Question 1

Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then:
A) producer surplus increases due to new buyers, but the producer surplus from existing customers declines due to the lower price.
B) the change in producer surplus is transferred to consumers.
C) the increase in consumer surplus is only due to the increase in quantity demanded.
D) the sum of producer and consumer surplus remains the same, but surplus value is transferred from the producer to consumers.

Accepted Answer

When the firm reduces its price, it gains new buyers, increasing producer surplus from these new sales, but loses some surplus from existing customers who now pay a lower price.

Question 2

An electric power company uses block pricing for electricity sales. Block pricing is an example of:
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) Block pricing is not a type of price discrimination.

Accepted Answer

Block pricing is an example of second-degree price discrimination, where the price of a product or service varies based on the quantity purchased. In block pricing, consumers pay different prices for different blocks or tiers of electricity usage. This encourages consumers to use less electricity to avoid higher prices, which is a form of price discrimination. However, this is not considered first-degree price discrimination because the company is not charging each individual consumer a different price based on their willingness to pay. It is also not considered third-degree price discrimination because the company is not charging different prices to different groups of consumers based on their demographics or characteristics.

Question 3

Which of the following strategies are used by business firms to capture consumer surplus?
A) Price discrimination
B) Bundling
C) Two-part tariffs
D) all of the above

Accepted Answer

All three strategies (price discrimination, bundling, and two-part tariffs) are commonly used by business firms to capture consumer surplus. Price discrimination involves charging different prices for the same product or service based on the consumer's willingness to pay. This allows the business to capture the surplus that would otherwise go to the consumer. Bundling involves offering two or more products or services together at a discounted price, which encourages consumers to buy more than they otherwise would and generates additional revenue for the business. Two-part tariffs involve charging a fixed fee for access to a product or service, as well as a per-unit charge for usage. This allows the business to capture consumer surplus from consumers who are willing to pay more for usage.

Question 4

McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of:
A) collusion.
B) price discrimination.
C) two-part tariff.
D) bundling.
E) tying.

Accepted Answer

This is an example of price discrimination because McDonald's is offering a discount to a specific group of customers (high school students with ID cards) based on their willingness to pay.

Question 5

The maximum price that a consumer is willing to pay for each unit bought is the ________ price.
A) market
B) reservation
C) consumer surplus
D) auction
E) choke

Accepted Answer

The maximum price a consumer is willing to pay for each unit is known as the reservation price. This is the price point at which a consumer is just willing to make a purchase. Choice A, market price, is the actual price at which goods are being sold in the market. Choice C, consumer surplus, is the amount by which the consumer's reservation price exceeds the market price. Choice D, auction, refers to a sales event where buyers bid for goods, and the highest bid wins. Choice E, choke, is not a term commonly used in economics.

Question 6

When a firm charges each customer the maximum price that the customer is willing to pay, the firm:
A) engages in a discrete pricing strategy.
B) charges the average reservation price.
C) engages in second-degree price discrimination.
D) engages in first-degree price discrimination.

Accepted Answer

When a firm charges each customer the maximum price that the customer is willing to pay, it is engaging in first-degree price discrimination. This strategy involves charging each customer their individual reservation price, which is the maximum price they are willing to pay. This allows the firm to capture more consumer surplus and increase profits.

Question 7

Figure 11.2.3
-Refer to Figure 11.2.3 above. In this case, the firm charges two different prices. This pricing scheme corresponds to:
A) First degree price discrimination.
B) Second degree price discrimination.
C) Third degree price discrimination.
D) Perfect price discrimination.

Accepted Answer

In this pricing scheme, the firm charges two different prices to two different consumer groups. This corresponds to third degree price discrimination, where the firm is able to segregate the market and charge different prices to each group based on their different elasticities of demand. This allows the firm to capture more consumer surplus and increase profits. First degree price discrimination would involve charging each customer their willingness to pay, which is not the case here since there are two distinct prices. Second degree price discrimination would involve offering quantity discounts, which is also not the case here. Perfect price discrimination would involve charging each customer their willingness to pay, but this is not possible in practice since customers do not reveal their willingness to pay.

Question 8

Figure 11.2.1
-Refer to Figure 11.2.1 above. When the firm charges the reservation price to each consumer, the additional profit equals area:
A) A
B) B
C) C
D) C + D

Accepted Answer

When the firm charges reservation price to each consumer, it earns profit equal to the triangle C + D. This is because the firm incurs a cost equal to area A to produce the good, but when it charges the reservation price to each consumer, it earns the price equal to area C + D. Therefore, the additional profit earned is equal to area C + D.

Question 9

Figure 11.1.1
-Refer to Figure 11.1.1 above. To capture the consumer surplus along the B range, the firm would ideally charge:
A) a higher price to consumers willing to pay more and a lower price to those willing to pay less.
B) the same higher price to all consumers.
C) a higher price to consumers willing to pay less and a lower price to those willing to pay more.
D) a range of random prices along the demand curve.

Accepted Answer

To capture the consumer surplus along the B range, the firm should ideally charge a higher price to consumers willing to pay more and a lower price to those willing to pay less. This is because charging the same higher price to all consumers (option B) would result in some consumers being priced out of the market and those who are still willing to pay the higher price not receiving any consumer surplus. Charging a higher price to consumers willing to pay less and a lower price to those willing to pay more (option C) would result in the firm capturing less consumer surplus and potentially losing some customers who are unwilling to pay the higher price. Charging random prices along the demand curve (option D) is not a feasible option as it is not something that the firm can predict or control.

Question 10

Figure 11.2.2 -Refer to Figure 11.2.2 above. If the firm chooses to charge the four prices shown on the figure instead of a single price, P₀, the firm practices: A) First degree price discrimination. B) Second degree price discrimination. C) Third degree price discrimination. D) Perfect price discrimination.

Accepted Answer

The answer of  Figure 11.2.2
-Refer to Figure 11.2.2 above....

Question 11

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing:
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) fourth-degree price discrimination.
E) fifth-degree price discrimination.

Accepted Answer

The tennis pro is practicing third-degree price discrimination by charging different prices for different groups of customers (children vs. adults) based on their price elasticity of demand. This allows the pro to capture more consumer surplus and maximize their profits.

Question 12

Figure 11.1.1
-Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then:
A) consumer and producer surplus must increase.
B) consumer surplus increases, producer surplus may increase or decrease.
C) consumer surplus increases, producer surplus must decline.
D) consumer and producer surplus must decline.

Accepted Answer

If the firm reduces its price, consumer surplus will increase as consumers will be able to purchase the product at a lower price. However, the change in producer surplus will depend on the elasticity of demand for the product. If demand is relatively elastic, then the increase in sales volume may offset the decrease in price, resulting in an increase in producer surplus. However, if demand is relatively inelastic, then the decrease in price may lead to a decrease in producer surplus. Therefore, the reduction in price may lead to an increase or decrease in producer surplus, while consumer surplus must increase.

Question 13

A doctor charges two different prices for medical services, and the price level depends on the patients' income such that wealthy patients are charged more than poorer ones. This pricing scheme represents a form of:
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) pricing at each consumer's reservation price.

Accepted Answer

This pricing scheme represents third-degree price discrimination as the price level depends on the patients' income, which is a characteristic that can easily be identified and used for price discrimination. First-degree price discrimination involves charging each individual their maximum willingness to pay, second-degree price discrimination involves charging different prices based on the quantity purchased, and pricing at each consumer's reservation price is not a form of price discrimination but rather a method of maximizing profits.

Question 14

A firm is charging a different price for each unit purchased by a consumer. This is called:
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) fourth-degree price discrimination.
E) fifth-degree price discrimination.

Accepted Answer

First-degree price discrimination, also known as perfect price discrimination, occurs when a seller charges a different price for each unit purchased, tailored to the maximum price the consumer is willing to pay for each unit.

Question 15

Figure 11.1.1
-Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. By engaging in this practice, the firm:
A) is trying to reduce its costs and therefore increase its profit.
B) is engaging in an illegal activity that is prohibited by the Sherman Antitrust Act.
C) is attempting to convert producer surplus into consumer surplus.
D) is attempting to convert consumer surplus into producer surplus.
E) Both A and C are correct.

Accepted Answer

By charging a higher price to men and a lower price to women, the firm is attempting to convert consumer surplus into producer surplus. This means that the firm is trying to capture more of the value that customers place on its product, thereby increasing its profits. This practice is not necessarily illegal, as long as it does not violate anti-discrimination laws.

Question 16

In 1994, the Walt Disney Corporation ran a special promotion on tickets to Disneyland. Residents of southern California who lived near the amusement park were offered admission at the special price of $22. Other visitors to Disneyland were charged about $30. This practice is an example of:
A) collusion.
B) price discrimination.
C) two-part tariff.
D) bundling.
E) tying.

Accepted Answer

This is an example of price discrimination because Disneyland is charging two different prices to different groups of people based on their location.

Question 17

Second-degree price discrimination is the practice of charging:
A) the reservation price to each customer.
B) different prices for different quantity blocks of the same good or service.
C) different groups of customers different prices for the same products.
D) each customer the maximum price that he or she is willing to pay.

Accepted Answer

Second-degree price discrimination involves charging different prices for different quantity blocks of the same good or service. This allows the seller to extract more consumer surplus from customers who are willing to pay higher prices for larger quantities, while still generating revenue from those who are only willing to pay lower prices for smaller quantities. This type of discrimination is also known as quantity discrimination.

Question 18

Third-degree price discrimination involves:
A) charging each consumer the same two part tariff.
B) charging lower prices the greater the quantity purchased.
C) the use of increasing block rate pricing.
D) charging different prices to different groups based upon differences in elasticity of demand.

Accepted Answer

Third-degree price discrimination involves charging different prices to different groups based upon differences in elasticity of demand. This allows the seller to capture more consumer surplus by charging higher prices to those with relatively inelastic demand while still attracting customers with more price-sensitive demand by offering lower prices.

Question 19

Discrimination based upon the quantity consumed is referred to as ________ price discrimination.
A) first-degree
B) second-degree
C) third-degree
D) group

Accepted Answer

Second-degree price discrimination is when the price varies depending on the quantity consumed. This type of discrimination can be observed in bulk discounts or price breaks for larger purchases. First-degree price discrimination is when the price is customized to match the consumer's willingness to pay, and third-degree price discrimination is when the price varies based on demographic or group characteristics. Therefore, option B is the best choice as it accurately describes the type of discrimination based on quantity consumed.

Question 20

The maximum price that a consumer is willing to pay for a good is called:
A) the reservation price.
B) the market price.
C) the first-degree price.
D) the block price.
E) the choke price.

Accepted Answer

The reservation price is the maximum price a consumer is willing to pay for a good. This represents the value that the consumer places on the good and is an important factor in determining market demand. The market price is the price at which the good or service is actually being sold in the market, while the other options (first-degree price, block price, choke price) are not commonly used terms in economics.

Quiz 11: Pricing With Market Power

Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then:

An electric power company uses block pricing for electricity sales. Block pricing is an example of:

Which of the following strategies are used by business firms to capture consumer surplus?

McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of:

The maximum price that a consumer is willing to pay for each unit bought is the ________ price.

When a firm charges each customer the maximum price that the customer is willing to pay, the firm:

Figure 11.2.3 -Refer to Figure 11.2.3 above. In this case, the firm charges two different prices. This pricing scheme corresponds to:

Figure 11.2.1 -Refer to Figure 11.2.1 above. When the firm charges the reservation price to each consumer, the additional profit equals area:

Figure 11.1.1 -Refer to Figure 11.1.1 above. To capture the consumer surplus along the B range, the firm would ideally charge:

Figure 11.2.2 -Refer to Figure 11.2.2 above. If the firm chooses to charge the four prices shown on the figure instead of a single price, P0, the firm practices:

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing:

Figure 11.1.1 -Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping. If the firm reduces its price, then:

A doctor charges two different prices for medical services, and the price level depends on the patients' income such that wealthy patients are charged more than poorer ones. This pricing scheme represents a form of:

A firm is charging a different price for each unit purchased by a consumer. This is called:

Figure 11.1.1 -Rather than charging a single price to all customers, a firm charges a higher price to men and a lower price to women. By engaging in this practice, the firm:

In 1994, the Walt Disney Corporation ran a special promotion on tickets to Disneyland. Residents of southern California who lived near the amusement park were offered admission at the special price of $22. Other visitors to Disneyland were charged about $30. This practice is an example of:

Second-degree price discrimination is the practice of charging:

Third-degree price discrimination involves:

Discrimination based upon the quantity consumed is referred to as ________ price discrimination.

The maximum price that a consumer is willing to pay for a good is called:

Figure 11.2.2 -Refer to Figure 11.2.2 above. If the firm chooses to charge the four prices shown on the figure instead of a single price, P₀, the firm practices: