1. Price discrimination
a.
is illegal in the United States and Europe.
b.
can occur in both perfectly competitive and monopoly markets.
c.
is illogical because it does not maximize profits.
d.
can maximize profits if the seller can prevent the resale of goods between customers.
2. Price discrimination is the business practice of
a.
bundling related products to increase total sales.
b.
selling the same good at different prices to different customers.
c.
pricing above marginal cost.
d.
hiring marketing experts to increase consumers’ brand loyalty.
3. When a monopolist is able to sell its product at different prices, it is engaging in
a.
b.
c.
d.
4. The practice of selling the same goods to different customers at different prices, but with the same marginal cost, is
known as
a.
price segregation.
b.
price discrimination.
c.
arbitrage.
d.
monopoly pricing.
5. For a firm to price discriminate,
a.
it must be a natural monopoly.
b.
it must be regulated by the government.
c.
it must have some market power.
d.
consumers must tell the firm what they are willing to pay for the product.
6. A rational pricing strategy for a profit-maximizing monopolist is
a.
price discrimination.
b.
price segregation.
c.
synergy pricing.
d.
average cost pricing.
7. Price discrimination requires the firm to
a.
separate customers according to their willingnesses to pay.
b.
differentiate between different units of its product.
c.
engage in arbitrage.
d.
use coupons.
8. Which of the following can eliminate the inefficiency inherent in monopoly pricing?
a.
arbitrage
b.
cost-plus pricing
c.
price discrimination
d.
regulations that force monopolies to reduce their levels of output
9. A firm cannot price discriminate if it
a.
has perfect information about consumer demand.
b.
operates in a competitive market.
c.
faces a downward-sloping demand curve.
d.
is regulated by the government.
10. A firm cannot price discriminate if
a.
it has declining marginal revenue.
b.
it operates in a competitive market.
c.
buyers only reveal the price they are willing to pay for the product.
d.
it has a constant marginal cost.
11. Price discrimination adds to social welfare in the form of
(i)
increased total surplus.
(ii)
reduced costs of production.
(iii)
increased consumer surplus.
a.
(i) only
b.
(i) and (ii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
12. Compared to the monopoly outcome with a single price, imperfect price discrimination
(i)
sometimes raises total surplus.
(ii)
sometimes lowers total surplus.
(iii)
always leads to a lower quantity of output.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
13. Price discrimination
a.
forces monopolies to charge a lower price as a result of government regulation.
b.
is an attempt by a monopoly to prevent some customers from purchasing its product by charging a high price.
c.
is an attempt by a monopoly to increases its profit by selling the same good to different customers at different
prices.
d.
increases the consumer surplus associated with a monopolistic market.
14. What do economists call the business practice of selling the same good at difference prices to different customers?
a.
price discrimination
b.
collusion
c.
compensating differential
d.
Both a and b are correct
15. A monopolist’s profits with price discrimination will be
a.
lower than if the firm charged a single, profit-maximizing price
b.
the same as if the firm charged a single, profit-maximizing price.
c.
higher than if the firm charged just one price because the firm will capture more consumer surplus.
d.
higher than if the firm charged a single price because the costs of selling the good will be lower.
16. Which of the following is not an example of price discrimination?
a.
A movie theater charges a lower price for a child’s ticket than for an adult’s ticket.
b.
A university rebates part of the cost of tuition in the form of financial aid for needy students.
c.
A local pizza chain offers a “buy three get one free” deal.
d.
An ice cream parlor charges a higher price for ice cream than for sherbet.
17. A movie theater can increase its profits through price discrimination by charging a higher price to adults and a lower
price to children if it
a.
can prevent children from buying the lower-priced tickets and selling them to adults.
b.
has some degree of monopoly pricing power.
c.
can easily distinguish between the two groups of customers.
d.
All of the above are correct.
18. A movie theater can increase its profits through price discrimination by charging a higher price to adults and a lower
price to children if
a.
adults buy more popcorn than children.
b.
the cost of showing a movie to children is less than the cost of showing a movie to adults.
c.
it has some degree of monopoly-pricing power.
d.
All of the above are correct.
19. Financial aid to college students, quantity discounts, and senior citizen discounts are all examples of
a.
consumer surplus.
b.
deadweight loss.
c.
price discrimination.
d.
nonprofit pricing strategies.
20. When deciding what price to charge consumers, the monopolist may choose to charge them different prices based on
the customers’
a.
geographical location.
b.
age.
c.
income.
d.
All of the above are correct.
21. Many movie theaters allow discount tickets to be sold to senior citizens because
a.
senior-citizen laws mandate such discounts.
b.
goodwill efforts earn community respect and win loyal patrons.
c.
the theaters are profit maximizers.
d.
senior citizens lobby city councils for lower prices.
22. Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you fly back. What is the reason
for this price discrepancy?
a.
Airlines are practicing imperfect price discrimination to raise their profits.
b.
Airlines charge a different rate based on the different nature of peoples’ travel needs.
c.
Airlines are attempting to charge people based on their willingness to pay.
d.
All of the above are correct.
23. When a local grocery store offers discount coupons in the Sunday paper it is most likely trying to
a.
reduce prices for all customers.
b.
encourage literacy.
c.
encourage arbitrage.
d.
price discriminate.
24. Price discrimination explains why Ivy League universities often base tuition costs on students’
a.
age.
b.
financial resources.
c.
high school GPA.
d.
gender.
25. Which of the following is not an example of price discrimination by a firm?
a.
children’s meals at a restaurant
b.
a natural gas company charging customers a higher rate in the winter than in the summer
c.
a senior citizens’ discount
d.
coupons in the Sunday newspaper
26. Some prescription drugs sell for more in the United States than they do in other countries. Which of the following
statements about this issue is most likely to be true?
a.
Drug companies are engaging in price discrimination, and this practice certainly reduces global social welfare.
b.
Global social welfare could be improved if the price in the United States were reduced to the price charged in
other countries.
c.
Global social welfare could be improved if the price in the other countries were increased to the price charged
in the United States.
d.
Drug companies are engaging in price discrimination, but this might improve global social welfare if it gives
more people access to the drugs.
27. Customers who purchase an audio CD from Sally’s Sounds are charged 20% more than customers who purchase the
audio CD from the Sally’s Sounds website. This is an example of
a.
perfect price discrimination.
b.
price discrimination.
c.
deadweight loss.
d.
socially inefficient output.
28. During the holiday season, high-end retailers frequently place a high price on merchandise on weekends and discount
the price during the week. They do this because they believe that two groups of customers exist: shoppers with little free
time and bargain hunters. Bargain hunters have time to shop around and frequently shop during the week. What do
economists call this price strategy used by high-end retailers?
a.
oligopoly
b.
price discrimination
c.
compensating differential
d.
in-kind transfers
29. Which of the following is an example of price discrimination?
a.
Nabisco provides cents-off coupons for its products.
b.
Amtrak offers a lower price for weekend travel compared to weekday rates on the same routes.
c.
Hotel rates for AAA members are lower than for nonmembers.
d.
All of the above are correct.
30. Which of the following is an example of price discrimination?
a.
An online bookstore charges more for overnight shipping than standard shipping when customers buy books
from it.
b.
Airline tickets are more expensive for first-class seats than for coach.
c.
Hotel rates for AAA members are lower than for nonmembers.
d.
All of the above are correct.
31. Which of the following statements comparing monopoly with competition is correct?
a.
A monopolist produces a higher level of output and charges a lower price than a competitive firm would.
b.
With perfect price discrimination, the total surplus under monopoly can be the same as under competition.
c.
With or without price discrimination, the consumer surplus under monopoly is at least as large as it would be
under competition.
d.
The deadweight loss associated with monopoly is caused by the positive economic profits of the monopolist;
competitive firms do not earn a positive economic profit so there is no deadweight loss under competition.
32. Suppose a monopolist is able to charge each customer a price equal to that customer’s willingness-to-pay for the
product. Then the monopolist is engaging in
a.
marginal cost pricing.
b.
arbitrage pricing.
c.
voodoo economics.
d.
perfect price discrimination.
33. Suppose that a professional photographer takes a prize-winning digital photo. She can sell a 5″x7″ color print of the
photo for $10. She can also sell the digital file for $20. There are 500 people willing to buy the color print and 2,000
people willing to buy the digital file. Assume the costs to the photographer are zero and that the people who purchase the
digital file cannot resell the file itself or any prints made from it. What should she do in order to maximize her profits?
a.
earn $5,000 by selling only the color prints
b.
earn $40,000 by selling only the digital files
c.
earn $45,000 by selling both the color prints and the digital files at their respective prices
d.
We do not have enough information with which to answer this question.
Scenario 15-5
An airline knows that there are two types of travelers: business travelers and vacationers. For a particular flight, there are
100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for a ticket. There
are 150 seats available on the plane. Suppose the cost to the airline of providing the flight is $20,000, which includes the
cost of the pilots, flight attendants, fuel, etc.
34. Refer to Scenario 15–5. How much profit will the airline earn if it sets the price of each ticket at $600?
a.
-$5,000
b.
$15,000
c.
$40,000
d.
$60,000
35. Refer to Scenario 15–5. How much profit will the airline earn if it sets the price of each ticket at $300?
a.
-$15,000
b.
-$5,000
c.
$25,000
d.
$45,000
36. Refer to Scenario 15–5. How much profit will the airline earn if it engages in price discrimination?
a.
-$5,000
b.
$40,000
c.
$55,000
d.
$75,000
37. Refer to Scenario 15–5. How much additional profit can the airline earn by charging each customer their willingness
to pay relative to charging a flat price of $600 per ticket?
a.
$15,000
b.
$25,000
c.
$40,000
d.
$70,000
38. Refer to Scenario 15–5. How much additional profit can the airline earn by charging each customer their willingness
to pay relative to charging a flat price of $300 per ticket?
a.
$10,000
b.
$15,000
c.
$30,000
d.
$45,000
Scenario 15-6
The concert promoters of a heavy-metal band, WeR2Loud, know that there are two types of concert-goers: die-hard fans
and casual fans. For a particular WeR2Loud concert, there are 1,000 die-hard fans who will pay $150 for a ticket and 500
casual fans who will pay $50 for a ticket. There are 1,500 seats available at the concert venue. Suppose the cost of putting
on the concert is $50,000, which includes the cost of the band, lighting, security, etc.
39. Refer to Scenario 15–6. How much profit will the concert promoters earn if they set the price of each ticket at $150?
a.
$75,000
b.
$100,000
c.
$150,000
d.
$175,000
40. Refer to Scenario 15–6. How much profit will the concert promoters earn if they set the price of each ticket at $50?
a.
$25,000
b.
$75,000
c.
$100,000
d.
$150,000
41. Refer to Scenario 15–6. How much profit will the concert promoters earn if they engage in price discrimination?
a.
$100,000
b.
$125,000
c.
$150,000
d.
$175,000
42. Refer to Scenario 15–6. How much additional profit can the concert promoters earn by charging each customer their
willingness to pay relative to charging a flat price of $150 per ticket?
a.
$25,000
b.
$50,000
c.
$75,000
d.
$100,000
43. Refer to Scenario 15–6. How much additional profit can the concert promoters earn by charging each customer their
willingness to pay relative to charging a flat price of $50 per ticket?
a.
$25,000
b.
$50,000
c.
$75,000
d.
$100,000
Scenario 15-7
Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area.
Let’s assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has
already installed cable to all of the homes in its market area, the marginal cost of delivering PMC to subscribers is zero.
The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting
price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of
subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a
year for the new PMC premium channel. Second, the PMC channel will appeal to 20,000 occasional TV viewers who will
pay as much as $20 a year for a subscription to PMC.
44. Refer to Scenario 15-7. If Black Box Cable TV is unable to price discriminate, what price will it choose to maximize
its profit, and what is the amount of the profit?
a.
price = $20; profit = $400,000
b.
price = $20; profit = $330,000
c.
price = $150; profit = $450,000
d.
price = $150; profit = $600,000
45. Refer to Scenario 15-7. If Black Box Cable TV is able to price discriminate, what would be the maximum amount of
profit it could generate?
a.
$500,000
b.
$600,000
c.
$850,000
d.
$925,000
46. Refer to Scenario 15-7. What is the deadweight loss associated with the nondiscriminating pricing policy compared
to the price discriminating policy?
a.
$375,000
b.
$400,000
c.
$475,000
d.
It cannot be determined from the information provided.
Scenario 15-8
Mega Media Cable TV is able to purchase an exclusive right to sell a premium sports channel in its market area. Let’s
assume that Mega Media pays $100,000 a year for the exclusive marketing rights to the sports channel. Since Mega Media
has already installed cable to all of the homes in its market area, the marginal cost of delivering the sports channel to
subscribers is zero. The manager of Mega Media needs to know what price to charge for the sports channel service to
maximize her profit. Before setting price, she hires an economist to estimate demand for the sports channel. The
economist discovers that there are two types of subscribers who value premium sporting channels. First are the 3,000 die-
hard sports fans who will pay as much as $150 a year for the new channel. Second, the premium sports channel will
appeal to 20,000 occasional sports viewers who will pay as much as $25 a year for a subscription to it.
47. Refer to Scenario 15-8. How much profit will Mega Media Cable TV earn if it sets the price at $25?
a.
$350,000
b.
$450,000
c.
$475,000
d.
$575,000
48. Refer to Scenario 15-8. How much profit will Mega Media Cable TV earn if it sets the price at $150?
a.
$350,000
b.
$450,000
c.
$475,000
d.
$575,000
49. Refer to Scenario 15-8. If Mega Media Cable TV is unable to price discriminate, what price will it choose to
maximize its profit, and what is the amount of the profit?
a.
price = $25; profit = $575,000
b.
price = $25; profit = $475,000
c.
price = $150; profit = $450,000
d.
price = $150; profit = $350,000
50. Refer to Scenario 15-8. If Mega Media Cable TV is able to price discriminate, what would be the maximum amount
of profit it could generate?
a.
$950,000
b.
$850,000
c.
$400,000
d.
$350,000
51. Refer to Scenario 15–9. How much profit will the museum earn if it charges all customers $8 for admission?
a.
$200
b.
$400
c.
$800
d.
$2,400
52. Refer to Scenario 15–9. How much profit will the museum earn if it charges all customers $12 for admission?
a.
–$800
b.
$100
c.
$800
d.
$1,200
53. Refer to Scenario 15–9. How much profit will the museum earn if it engages in price discrimination?
a.
$800
b.
$1,200
c.
$1,600
d.
$2,800
54. Refer to Scenario 15–9. How much additional profit will the museum earn if it engages in price discrimination
compared to charging each customer $8 for admission?
a.
$0
b.
$200
c.
$400
d.
$800