Question 1

Which case best represents a case of price discrimination?

Accepted Answer

Price discrimination occurs when a firm charges different prices for the same good or service to different customers. In this case, the major airline is offering lower prices to senior citizens based on their age, which is an example of price discrimination. The other options involve different pricing strategies that do not constitute price discrimination. The insurance company is offering discounts based on driving behavior, the baseball team is paying players based on performance, and the utility company is charging less during off-peak hours based on the cost of generating electricity at different times of day. None of these involve offering different prices to different groups of customers based solely on their characteristics.

Question 2

Consumers who clip and redeem discount coupons

Accepted Answer

Consumers who clip and redeem discount coupons are more price-sensitive than those who do not use coupons, as they are actively seeking discounts and are likely to be more aware of prices. This means that they are more likely to be influenced by price changes and exhibit a higher price elasticity of demand.

Question 3

Which of the following statements is true of price discrimination?

Accepted Answer

Price discrimination allows firms to charge different prices to different segments of consumers, resulting in higher overall profits. By charging different prices, the firm can capture more of the consumer surplus and increase its revenues. This strategy can result in higher profits than if the firm charged a single price for all consumers.

Question 4

Which would definitely not be an example of price discrimination?

Accepted Answer

Price discrimination involves charging different prices to different consumers for the same good or service based on willingness to pay, not cost differences. Option D reflects cost-based pricing, not price discrimination.

Question 5

One argument for having the government regulate natural monopolies is that without regulation,

Accepted Answer

The answer of One argument for having the government regulate...

Question 6

An argument for making regulated monopolies adopt marginal-cost pricing is that this would

Accepted Answer

Marginal-cost pricing ensures that the price of a good reflects the cost of producing an additional unit, aligning the price with the societal valuation of the marginal benefit, thus promoting allocative efficiency.

Question 7

The problem with adopting a fair-return pricing policy for a natural monopoly is that

Accepted Answer

Adopting a fair-return pricing policy for a natural monopoly may not result in allocative efficiency because it does not ensure that price equals marginal cost, which is necessary for allocative efficiency. Fair-return pricing policy only ensures that the monopoly earns a fair rate of return on its investments, but it does not necessarily lead to productive efficiency or allocative efficiency. If economic profits are positive, it may indicate that the monopoly is not setting prices at the level of marginal cost, and if economic profits are negative, it may indicate that prices are too low to cover costs and encourage investment in the long run.

Question 8

Even though many ballparks practice price discrimination between adults and children in selling tickets, such discrimination is not applied at the concession stands because

Accepted Answer

Price discrimination between adults and children at concession stands cannot be applied because children can purchase the product at a lower price and then transfer it to an adult, thus eliminating any potential price discrimination. This is known as resale, and it prevents the seller from being able to effectively price discriminate based on age.

Question 9

"Big data" collection by online firms about buyers and their behaviors allows the firms to practice

Accepted Answer

Big data collection enables online firms to practice price discrimination by segmenting customers and charging different prices based on their willingness to pay. This allows firms to increase profits by charging a higher price to customers who are willing to pay more while still attracting price-sensitive customers with lower prices.

Question 10

With a natural monopoly, the fair-return price

Accepted Answer

With a natural monopoly, the firm can produce at a lower cost than any potential competitor, resulting in a market with just one firm. This market structure results in a deadweight loss, where the intersection of marginal cost and demand occurs where marginal cost is less than the price charged. Therefore, the fair-return price is allocatively inefficient because it is higher than the socially optimal price that would occur under perfect competition. The socially optimal price is allocatively efficient because it equals marginal cost, but this is not achievable in a natural monopoly.

Question 11

What is the meaning of the phrase "dilemma of regulation"?

Accepted Answer

The phrase "dilemma of regulation" refers to the challenge faced by regulators in determining the appropriate price for a natural monopoly. The socially optimal price achieves allocative efficiency, but it may result in economic losses for the firm, while the fair-return price yields a normal profit but may not be allocatively efficient. This dilemma creates a difficult choice for regulators in balancing the needs of consumers and the firm. Option A refers to economies of scale, while Option B discusses price discrimination. Option C also mentions the fair-return price but does not address the issue of regulation.

Question 12

Which is the best example of price discrimination?

Accepted Answer

Price discrimination occurs when a company charges different prices to different groups for the same product or service. In option B, the telephone company charges different rates based on the time of use, which is a form of price discrimination.

Question 13

Price discrimination is more common in service industries because

Accepted Answer

Service industries often involve non-transferable or perishable services, making it difficult for low-price buyers to resell to high-price buyers.

Question 14

To practice long-run price discrimination, a monopolist must

Accepted Answer

Long-run price discrimination involves a monopolist being able to separate buyers into different markets with different price elasticities. This allows the monopolist to charge higher prices to buyers with a lower price elasticity of demand and lower prices to buyers with a higher price elasticity of demand. Natural monopoly, charging one price to all buyers, and permitting resale of the product do not necessarily relate to long-run price discrimination.

Question 15

If a price-discriminating monopolist sells the same product in two markets but charges a higher price in market X and a lower price in market Y, the pricing difference indicates that demand is

Accepted Answer

A monopolist charges a higher price in a market where demand is less elastic because consumers are less sensitive to price changes, allowing the monopolist to maximize profits by setting a higher price.

Question 16

Which is true of a price-discriminating pure monopolist?

Accepted Answer

Price discrimination allows the monopolist to charge different prices to different buyers according to their willingness to pay. This results in a higher total profit compared to a nondiscriminating monopolist which charges the same price to all buyers. The other options are not necessarily true for a price-discriminating monopolist.

Question 17

Electric companies generally practice price discrimination and charge higher prices for electricity used for illumination and lower prices for electricity used for heat. These lower prices for electric heating result primarily from

Accepted Answer

The existence of good heating substitutes, such as natural gas and oil, forces electric companies to lower prices for electric heating in order to compete.

Question 18

A price-discriminating monopolist will follow a system where

Accepted Answer

A price-discriminating monopolist will charge higher prices to buyers with inelastic demand because they are less sensitive to price changes and will still buy the product even if the price is higher. On the other hand, buyers with elastic demand will be charged lower prices because they are more sensitive to price changes and will only buy the product if the price is lower. This allows the monopolist to maximize their profits by capturing surplus from both groups of buyers.

Question 19

The problem with socially optimal pricing regulation of a natural monopoly is that

Accepted Answer

Socially optimal pricing regulation for a natural monopoly requires setting price equal to marginal cost (P = MC) to achieve allocative efficiency. However, since natural monopolies have economies of scale, their average total cost (ATC) curve continually decreases with increased production. Therefore, in order to set price equal to marginal cost, the price would need to be set below their average total cost, resulting in a loss for the firm. Thus, the socially optimal price for a natural monopoly is below its average total cost (P < ATC).

Question 20

Which is not true of price discrimination?

Accepted Answer

Successful price discrimination allows firms to charge different prices to different customers based on their willingness to pay, which can increase profits. However, this often leads to a lower level of output as the firm reduces output in the higher-priced segments to prevent customers from switching to lower-priced segments. Thus, statement D is incorrect, as successful price discrimination can result in a lower level of output.

Quiz 12: Pure Monopoly