c. It connects the bakery with buyers who value day-old products but aren’t willing to pay the
full price for a product that isn’t fresh.
d. Individuals with an inelastic demand for baked goods will travel to a different bakery if their
preferred bakery runs out of fresh product.
e. The bakery is unable to distinguish between types of buyers with fresh product, so it is forced
to keep old baked goods in order to maximize profit.
134. Service providers like cable companies have tiered pricing and also charge their customers
according to a schedule of fees. Sometimes customers are able to get fees or service charges
waived for a certain amount of time if they contact customer service and threaten to cancel their
service. This type of negotiation is an attempt to practice
a. good customer service. d. competitive pricing.
b. misleading pricing. e. perfect price discrimination.
c. elastic price discrimination.
135. As the quantity of different prices charged by a firm ________, the amount of ________ generated
increases.
a. decreases; social welfare d. increases; deadweight loss
b. decreases; producer surplus e. increases; consumer surplus
c. increases; profit
136. Airlines have first-class or business-class seating, for which customers pay a higher price to
receive more room, extra amenities, and more attentive service. Would this illustrate price
discrimination?
a. No, because first-class and economy-class tickets represent two entirely different products.
b. No, because there is no additional value in purchasing a first-class ticket.
c. Yes, because airlines are able to charge different prices to customers seeking an improved
flying experience.
d. Yes. Since wealthy travelers are the only individuals who can afford first-class travel, the
airline is able to set pricing based on their increased ability to pay.
e. Maybe. It is price discrimination only if no other airline offers first-class tickets for that travel
route.
137. Despite the fact that a single price can provide ________ for both producer and consumer, it
causes ________, resulting from market inefficiency.
a. surplus; deadweight loss
b. deadweight loss; surplus
c. price discrimination; producer surplus
d. price discrimination; consumer surplus
e. competition; misallocation
138. ________ transfers the consumer surplus under perfect competition to the producer.
a. Monopolistic competition d. Profit maximizing
b. Deadweight loss e. Perfect price discrimination
c. Social welfare
139. A common feature among perfect competition and perfect price discrimination is the elimination
of
a. deadweight loss. d. market efficiency.
b. consumer surplus. e. social welfare.
c. producer surplus.
140. ________ maximizes the quantity of goods sold because it matches each consumer with his or her
willingness to pay.
a. Perfect price discrimination d. Marginal cost
b. Monopolistic competition e. Deadweight gain
c. Total surplus
141. When economists use the word “perfect,” what does it indicate about the outcome of a market?
a. Deadweight gains are maximized and marginal output is equal to zero.
b. Consumer surplus is maximized and economic growth results from accelerated consumer
spending.
c. Producer surplus is minimized because society is harmed by excessive firm profits.
d. Social welfare is maximized, resulting from an absence of deadweight loss.
e. Producer surplus and consumer surplus are exactly equal.
142. The study of price discrimination is both interesting and complex because
a. there is no single model that represents how it is practiced in each firm or industry.
b. the single model that represents all price discrimination allows economists to delve more
deeply into practical analysis.
c. monopolies are often shrouded in mystery and this practice opens a window into their
day-to-day operations.
d. students of economics can relate to the examples, but aren’t able to easily calculate how price
discrimination is beneficial.
e. the consumer or the producer has the potential to maximize surplus, leading to rigorously
debated social concerns.
143. If total welfare is equal to the entire area under the demand curve, what other information do we
know with certainty?
a. Consumer surplus is maximized.
b. Producer surplus is maximized.
c. Deadweight loss is zero.
d. Consumer surplus is equal to producer surplus.
e. A firm has achieved perfect price discrimination.
144. In the context of this chapter, how can price discrimination increase profits for firms and increase
the welfare of society?
a. It can’t; those are two mutually exclusive goals.
b. When firms earn higher profits, governments collect additional tax revenue.
c. When firms earn higher profits, they are able to employ more workers, leading to a more
prosperous economy.
d. Firms are able to capture more revenue by selling their product to more consumers, which
means that more buyers are able to acquire a desired product.
e. It can’t; welfare-minded societies tend to overregulate business profits.
145. The federal government often gives out tax credits for individuals who purchase fuel-efficient or
electric vehicles. A car dealership, which attempts perfect price discrimination, would respond to
this knowledge by
a. targeting the same price since the individual must like the car, with or without the tax credit.
b. targeting a lower price. The buyer needed an incentive in order to purchase the vehicle, so it
can be assumed that the individual is more demand-elastic.
c. targeting a higher price. The tax credit increases the buyer’s maximum willingness to pay.
d. targeting the same price because there’s no way for the dealership to know who has the tax
credit and who doesn’t.
e. increasing the sticker price on all of its vehicles by the amount of the tax credit.
146. According to economists, extreme couponing is not worth the effort if the ________ exceeds the
________ from the coupons, when time is taken into account.
a. waste; benefit d. savings; time
b. opportunity cost; savings e. efficiency; cost
c. savings; benefit
147. How does price discrimination help us understand how many markets actually function?
a. All firms will practice price discrimination unless a government prohibits the practice.
b. Monopolistic competition is rare, so economists are able to focus in on the few firms that
engage in the practice.
c. Instances of perfectly competitive markets and monopoly are rare.
d. Antidiscrimination laws are widespread, so models explaining price discrimination help us
better understand markets that we are unable to witness.
e. Monopolistic competition is the most common market form, but it is the only one that does not
engage in price discrimination.
148. From an initial examination, price discrimination may not seem like a social good because
________ is transferred from consumer to producer, but the overall benefit for society ________.
a. deadweight loss; decreases d. surplus; decreases
b. deadweight loss; increases e. surplus; increases
c. market power; multiplies
149. Which of the following is a true statement about perfect price discrimination?
a. If the ability to discriminate maximizes, the overall social welfare minimizes.
b. The transfer of surplus from consumer to producer results in an unequitable outcome.
c. Firms are able to determine the exact maximum willingness to pay for most consumers.
d. Social welfare is determined by subtracting producer surplus from consumer surplus.
e. Deadweight loss does not exist.
150. Charging a different price to each consumer results in an interesting situation. A firm is able to
achieve the efficiency of a(n) ________ while also producing the output that a(n) ________ would
choose.
a. monopolist; government
b. monopolist; society
c. firm; consumer
d. elastic consumer; inelastic consumer
e. competitive market; monopolist
SHORT ANSWER
1. Why would a restaurant choose to make most of its profit on alcoholic drinks, yet only break even
on food?
2. How do we know if the market for a product or service is vulnerable to price discrimination?
3. Each year, more shopping is completed online by consumers who are hoping to get a better deal.
However, many companies’ websites actively collect data about consumers’ shopping habits and
send this information, known as “cookies,” back to the website owner. How might this information
be used to the company’s advantage?
4. Many retailers and stores tend to offer different goods bundled together as a promotion, selling
them at a lower price than they would cost if you bought each item separately. Is this a practice of
price discrimination? Explain.
5. Why would a store in a college town be likely to offer a discount to college students who show
their student identification (ID)?
6. In the research paper by Aydin and Ziya, “Personalized Dynamic Pricing of Limited Inventories,”
Operations Research 57, no. 6 (2007):1523–1531, the authors state that research “suggests that
personalized pricing is more acceptable to consumers when it is framed as offering tailored
discounts from a fixed price.” Survey summaries found that “90% of customers found . . .
personalized pricing unacceptable,” but “only 64% of the same customers stated that they would
be bothered if other customers got better discount offers than they did.” What economic insight are
these customers missing about the benefits of price discrimination in any form?
7. Reflect on the following excerpt, which is a news story from the Washington Post about dynamic
pricing by online retail giant Amazon.com:
Few things stir up a consumer revolt quicker than the notion that someone else is getting a better
deal. That’s a lesson Amazon.com has just learned. Amazon, the largest and most potent force in
e-commerce, was recently revealed to be selling the same DVD movies for different prices to
different customers. It was the first major Web test of a strategy called “dynamic pricing,” which
gauges a shopper’s desire, measures his means and then charges accordingly. The Internet was
supposed to empower consumers, letting them compare deals with the click of a mouse. But it is
also supplying retailers with information about their customers that they never had before, along
with the technology to use all this accumulated data. While prices have always varied by
geography, local competition and whim, retailers were never able to effectively target individuals
until the Web. “Dynamic pricing is the new reality, and it’s going to be used by more and more
retailers,” said Vernon Keenan, a San Francisco Internet consultant. “In the future, what you pay
will be determined by where you live and who you are. It’s unfair, but that doesn’t mean it’s not
going to happen.”
Source: David Streitfeld, “On the Web, Price Tags Blur: What You Pay Could Depend on Who You Are,” Washington
Post, September 27, 2000, A1.
Based on your reading of the chapter about price discrimination, how would you respond to this
article?
8. Why might some consumers believe that, when a firm is able to practice perfect price
discrimination, the outcome is less than “perfect” for the consumer?
9. Before he became Dr. McDreamy in Grey’s Anatomy, Patrick Dempsey played Ronald, an
awkward high school student in the romantic comedy Can’t Buy Me Love (1987). In the film,
Ronald pays Cindy, the most popular girl in school, $1,000 to date him for a month. Cindy’s old
boyfriend was the former star quarterback who was equally as popular as Cindy and did not have
to pay to date her. Explain how Cindy is practicing price discrimination with her dating practices.
10. Colleges are able to practice price discrimination by separating their students into distinct income
groups using the Free Application for Federal Student Aid (FAFSA) and by offering a two-tiered
pricing structure based on residency. Based on what we know about price elasticity of demand,
what is generally true about these distinct groups?
11. Price discrimination is practiced in different ways in the real world. Explain why the $5 foot-long
submarine sandwich from Subway does not strictly meet the definition of price discrimination.
12. Publishing novels is another example of price discrimination. A hardback version of a novel
precedes a less-expensive paperback version. Explain how price discrimination can occur in these
markets.
13. List and explain the conditions for price discrimination.
14. Using different words as search criteria can produce different prices on the same Web-based
market. Explain how this could happen.
15. How could college campus “smart” vending machine owners practice price discrimination?
16. Explain the welfare effects of perfect price discrimination.
17. Explain the welfare effects of price discrimination.
18. Explain the relationship between price elasticity and price discrimination.
19. Why would some consumer groups complain to public policy makers about alleged price
discrimination?
20. List three examples of retail price discrimination.
21. How do grocery stores practice price discrimination?
22. What is the relationship between an auction and perfect price discrimination?
23. Suppose a small town has one movie theater and one Mexican food restaurant. Which
establishment will find it easier to price discriminate?
24. Why would a theme park practice discrimination by age for admission but not for souvenirs?
25. Suppose there are three types of concertgoers at symphony hall. Staff number 30 and are willing to
pay $50. Students number 20 and are willing to pay $30. Music lovers number 50 and are willing
to pay $70. The cost of the concert is $500. The hall must charge in increments of $5 (that is, $20
or $25, but not $23), and wants to maximize revenue.
a. If symphony hall can charge only one price, how much revenue is earned?
b. If symphony hall can perfectly price discriminate, how much revenue is earned?
