Question 1

An argument for making regulated monopolies adopt marginal-cost pricing is that this would
A)increase productive efficiency by making price equal average cost.
B)benefit higher-income groups by making monopoly products more affordable.
C)increase managerial incentives to reduce employment and production.
D)make the marginal cost equal to society's valuation of the marginal benefit.

Accepted Answer

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Question 2

Which is the best example of price discrimination?
A)an airline company charging lower fares per pound for air freight than for passengers
B)a telephone company charging lower rates to weekend users than weekday users
C)a supermarket charging lower prices in its city stores than its out-of-the-way rural store
D)a private doctor charging higher fees to patients receiving special services than patients receiving regular services

Accepted Answer

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Question 3

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
A)more elastic in market X than in market Y.
B)less elastic in market X than in market Y.
C)less elastic in market Y than in market X.
D)the same in both markets X and Y.

Accepted Answer

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Question 4

Which of the following statements is true of price discrimination?
A)Successful price discrimination will provide the firm with lower total profits than if it did not discriminate.
B)Successful price discrimination will provide the firm with more profit than if it did not discriminate.
C)Successful price discrimination will generally result in a lower level of output than would be the case under a single-price monopoly.
D)Successful price discrimination occurs when there are differences in the costs of producing for different groups of buyers.

Accepted Answer

Successful price discrimination allows the firm to charge higher prices to those with higher willingness to pay, and lower prices to those with lower willingness to pay. This results in more profit for the firm as compared to not practicing price discrimination. Option C is incorrect because successful price discrimination can increase the level of output as the firm is able to sell to more consumers at varying price levels. Option D is incorrect because successful price discrimination can occur even if the costs of producing for different groups of buyers are the same.

Question 5

A price-discriminating monopolist will follow a system where
A)buyers with inelastic demand are charged higher prices than buyers with elastic demand.
B)buyers with inelastic demand are charged lower prices than buyers with elastic demand.
C)all buyers are charged the same price regardless of their elasticity of demand.
D)the price of the product is held the same even if the demand changes.

Accepted Answer

A price-discriminating monopolist charges higher prices to buyers with inelastic demand because these buyers are willing to pay more and lower prices to buyers with elastic demand because they are more price-sensitive and may not purchase the product at a higher price. This allows the monopolist to extract the maximum amount of revenue from each buyer. Therefore, A is the correct answer.

Question 6

Even though many ballparks practice price discrimination between adults and children in selling tickets, such discrimination is not applied at the concession stands because
A)children's demand for food is elastic and adults' demand for food is inelastic.
B)adults' demand for food is elastic and children's demand for food is inelastic.
C)there can be exchange of the product from children, whoâ€™d buy it at a lower price, to adults.
D)there can be exchange of the product from adults, whoâ€™d buy it at a higher price, to children.

Accepted Answer

Price discrimination between adults and children for concession stand items is not practical as there can be exchange of the product from children, who would buy it at a lower price, to adults. This would eliminate the effectiveness of price discrimination and result in lost revenue for the ballpark.

Question 7

The problem with socially optimal pricing regulation of a natural monopoly is that
A)P < MC.
B)P < AVC.
C)P < ATC.
D)P < MR.

Accepted Answer

Socially optimal pricing regulation aims to set the price where P = MC, which would achieve allocative efficiency. However, in the case of a natural monopoly, the ATC curve is continuously decreasing due to economies of scale, making it impossible to set a price where P = ATC without the firm incurring losses. Therefore, setting P < ATC is necessary to prevent the monopoly from operating and earning economic profits in the long run, but it may not achieve allocative efficiency.

Question 8

To practice long-run price discrimination, a monopolist must
A)be a natural monopoly.
B)charge one price to all buyers.
C)permit the resale of the product by the original buyers.
D)be able to separate buyers into different markets with different price elasticities.

Accepted Answer

Long-run price discrimination requires the monopolist to be able to separate buyers into different markets with different price elasticities. This allows the monopolist to charge each group the maximum price they are willing to pay, increasing profits. Being a natural monopoly or allowing resale of the product by buyers are not necessary for long-run price discrimination. Charging one price to all buyers is actually the opposite of price discrimination.

Question 9

Which case best represents a case of price discrimination?
A)An insurance company offers discounts to safe drivers.
B)A major airline sells tickets to senior citizens at lower prices than to other passengers.
C)A professional baseball team pays two players with identical batting averages different salaries.
D)A utility company charges less for electricity used during off-peak hours, when it does not have to operate its less-efficient generating plants.

Accepted Answer

Price discrimination occurs when a firm charges different prices to different groups of consumers for essentially the same product or service. Option B represents this scenario as the airline is charging different prices to senior citizens, which is a specific group of consumers. The other options involve differentiation based on risk, individual performance, or time of use, rather than targeting specific groups of consumers, which is not considered price discrimination.

Question 10

Price discrimination is more common in service industries because
A)low-price buyers will find it virtually impossible to resell the products of such industries to high-price buyers.
B)the costs of providing such industries' products to different groups of buyers vary dramatically.
C)the price elasticity of demand is the same for all groups of buyers in these industries.
D)all firms in these industries have significant monopoly power over price.

Accepted Answer

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Question 11

Which would definitely not be an example of price discrimination?
A)A movie theater charges children less than adults for a movie ticket.
B)Universities charge higher tuition for out-of-state residents than for in-state students.
C)A doctor charges for services according to the income of individual patients.
D)An electric power company charges less for electricity used during off-peak hours, when production costs are lower.

Accepted Answer

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Question 12

Which is true of a price-discriminating pure monopolist?
A)P > MR for the last unit sold.
B)Profit will be higher than in the nondiscriminating case.
C)The average price will be higher than in the nondiscriminating case.
D)Allocative inefficiency will be greater than in the nondiscriminating case.

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 13

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
A)the existence of good heating substitutes.
B)economies of scale in electric heat generation.
C)prices for electric heat being set at the socially optimal level.
D)strict government regulation of the price charged for electric heat.

Accepted Answer

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Question 14

With a natural monopoly, the fair-return price
A)is allocatively efficient; the socially optimal price is allocatively inefficient.
B)is allocatively inefficient; the socially optimal price is allocatively efficient.
C)and the socially optimal price are both allocatively inefficient.
D)and the socially optimal price are both allocatively efficient.

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 15

If a monopoly is faced with competition from foreign multinational corporations or from potential new entrants, then it would probably
A)raise price and reduce output.
B)reduce price and raise output.
C)start operating at the inelastic portion of its demand curve.
D)increase production so that MR > MC.

Accepted Answer

Faced with competition from foreign multinational corporations or potential new entrants, a monopoly will likely reduce price and increase output to remain competitive and maintain market share. This strategy is known as predatory pricing, which involves lowering prices to drive out competitors and deter potential entrants. This may involve operating at a loss in the short term, but if successful, the monopoly can emerge as the dominant player in the market with higher prices and profits in the long run.

Question 16

Consumers who clip and redeem discount coupons
A)exhibit the same price elasticity of demand for a given product than consumers who do not clip and redeem coupons.
B)exhibit a higher price elasticity of demand for a given product than consumers who do not clip and redeem coupons.
C)exhibit a lower price elasticity of demand for a given product than consumers who do not clip and redeem coupons.
D)cause total revenue to decrease for firms that issue coupons for their products.

Accepted Answer

Consumers who clip and redeem discount coupons tend to be more price-sensitive and therefore exhibit a higher price elasticity of demand for a given product compared to those who do not use coupons. This is because they are actively seeking out ways to save money on their purchases and may be more willing to switch to a lower-priced alternative if it is available. However, it is not necessarily true that total revenue will decrease for firms that issue coupons, as the increased sales volume from coupon users can offset the lower price.

Question 17

The economic incentive for price discrimination is based upon
A)prejudices of business managers.
B)differences among sellers' costs.
C)a desire to evade antitrust legislation.
D)differences among buyers' elasticities of demand.

Accepted Answer

Price discrimination is the practice of charging different prices to different consumers for the same product or service. The economic incentive for price discrimination is based on the differences among buyers' elasticities of demand. Buyers with a more elastic demand are more sensitive to changes in price, and are more likely to switch to a competing product if the price is too high. On the other hand, buyers with a less elastic demand are less sensitive to price changes, and are more likely to continue buying even if the price is high. By charging higher prices to buyers with less elastic demand and lower prices to buyers with more elastic demand, a business can increase profits by capturing the maximum amount that each customer is willing to pay.

Question 18

Many economists agree that government should deal with monopolists on a case-by-case basis.Which of the following is not a government policy option?
A)If the monopoly is attained and maintained through anticompetitive behavior, the government can file a suit based on antitrust laws.
B)If the firm is a natural monopoly, the government may decide to regulate its prices and operations.
C)If the monopoly is maximizing economic profits, the government can subsidize new firms to enter the industry.
D)If the monopoly is subject, and vulnerable, to potential competition, the government can decide to leave it alone.

Accepted Answer

The government can file antitrust suits, regulate prices and operations of natural monopolies, and choose to leave monopolies alone if they are subject to potential competition. However, subsidizing new firms to enter the industry is not a policy option for dealing with monopolies.

Question 19

The problem with adopting a fair-return pricing policy for a natural monopoly is that
A)economic profits will be positive.
B)economic profits will be negative.
C)it is not productively efficient.
D)it is not allocatively efficient.

Accepted Answer

Adopting a fair-return pricing policy for a natural monopoly may not be allocatively efficient because the price will be set at a level that covers the firm's costs and allows for a fair rate of return, but it may not necessarily lead to the most socially desirable outcome in terms of consumer surplus and total welfare. In other words, the price may be too high and output levels too low compared to what would be optimal from the perspective of society as a whole.

Question 20

Which is not true of price discrimination?
A)Successful price discrimination requires that different segments of the market have different demand elasticities.
B)Successful price discrimination will provide the firm with more profit than if it does not discriminate.
C)Successful price discrimination implies that the producer can separate customers into easily identifiable groups.
D)Successful price discrimination will generally result in a lower level of output than would be the case under a single-price monopoly.

Accepted Answer

Successful price discrimination can result in a higher level of output than would be the case under a single-price monopoly as the firm is able to capture more of the consumer surplus. Therefore, choice D is not true. Choices A, B, and C are all true of price discrimination.

Quiz 12: Pure Monopoly

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

Which is the best example of price discrimination?

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

Which of the following statements is true of price discrimination?

A price-discriminating monopolist will follow a system where

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

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

To practice long-run price discrimination, a monopolist must

Which case best represents a case of price discrimination?

Price discrimination is more common in service industries because

Which would definitely not be an example of price discrimination?

Which is true of a price-discriminating pure monopolist?

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

With a natural monopoly, the fair-return price

If a monopoly is faced with competition from foreign multinational corporations or from potential new entrants, then it would probably

Consumers who clip and redeem discount coupons

The economic incentive for price discrimination is based upon

Many economists agree that government should deal with monopolists on a case-by-case basis.Which of the following is not a government policy option?

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

Which is not true of price discrimination?