Chapter 11 - Price Discrimination

with perfect price discrimination, C.S. is _____, P.S. is _____, total welfare is ______, DWL is ____

0; A+B+C; A+B+C; 0

The federal government of

Targeting a higher price. The tax credit increases the buyer's maximum willingness to pay

How does this practice also benefit consumers?

A company charges a high price to some and a low price to others, so more consumers are able to buy the good

Which of the following best describes price discrimination?

A firm selling the same good at more than one price to different groups of customers

Price discrimination

A firm sells the same good or service at different prices to different groups of customers

Which area(s) represent total surplus under a single-price monopolist?

A+B (C is DWL)

Which area(s) represent total surplus under perfect competition?

A+B+C

Which area(s) represent total surplus under a monopolist that can perfectly price-discriminate?

A+B+C (all C.S. from perfectly competitive will turn into P.S.)

With perfect competition, C.S. is _____, P.S. is ______, total welfare is _______, DWL is _____

A+B+C; 0; A+B+C; 0

Select the options that illustrate the ways in which firms get consumers to reveal their demand elasticity. A. locating discount outlets far from major population centers B. making people show a coupon in C. order to receive a discount C. limiting outside food and drink at the movie theater D. having a kids' menu with no age limit

A, B, C

Example of preventing resale

Airlines require electronic tickets to match the passenger's gov. ID > prevents a passenger with discounted fare from reselling to someone who would pay more

What can we say about a firm that is perfectly price discriminating? Choose one or more: A. This firm will usually have two prices: one for customers that have a more elastic demand and one for customers that have a less elastic demand. B. All else equal, this firm will have greater profits than a firm that charges only one price. C. The firm will charge each customer his or her maximum willingness to pay.

B, C

Which of the following situations is considered price discrimination?

Barnes & Noble offers books at a lower-than-market price to members, who must pay an annual fee

Dine-in restaurants typically have their lowest business volume on Monday and Tuesday nights. Besides appealing to consumers on a budget, how might a restaurant benefit from charging discounted prices on these nights?

By creating an incentive for consumers, a restaurant is able to capture revenue that it wouldn't otherwise

Perfect price discrimination occurs when a firm is able to

Charging each buyer the highest price that he or she is willing to pay for the good

Monopolist competition is

Common

Compared to a single-price monopoly, a firm that operates in a perfectly competitive market is similar to a monopoly firm that is able to perfectly price discriminate in which of the following ways?

Deadweight loss is eliminated. Total surplus is maximized. Quantity sold would be the same. {Price would NOT be the same}

If total welfare is equal to the entire area under the demand curve, what other information do we know with certainty?

Deadweight loss is zero

Under price discrimination, _______ decreases because the number of consumers able to purchase the good or service increases. This always has the effect of increasing _________. Depending on the nature of the price discrimination, ________ may decrease, but total welfare for society will _______.

Deadweight loss; producer surplus; consumer surplus; increase

Price discrimination exists when a firm sells ________ goods at more than one price to _____ groups of customers

Identical; different

As the quantity of different prices charged by a firm ________, the amount of ________ generated increases.

Increases; profit

In price discrimination, firms can charge a higher price to consumers with _______ demand, and a lower price to consumers with ______ demand. This reduces ___________ and increases the welfare of society. However, price discrimination can only be practiced if the firm is a __________.

Inelastic; elastic; deadweight loss; price maker

Examples of perfect price discrimination

Jewelry stores & car dealerships (bargaining from high sticker price)

Profit-maximizing rule

MR=MC

Firms can generate more revenue by charging ____ to inelastic demand consumers and ____ to elastic demand consumers

More; less

Perfect price discrimination makes _____ money and serves _____ consumers

More; more

Examples of price discrimination

Movie tickets, restaurant menus, college tuition, airline reservations, coupons, etc.

Airlines have first-class or business-class seating, for which customers pay a higher price to receive more room, extra amenities, and more attentive service. Would this illustrate price discrimination?

No, because first-class and economy-class tickets represent two entirely different products

Perfect price discrimination

Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit

An example of price discrimination is when

Out of state students pay more for the same education as in-state students

Perfect price competition, single price monopoly, or perfect competition? A, B, and C are all consumer surplus.

Perfect competition

In 1996, Victoria's Secret shipped different catalogs to customers based on their buying habits. Frequent customers received catalogs with lower prices, whereas new customers received catalogs with higher prices for those same items. Victoria'sSecret was practicing _________

Price discrimination

In Legally Blonde, a sales associate at an exclusive boutique store attempts to convince the main character to pay full price for a dress that was on the clearance rack because the salesperson incorrectly believes that the buyer is uninformed about the quality of the product and has an inelastic demand. In this case, the salesperson is attempting to practice perfect

Price discrimination

For a firm to be able to practice price discrimination, it must be a

Price maker

To practice price discrimination, a firm must be a ______ _______

Price maker (monopoly) B/c it must have some market power before it can charge > 1 price

Monopolies are _____

Rare

Perfect competition is

Rare

Because passengers cannot _____ their tickets or easily change their plans, airlines can effectively price-discriminate.

Resell

T/F: A market is more efficient, and society is better off, whenever a price-making firm is able to price-discriminate, even when consumer surplus is converted to producer surplus.

TRUE [DWL is reduced]

Perfect price competition, single price monopoly, or perfect competition? A is consumer surplus, B is producer surplus, and C is deadweight loss.

Single price monopoly

Suppose two brothers own identical skydiving companies but have decided to experiment with different pricing structures

Sky Warriors will generate a higher net revenue than Air Adventures

When economists use the word "perfect," what does it indicate about the outcome of a market?

Social welfare is maximize, resulting from an absence of deadweight loss

Despite the gain from higher profits, firms are not always able to price discriminate because

They are unable to partition their customers into distinct groups

Internet service providers such as Comcast are able to price discriminate easily for many reasons. Which of the following is a reason for them to price discriminate?v

They can easily identify new customers from old customers

When we say that firms must be price makers in order to practice price discrimination, it means that this activity cannot occur with

competitive firms

The main reason firms cannot price discriminate under perfect competition is because

firms are price-takers and cannot set prices for their goods

Senior citizens typically receive many discounts in movie theaters, among other places, because they

have very elastic demands

A firm that is able to differentiate between each of its customers by selling the same good at a unique price to each customer is practicing _______ discrimination

perfect price

Perfect price competition, single price monopoly, or perfect competition? A, B, and C are all producer surplus.

perfect price competition

In a price-discrimination setting, who pays the higher price for the same good

the consumers with the most inelastic demand pay the highest price

A potential complication for successful price discrimination is

the potential for consumers to resell a product or service.

3 solutions to monopoly

1. Gov. can break up firms with too much market power 2. Gov. can promote open markets by reducing trade barriers 3. Gov. can regulate a monopolist's ability to charge excessive prices

2 conditions for price discrimination

1. Must be at least 2 types of buyers 2. Firm must be able to prevent resale of their product

Airlines typically try to fill the place by ________ the price of some seats

Discounting

T/F: Firms are able to price-discriminate when resale is impossible and groups of individuals are difficult to distinguish.

FALSE

Which of the following is true?

Firms that can prevent reselling may be able to engage in price discrimination

Both private and public universities are able to price-discriminate among entering students.

True

Price discrimination is _______ to both sellers and buyers

Beneficial

When a market model moves from that of a monopoly to one in which perfect price discrimination is practice, the deadweight loss

Decreases

Price discrimination is profitable for companies, but it also increases the welfare of ______

Society

The monopolist controls the ____, not the ______

Supply; demand

Which of the following are examples of price discrimination that take advantage of customer impatience? A. charging more for a hardcover book that comes out before the same book in paperback B. charging high prices for brand-new models of smartphones C. charging more for first-class airline tickets than for economy tickets D. charging full price for brand-new designer clothing and discounting last season's fashions E. warehouse memberships (such as Costco or Sam's Club) F. offering a student discount for movie tickets

A, B, D

Which of the following conditions must exist for price discrimination to occur? A. preventing resale of the product or service B. differentiating every customer's price elasticity of demand C. identifying at least three different groups of customers D. selling the same good or service at different prices E. distinguishing groups of buyers with different price elasticities F. being a price taker

A, D, E

Some people argue that monopolists should not be allowed to practice perfect price discrimination. For which of the following reasons might consumers be opposed to perfect price discrimination? A. Perfect price discrimination allows the monopolist to capture the entire consumer surplus. B. Perfect price discrimination means some consumers pay less than other consumers, even though all consumers are buying the same product. C. The resulting price and quantity will not be efficient. D. When the monopolist uses this type of price discrimination, there will be deadweight loss.

A. Perfect price discrimination allows the monopolist to capture the entire consumer surplus. B. Perfect price discrimination means some consumers pay less than other consumers, even though all consumers are buying the same product. They would sell the efficient amount and leave no deadweight loss

With a single priced monopoly, C.S. is _______, P.S. is _____, total welfare is _____, DWL is ______

A; B; A+B; C