Chapter 14 Micro

A monopolist sells its output in two markets: Canada and Europe, as shown in these figures. To maximize profits, the monopolist should:

set a price of $10 in Canada and $7.50 in Europe.

A monopolist facing different demand curves in two separate markets maximizes profit by:

setting marginal revenue equal to marginal cost and charging the maximum price that demand will bear in each market.

For price discrimination to work, the young should ________ than/to the old.

sometimes be charged more and sometimes charged less

If a monopolist begins to perfectly price discriminate,:

the deadweight loss will be eliminated as output expands to its efficient level.

(Figure: Perfect Price Discrimination) Refer to the figure. Which curve represents the marginal revenue (MR) curve for the monopolist who practices perfect price discrimination?

the demand curve

Haircuts for men are often cheaper than haircuts for women, even when they are offered by the same stylist. Why might this be price discrimination?

Demand for haircuts for women might be more inelastic than demand for haircuts for men, and haircuts are impossible to arbitrage.

Although price discrimination may increase the profits of drug companies, it reduces the incentive for drug companies to develop new drugs.

False

An example of price discrimination is charging more for steak than for a hamburger.

False

How did IBM price discriminate its laser printers?

IBM offered two different printers: a fast printer and a slow printer.

Bundling is expected to provide greater profits when the two bundled goods are: I. substitutes. II. goods that have high fixed costs and low marginal costs. III. very close complements.

II and III only

How does price discrimination increase social surplus?

It expands the output that a firm would otherwise produce.

Refer to the figure. Using the principles of price discrimination, explain and calculate how much profit the monopolist serving these markets could make.

Quantity = 120; Price = 14; Monopoly profit = 120*4 = 480 Quantity = 150; Price = 16; Monopoly profit = 150*6 = 900

(Figure: PPD) Refer to the figure. Which of the following statements best explains why a firm that perfectly price discriminates would sell additional units beyond a units of output?

The marginal cost is less than consumers' willingness to pay for these units.

A monopolist sells its output in two markets, each with different demand curves as shown in this figure. If the marginal cost is identical in both markets, the monopolist should charge a ______ price in the inelastic market, represented by the demand curve ______.

higher; D2

Airlines try to differentiate their customers by willingness to pay based on:

how long in advance a person books their flight.

Even when gas stations and grocery stores are close enough to share a parking lot, gas stations will typically charge much more for candy bars. This kind of price discrimination occurs because grocery store patrons have a:

more elastic demand curve.

A museum in Russia has two entrances: one for locals (written in Russian) and one for tourists (written in English). People who enter through the entrance written in Russian will end up paying 81.93 Rubles ($3.00). English-speaking tourists will use the entrance written in English, but they will end up paying 409.67 Rubles ($15.00). This practice is an example of:

price discrimination.

Economists call selling the same product at different prices to different customers:

price discrimination.

(Figure: Price-Discriminating Monopolist) Refer to the figure. In order to maximize profits, the monopolist should charge a:

price of $16 in Market A and $10 in Market B.

(Figure: Price-Discriminating Monopolist 2) The perfectly price-discriminating monopolist in this diagram will produce _____ units of output, and a single-price monopolist would produce ______ units of output.

8; 4

(Figure: Perfect Price Discrimination) Refer to the figure. For a firm practicing perfect price discrimination, calculate the dollar amount of consumer surplus in this market.

$0

(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—what price should the monopolist charge in Market A?

$10

(Figure: Price-Discriminating Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—if the monopolist were to charge a uniform price PU between the two markets, in which range would the price fall?

$10 < PU < $16

Refer to the figure. Profit for the single-price monopoly in this diagram is ______, and under perfect price discrimination, profit is ______.

$4.50; $18

(Figure: PPD) Refer to the figure. Which of the following statements best explains why a firm that perfectly price discriminates would sell additional units beyond c units of output?

A firm will not sell beyond c units of output. The marginal cost is greater than consumers' willingness to pay for these units.

(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—through the process of price discrimination, how much profit is the monopolist making in Market A?

$450

(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—through the process of price discrimination, how much profit is the monopolist making in Market B?

$520

(Figure: Price-Discriminating Monopolist 2) Consumer surplus with a single-price monopoly is ______, and consumer surplus with a perfect price discrimination is ______.

$8; $0

(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—what price should the monopolist charge in Market B?

$9

(Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—if the monopolist were to charge a uniform price PU between the two markets, in which range would the price fall?

$9 < PU < $10

Airlines engage in price discrimination.

True

GlaxoSmithKline attempts to prevent arbitrage of its drug Combivir by selling different colored pills in special bar-coded packages, to identify and track distributors in different markets.

True

(Figure: PPD) Refer to the figure. A firm that perfectly price discriminates will sell:

b units of output.

Refer to the figure. A monopolist who cannot price discriminate earns profit equal to area(s) ________, and a monopolist practicing perfect price discrimination earns profit equal to areas ________.

b; abc

Refer to the figure. Suppose that a German manufacturer can sell its kidney lithotripter in two markets: Country X and Country Y. If this firm is interested in maximizing profits, it should set a price of ________ in Country X and ________ in Country Y.

b; z

Airlines price discriminate prominently by charging _______ more than _________.

business travelers; vacationers

If two products from a company are designed to perfectly complement each other (in a one-to-many ratio), then the products are:

tied.

Gillette's practice of selling razors at a relatively low cost but marking up the price significantly on its blades when Gillette razors will only work with Gillette blades is an example of:

tying.

Hewlett Packard's pricing scheme is to sell printers at relatively low price and ink cartridges at relatively high price. This practice is known as:

tying.