoned to prevent arbitrage.
D) Arbitrage is the practice of buying products on credit.

Question 72

To which of the following groups would a monopolist typically charge the lowest price?

A) individuals with a very elastic demand
B) individuals with a very inelastic demand
C) senior citizens
D) vacationers

Question 73

Which of the following does NOT practice price discrimination on a regular basis?

A) universities
B) farmers
C) movie theaters
D) airline companies

Question 74

Airlines try to differentiate their customers by willingness to pay based on:

A) how long in advance a person books their flight.
B) a person's weight.
C) the ethnicity of a person's last name.
D) All of the answers are correct.

Question 75

For price discrimination to work, the young should ________ than/to the old.

A) be charged less for a product
B) be charged more for a product
C) sometimes be charged more and sometimes charged less
D) be charged a price equal to the marginal cost

Question 76

DVDs may be encoded with one of six region codes, preventing videos sold in one region of the world from being used in another region. Why might film distributors use region codes?

A) to prevent people from buying videos in a low-price region and then reselling them in a high-price region
B) to make it easier to charge the same price in different locations
C) to minimize the menu costs of frequent price changes
D) to reduce the cost of collecting sales taxes, especially in areas with different tax rates

Question 77

Arbitrage usually makes it ______ for a firm to profitably engage in price discrimination.

A) easier
B) impossible
C) more difficult
D) unnecessary

Question 78

How did IBM price discriminate its laser printers?

A) IBM provided special financing terms to different customers.
B) IBM offered two different printers: a fast printer and a slow printer.
C) IBM offered printers in different colors.
D) IBM charged seniors lower prices than businesses.

Question 79

Which of the following is NOT an example of price discrimination?

A) children's menus in restaurants
B) peak and nonpeak rates for cell phone usage
C) product innovations leading to lower prices
D) standby seats sold at the last minute by airlines

Question 80

Which of the following is NOT an easy way to split markets in order to practice price discrimination?

A) using age of customers
B) releasing different versions of a product over time
C) relying on the self-reported marital status of customers
D) using characteristics that are correlated with a consumer's willingness to pay