Chapter 12 MC Questions
What are some ways firms can enforce tie in sales?
1) One of the goods has no close substitutes 2) Contractual agreements 3) Information asymmetry
Why can a firm earn more profits by PD than from setting a uniform price?
1) PD allows a firm to charge a higher price to customers who are willing to pay more than the uniform price. Thus, the firm captures more of the CS. 2) A PD firm can sell to additional customers who were unwilling to pay the uniform price.
Consider a car dealership advertising a 3 year lease at 250$ a month. When you arrive to apply, the lease requires a downpayment of 3600$. You will undertake the lease if?
3600/36 months = 100$ a month. + 250$/month = 350$. So you will undertake the lease if you value it at at least 350$ a month
Which helps a monopoly PPD? 1) Unit demand by each consumer 2) The product is perishable 3) The product is personalizable 4) All of the above
4) All of the above
If a firm organizes all individuals by their willingness to pay, least to most, and the firm starts to PPD, what will happen? A) Consumers will start to arbitrage among themselves B) Firm's profits will be maximized C) The firm's costs will be maximized D) The firm starts to arbitrage with consumers
A) Consumers will arbitrage among themselves
How can a monopoly shift the demand for its product rightward?
Advertising new uses for its product. If the monopoly can advertise and turn its demand curve more inelastic, it's more profitable to advertise.
When firms PD, they turn ___ into ___ A) Producer surplus into revenue B) Consumer surplus into profit C) Total cost into profit D) Producer surplus into consumer surplus
B) Consumer surplus into profit
If consumers are identical, then? A) PD is impossible B) PD can occur if each consumer has a downward sloping demand curve for the product C) Perfect PD is the only form of PD that can increase a monopoly's profit D) Tie in sales cannot increase a monopoly's profit
B) PD can occur if each consumer has a downward sloping demand curve for the product. If the firm faces a flat demand curve, it cannot enggage in PD. Meanwhile when it comes to multimarket PD, if both markets have the same price elasticity of demand at every price, there is nothing to be gained by PD.
If the price of business broadband is greater than that of residential broadband, all else equal, A) Business has greater PED than residential B) Residential has greater PED than business C) Both have positive income elasticity D) Broadband is equally priced generally speaking
B) Residential has greater PED than business - they are more price sensitive/flexible. Thus in group PD, it's possible to charge business broadband more. You want to set a lower price in the market that is more price elastic.
Which of the following conditions must be true so that a firm can price discriminate? A) There are no other firms in the market B) The good is a non durable C) The good cannot be easily resold D) All of the above
C) The good cannot be easily resold
Suppose a profit-maximizing monopoly is able to employ multimarket PD. The marginal cost of providing the good is constant and the same in both markets. The MR the firm earns on the last unit sold in the market with the lower price will be? A) Greater than the MR the firm earns on the last unit sold in the market with the higher price B) Less than the MR the firm earns on the last unit sold in the market with the higher price C) Equal to the MR the firm earns on the last unit sold in the market with the higher price D) Greater than the MC of the last unit
C) They are equal
Theatres charge lower prices for the morning and don't accept coupons for the night showing of a movie because?
Consumers attending in the morning have a higher price elasticity of demand - more sensitive/flexible to price changes. Consumers that attend the night show have a lower price elasticity of demand. This increases profits compared to charging a single price
Tie in sales are most advantageous when?
Demands for the two goods are negatively correlated; Ben values X more than good Y, and Catherine values Y more than good X. THIS DOES NOT WORK when both Ben and Catherine value good X more than good Y.
Why does advertising that results in spuriously differentiated products result in DWL to total welfare?
Firm spends money to steal customers away from a rival. This additional expense only results in a transfer from one producer to another. The firm that advertises gains, the rival loses, and the advertising expense is part of the DWL.
The case where a firm sells each unit at the maximum amount each customer is willing to pay for it is called?
First degree PD
Under what conditions would firms be likely to support an industry wide advertising ban?
If advertising only takes shares away from rivals, the firms in the industry are better off if advertising is banned. If advertising is not banned then the dominant strategy is to advertise. This Nash Eqm of all firms advertising however does NOT yield maximum joint profits.
Compared to a single price monopoly, what is the effect of group PD on social welfare?
It's ambiguous. Group PD results in inefficient prices and quantities. Welfare under GPD is lower than under competitive market or PPD. But it may be higher or lower than single price.
A firm will increase spending on advertising until?
MB of advertising = MC of advertising
How do firms that use quantity discrimination make their profit?
Most of their profit is generated by the fact that the firm is able to charge a high price to purchasers of low quantities and cut in their CS.
Is price discrimination welfare reducing?
No...PD can increase the coverage of a market which can reduce welfare
Charging a higher price for a motel room to customers with dogs or cats than to customers with no pets is an example of?
Not 1st/2nd/3rd degree PD, but actual cost differences
Suppose group PD is possible. But a firm sets the same price in each market. As a result?
The marginal revenue in the more price elastic market exceeds the marginal revenue in the less price elastic market.
Why do firms engage in price discrimination?
To increase profits. NOT to maximize total revenue.