Question 1

Hersheypark in Pennsylvania mentions the following offer on its Web page: "A military discount is available at Hersheypark during the regular summer operating schedule off of the Regular, Junior and Senior One Day admission. This discount is available to active duty military, reserves, retired military personnel, and members of the National Guard." This is _____ price discrimination.

Accepted Answer

This is an example of segmenting or third-degree price discrimination as the discount is only offered to certain segments of customers (active duty military, reserves, retired military personnel, and members of the National Guard).

Question 2

Price discrimination is the practice of charging:

Accepted Answer

Price discrimination is the practice of charging different prices to different customers for the same good. This can be done based on various factors like age, gender, income level, location, etc. The idea is to charge the maximum amount that each customer is willing to pay in order to maximize profits. However, price discrimination can be illegal if it is based on factors like race, religion, or nationality.

Question 3

If a firm has market power but cannot prevent its customers from reselling the product, the firm will:

Accepted Answer

A firm with market power will aim to maximize its profits by producing a quantity of output where marginal revenue equals marginal cost. This principle applies regardless of the firm's ability to prevent resale.

Question 4

Use the following to answer questions 6-7:
Figure 10.1 
-(Figure 10.1) Producer surplus under monopoly and under perfect price discrimination are _____ and _____, respectively.

Accepted Answer

Producer surplus under monopoly is $24, and under perfect price discrimination is $48.

Question 5

A rock-climbing school faces two demand curves. The demand by local residents is Q = 400 - 0.5P, and the demand by others is Q = 500 - 0.5P. The marginal cost of serving either local or nonlocal residents is constant at $100. If the rock-climbing school cannot practice third-degree price discrimination and must charge a single price to all customers, it will charge:

Accepted Answer

To find the single price the school will charge, we first need to find the combined demand curve by adding the quantities demanded by locals and nonlocals at any price P. The combined demand is Q_combined = (400 - 0.5P) + (500 - 0.5P) = 900 - P. To maximize profit, we set marginal revenue (MR) equal to marginal cost (MC). The inverse demand curve is P = 900 - Q. Differentiating this with respect to Q gives us MR = 900 - 2Q. Setting MR = MC, we have 900 - 2Q = 100. Solving for Q gives Q = 400. Substituting Q back into the inverse demand curve, P = 900 - 400 = $500.

Question 6

Price discrimination is motivated by the firm's desire to:

Accepted Answer

Price discrimination is primarily used by firms to increase producer surplus by charging different prices to different consumers based on their willingness to pay, thereby capturing more consumer surplus.

Question 7

Sparkling Water Co. has determined that for Michigan residents the price elasticity of demand for a case of its purified water is -3.0, while the price elasticity of demand for Florida residents is -2.5. Assume that the marginal cost is constant at $8. What price per case should Sparkling Water Co. charge Michigan and Florida customers?

Accepted Answer

The optimal price can be calculated using the formula P = MC / (1 + (1/E)), where P is the optimal price, MC is the marginal cost, and E is the price elasticity of demand. For Michigan, P = $8 / (1 + 1/(-3)) = $11.94. For Florida, P = $8 / (1 + 1/(-2.5)) = $13.33.

Question 8

Use the following to answer question:
Table 10.1 
-(Table 10.1) The table shows each consumer's maximum willingness to pay for a monthly subscription to MLB.TV. Each consumer is interested in purchasing a single subscription per month. The marginal cost of a subscription is $10. If MLB.TV can practice first-degree price discrimination, how much producer surplus will it earn from these consumers?

Accepted Answer

First-degree price discrimination means that the producer will charge each consumer the maximum they are willing to pay, resulting in all of the consumer surplus being converted to producer surplus. Adding up the maximum willingness to pay for each consumer results in a total of $290. Subtracting the total variable cost (marginal cost x number of subscribers, which is $10 x 10 = $100) from the total revenue ($290) yields a producer surplus of $190. However, the question asks specifically for how much producer surplus MLB.TV will earn from these consumers, so we need to subtract the producer surplus that would have been earned if it charged a single price to all consumers. In this case, that would be the producer surplus if MLB.TV charged every consumer $20, which is the midpoint of the highest and lowest willingness to pay values. Charging every consumer $20 would result in a total revenue of $200 ($20 x 10 subscribers) and total variable cost of $100, resulting in a producer surplus of $100. Subtracting $100 from $190 gives us a producer surplus of $90, which is equal to the sum of the differences between each individual's willingness to pay and $20 (the single price MLB.TV would have charged). Those differences are $37, $27, $22, $10, $7, $5, $4, $0, $0, and $0, which sum to $107. However, since the question asks for how much producer surplus MLB.TV will earn from these consumers, we need to subtract the total amount of surplus that would have been earned if it charged a single price from the total surplus that it will earn with first-degree price discrimination. So $107 minus $50 (half of $100, which is the producer surplus if MLB.TV charged $15, the average willingness to pay) gives us a producer surplus of $57. Therefore, the correct answer is C.

Question 9

(Figure 10.4) If the firm cannot practice third-degree price discrimination and must charge a single profit-maximizing price, it will earn producer surplus of approximately:

Accepted Answer

The correct answer is A because the profit-maximizing price is $10.50, and the quantity sold at that price is 400 units. The total revenue is therefore $4,200, and the total cost is $678.95. The producer surplus is therefore $4,200 - $678.95 = $3,521.05.

Question 10

Use the following to answer questions 6-7:
Figure 10.1 
-(Figure 10.1) The deadweight losses under monopoly and perfect price discrimination are _____ and _____, respectively.

Accepted Answer

Figure 10.1 shows that under monopoly, the deadweight loss is $8, while under perfect price discrimination, the deadweight loss is reduced to zero ($0). Therefore, the best choice is D, which corresponds to option D in the question.

Question 11

Use the following to answer question:
Figure 10.3 
-(Figure 10.3) Producer surplus using perfect price discrimination is _____ greater than under perfect competition and _____ greater than under monopoly.

Accepted Answer

The producer surplus under perfect price discrimination is the shaded triangle above the supply curve and below the demand curve, which is $1,600. This is twice the producer surplus under perfect competition, which is $800 (area between the supply and market price), and four times the producer surplus under monopoly, which is $400 (area between the supply and demand curves). Therefore, the correct answer is B.

Question 12

Use the following to answer questions 16-17:
Figure 10.4 
-(Figure 10.4) If the firm can segment the market by residence, it will earn producer surplus of:

Accepted Answer

To find the producer surplus when the market is segmented by residence, we need to first identify the area of the rectangle representing the total revenue and then subtract the area of the triangle representing the variable cost. 
Total revenue = (200 x $20) + (400 x $30) = $8,000 
Variable cost = 200 + 400 = 600 
Producer surplus = Total revenue - Variable cost = $8,000 - $600 = $7,400 
Segmented producer surplus = ($20 - $10) x 200 + ($30 - $10) x 400 - Variable cost 
= $2,000 + $8,000 - $600 = $9,400 
Therefore, the producer surplus when the market is segmented is $9,400 - $7,375 = $4,025.

Question 13

Which of the following requirements is necessary to practice price discrimination?

Accepted Answer

The answer of Which of the following requirements is necessary...

Question 14

If a firm practices first-degree price discrimination, the firm must:

Accepted Answer

First-degree price discrimination involves charging each individual customer a different price based on their willingness to pay. This requires the firm to have complete information about each customer's unique demand curve before the customer buys the product, so that they can charge the highest possible price to each individual. Options A, C, and D are incorrect because they do not accurately describe the requirements for first-degree price discrimination.

Question 15

A firm with market power has the inverse demand curve P = 90 - 1.5Q and marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its profit-maximizing output level will:

Accepted Answer

Under perfect price discrimination, the firm charges each customer the maximum they are willing to pay. This means that the firm's marginal revenue (MR) curve will coincide with its demand curve.

First, we need to find the profit-maximizing quantity under perfect price discrimination. We do this by setting MR equal to MC:

90 - 3Q = 10 + Q
80 = 4Q
Q = 20

So the profit-maximizing output level under perfect price discrimination is 20 units.

Next, let's compare this to the output level under regular monopoly pricing. The monopoly's profit-maximizing output level is found by setting marginal revenue equal to marginal cost:

MR = 90 - 3Q 
MC = 10 + Q

90 - 3Q = 10 + Q
80 = 4Q
Q = 20

So the monopoly's profit-maximizing output level is also 20 units.

This means that the firm's output level does not change when it switches from regular monopoly pricing to perfect price discrimination.

However, its profit will increase under perfect price discrimination because it is now able to capture all the consumer surplus that was previously lost due to charging a single price.

Question 16

A firm with market power has the inverse demand curve P = 90 - 1.5Q and the marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its producer surplus will:

Accepted Answer

Under perfect price discrimination, a firm captures all consumer surplus as producer surplus. The area of producer surplus is the area above the MC curve and below the demand curve, up to the quantity sold. To find the quantity where MR = MC under perfect price discrimination, equate MC to the derivative of the revenue function (which is the integral of the inverse demand curve). However, for simplicity in this case, we calculate the increase in producer surplus directly from the given options. The correct calculation involves integrating the area between the MC and the demand curve, which results in an increase in producer surplus, as option B suggests.

Question 17

Use the following to answer question:
Figure 10.2 
-(Figure 10.2) Which of the following statements is (are) TRUE?

Accepted Answer

The answer of Use the following to answer question:
Figure 10.2...

Question 18

The inverse demand curve for a firm with market power is P = 60 - Q, and its marginal cost is given by MC = 2Q. If the firm decides to practice first-degree price discrimination, the deadweight loss will:

Accepted Answer

Under first-degree price discrimination, the firm charges each consumer their willingness to pay, which leads to zero consumer surplus as well as no deadweight loss. In this case, since the firm knows each consumer's willingness to pay, it will set the price accordingly, and there will be no deadweight loss. Therefore, the deadweight loss will decrease from $37.50 (the deadweight loss under monopoly pricing) to $0.

Question 19

A firm with market power has the inverse demand curve P = 160 - 4Q and the marginal cost curve MC = 8Q. If the firm decides to practice perfect price discrimination, consumer surplus will:

Accepted Answer

Perfect price discrimination means the firm charges each customer their maximum willingness to pay, therefore, the entire consumer surplus is captured by the firm as profit. In this case, the firm's marginal revenue is equal to the price since they practice perfect price discrimination. Thus, we can set MR = MC to find the profit-maximizing quantity: 160 - 8Q = MC = 8Q. Solving for Q, we get Q = 10. Plugging this back into the demand curve, we get P = 120. Therefore, the firm's profit is (120 - 8*10) * 10 = $1,120. Since the entire consumer surplus is captured by the firm, consumer surplus is reduced to 0.

Question 20

A rock-climbing school faces two demand curves. The demand by local residents is Q = 400 - 0.5P, and the demand by others is Q = 500 - 0.5P. The marginal cost of serving either local residents or others is constant at $100. If the rock-climbing school practices third-degree price discrimination, it will charge local residents and others a price of _____ and _____, respectively.

Accepted Answer

To practice third-degree price discrimination, the firm must set different prices for different groups of customers based on their willingness to pay. To determine the optimal prices, we need to find the profit-maximizing quantities and prices for each group separately and then compare the profits.

For local residents, the demand curve is Q = 400 - 0.5P. We need to solve for P in terms of Q and then invert the demand function to get P as a function of Q.

Q = 400 - 0.5P

0.5P = 400 - Q

P = 800 - 2Q

Now we can set marginal cost equal to marginal revenue to find the profit-maximizing quantity:

MC = MR

100 = d(800-2Q)/dQ

100 = -2

Q = 350

Substituting Q = 350 into the demand function, we get the optimal price for local residents:

P = 800 - 2Q = 800 - 2(350) = 100

Therefore, local residents will be charged $100 per climb.

For others, the demand curve is Q = 500 - 0.5P. Again, we need to solve for P in terms of Q and then invert the demand function to get P as a function of Q.

Q = 500 - 0.5P

0.5P = 500 - Q

P = 1000 - 2Q

Setting marginal cost equal to marginal revenue gives us the profit-maximizing quantity:

MC = MR

100 = d(1000-2Q)/dQ

100 = -2

Q = 450

Substituting Q = 450 into the demand function, we get the optimal price for others:

P = 1000 - 2Q = 1000 - 2(450) = 100

Therefore, others will also be charged $100 per climb.

The answer is B, as local residents and others will both be charged $100 per climb.

Quiz 10: Market Power and Pricing Strategies

Price discrimination is the practice of charging:

If a firm has market power but cannot prevent its customers from reselling the product, the firm will:

Use the following to answer questions 6-7: Figure 10.1 -(Figure 10.1) Producer surplus under monopoly and under perfect price discrimination are _ and _, respectively.

Price discrimination is motivated by the firm's desire to:

(Figure 10.4) If the firm cannot practice third-degree price discrimination and must charge a single profit-maximizing price, it will earn producer surplus of approximately:

Use the following to answer questions 6-7: Figure 10.1 -(Figure 10.1) The deadweight losses under monopoly and perfect price discrimination are _ and _, respectively.

Use the following to answer question: Figure 10.3 -(Figure 10.3) Producer surplus using perfect price discrimination is _ greater than under perfect competition and _ greater than under monopoly.

Use the following to answer questions 16-17: Figure 10.4 -(Figure 10.4) If the firm can segment the market by residence, it will earn producer surplus of:

Which of the following requirements is necessary to practice price discrimination?

If a firm practices first-degree price discrimination, the firm must:

A firm with market power has the inverse demand curve P = 90 - 1.5Q and marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its profit-maximizing output level will:

A firm with market power has the inverse demand curve P = 90 - 1.5Q and the marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its producer surplus will:

Use the following to answer question: Figure 10.2 -(Figure 10.2) Which of the following statements is (are) TRUE?

The inverse demand curve for a firm with market power is P = 60 - Q, and its marginal cost is given by MC = 2Q. If the firm decides to practice first-degree price discrimination, the deadweight loss will:

A firm with market power has the inverse demand curve P = 160 - 4Q and the marginal cost curve MC = 8Q. If the firm decides to practice perfect price discrimination, consumer surplus will:

Quiz 10: Market Power and Pricing Strategies

Price discrimination is the practice of charging:

If a firm has market power but cannot prevent its customers from reselling the product, the firm will:

Use the following to answer questions 6-7: Figure 10.1 -(Figure 10.1) Producer surplus under monopoly and under perfect price discrimination are _____ and _____, respectively.

Price discrimination is motivated by the firm's desire to:

(Figure 10.4) If the firm cannot practice third-degree price discrimination and must charge a single profit-maximizing price, it will earn producer surplus of approximately:

Use the following to answer questions 6-7: Figure 10.1 -(Figure 10.1) The deadweight losses under monopoly and perfect price discrimination are _____ and _____, respectively.

Use the following to answer question: Figure 10.3 -(Figure 10.3) Producer surplus using perfect price discrimination is _____ greater than under perfect competition and _____ greater than under monopoly.

Use the following to answer questions 16-17: Figure 10.4 -(Figure 10.4) If the firm can segment the market by residence, it will earn producer surplus of:

Which of the following requirements is necessary to practice price discrimination?

If a firm practices first-degree price discrimination, the firm must:

A firm with market power has the inverse demand curve P = 90 - 1.5Q and marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its profit-maximizing output level will:

A firm with market power has the inverse demand curve P = 90 - 1.5Q and the marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its producer surplus will:

Use the following to answer question: Figure 10.2 -(Figure 10.2) Which of the following statements is (are) TRUE?

The inverse demand curve for a firm with market power is P = 60 - Q, and its marginal cost is given by MC = 2Q. If the firm decides to practice first-degree price discrimination, the deadweight loss will:

A firm with market power has the inverse demand curve P = 160 - 4Q and the marginal cost curve MC = 8Q. If the firm decides to practice perfect price discrimination, consumer surplus will:

Use the following to answer questions 6-7: Figure 10.1 -(Figure 10.1) Producer surplus under monopoly and under perfect price discrimination are _ and _, respectively.

Use the following to answer questions 6-7: Figure 10.1 -(Figure 10.1) The deadweight losses under monopoly and perfect price discrimination are _ and _, respectively.

Use the following to answer question: Figure 10.3 -(Figure 10.3) Producer surplus using perfect price discrimination is _ greater than under perfect competition and _ greater than under monopoly.