Deck 12: Capturing Surplus

Question 1

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.

Answer 1

C

Question 2

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.

Answer 2

D

Question 3

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.

Answer 3

A

Question 4

Suppose that a firm faces a demand curve for its product of . The corresponding marginal revenue curve is . 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 5

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 6

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.

Question 7

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 8

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 9

A monopolist faces inverse demand and has constant marginal cost . 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

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 11

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 12

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 13

A monopolist faces demand and has constant marginal cost . 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 14

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 15

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 16

Suppose that a firm faces a demand curve for its product of . The corresponding marginal revenue curve is . 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 17

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 18

A monopolist faces inverse demand and has constant marginal cost . 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 19

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 20

A monopolist faces inverse demand and has constant marginal cost . 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

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 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 23

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 24

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 25

Question 26

Question 27

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 28

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 29

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

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

Question 30

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 31

Question 32

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 33

Question 34

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 35

Question 36

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 37

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 38

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 39

Question 40

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.

Question 41

Bundling is a form of:

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

Question 42

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 43

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 44

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 45

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 46

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 47

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 48

Use the table above. 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 49

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 50

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 51

Third-degree price discrimination is illegal.

Question 52

Use the table above. 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

Question 53

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 54

Second-degree price discrimination refers to pricing differently for different market segments.

Question 55

In order to capture more surplus, the firm must have some market power.

Question 56

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 57

Advertising is an example of a firm's:

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

Question 58

Use the table above. 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 59

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 60

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 61

If a seller engages in second-degree price discrimination, the seller captures more producer surplus than with uniform pricing.

Question 62

An example of second-degree price discrimination is when you segment the market and charge individuals different prices for the same product or service based on their age.

Question 63

Consider price discrimination. The firm must be able accurately forecast total sales.

Question 64

A damaged good strategy is an example of "versioning".

Question 65

An example of second-degree price discrimination is when you sell something on eBay to an individual and ship it through the mail.

Question 66

A damaged good strategy is generally less profitable than a uniform pricing strategy for a high quality product.

Question 67

First-degree price discrimination is relatively easy to implement.

Question 68

The seller captures the maximum producer surplus by engaging in block pricing.

Question 69

Consider a monopoly's first-degree price discrimination. With first-degree price discrimination, producer surplus is lower than with uniform pricing.

Question 70

Consider a monopoly's first-degree price discrimination. With first-degree price discrimination, total surplus is greater than when the monopoly charges a uniform price.

Question 71

A damaged good strategy can be an example of third-degree price discrimination.

Question 72

A damaged good strategy can be an example of "building fences".

Question 73

Consider price discrimination. The firm must have some information about the different amounts people will pay for the product.

Question 74

Consider price discrimination. The firm must be able to prevent resale.

Question 75

Consider price discrimination. In order to capture more surplus, the firm must have some market power.

Question 76

Consider a monopoly's first-degree price discrimination. With first-degree price discrimination, deadweight loss is large.

Question 77

An example of second-degree price discrimination is when you get an "early bird" discount by eating at a restaurant before 7:00 pm.

Question 78

Consider a monopoly's first-degree price discrimination. With first-degree price discrimination, consumer surplus is small, yet still greater than zero.

Question 79

An example of second-degree price discrimination is when you order 12 of something online and you pay less per unit than if you had bought only one.