Section 11 Module 63

price elasticity of demand

- If low price elasticity of demand (less price sensitive), consumer cares less about the price because they need something (e.g. a business traveler willing to pay more for airline ticket because they have to fly somewhere for a meeting). - If high price elasticity of demand (more price sensitive), consumer does care about the price, e.g. a student traveler will take the bus instead of flying if the airline ticket is too high. Student traveler might be more flexible on the travel dates versus business traveler who has to be at a meeting

True or false? A single price monopolist sells to some customers that would not find the product affordable if purchasing from a price-discriminating monopolist.

False - A price-discriminating monopolist will sell to some customers that would not find the product affordable if purchasing from a single-price monopolist - namely, customers with a high price elasticity of demand who are willing to pay only a relatively low price for the goods.

True of false? A price-discriminating monopolist creates more inefficiency than a single-price monopolist because it captures more of the consumer surplus.

False - Although a price-discriminating monopolist does capture more of the consumer surplus, less inefficiency is created: more mutually beneficial transactions occur because the monopolist makes more sales to customers with a low willingness to pay for the good.

True or false? Perfect price discrimination is always possible.

False- perfect price discrimination is almost never possible in real life.

perfect price discrimination

Takes place when a monopolist charges each customer the maximum that the consumer is willing to pay. In general, the greater the number of different prices charged, the closer the monopolist is to perfect price discrimination. The entire consumer surplus is extracted as profit.

Is this price discrimination? Food manufacturers place discount coupons for their merchandise in newspapers.

This is a case of price discrimination. Consumers with a high price elasticity of demand will pay a lower price by collecting and using discount coupons. Consumers with a low price elasticity of demand will not collect or use coupons.

single-price monopolist

a monopolist that charges everyone the same price

With perfect price discrimination, consumer surplus a) is maximized b) equals zero c) is increased d) cannot be determined e) is the area below the demand curve above MC

b - equals zero

Price discrimination a) is the opposite of volume discounts b) is a practice limited to movie theaters and the airline industry c) can lead to increased efficiency in the market d) rarely occurs in the real world e) helps to increase the profits of perfect competitors

c - can lead to increased efficiency in the market

Which of the following characteristics is necessary for a firm to price-discriminate? a) free entry and exit b) differentiated product c) many sellers d) some control over price e) horizontal demand curve

d - some control over price

Which of the following is a technique used by price discriminating monopolists? I. advance purchase restrictions II two-part tariffs III volume discounts a. I only b. II only c. III only d. I and II only e. I, II, and III

e - I, II and III

price discrimination

sellers charge different prices to different consumers for the same product or service

price sensitivity

when different groups of consumers respond differently to price, e.g. business travelers vs student leisure travelers. A monopolist can capture more consumer surplus and increase its profit by charging them different prices

What are common techniques for price discrimination?

- Advance purchase restrictions - prices are lower for those who purchase way ahead. (Sometimes prices might also be lower for last-minute purchases.) - Volume discounts - price is lower if you buy a large quantity. - Two part tariffs - you pay an annual fee to the seller in order to shop at their business, and you pay seller again when purchasing items (e.g. Costco or Sam's Club)

The following is true when the monopolist charges a lot of different prices:

- Some consumers will pay prices close to the sellers marginal cost (e.g. the lowest price offered by the seller will not make him much profit) - More surplus extracted from consumers

Is this price discrimination? Restaurants have senior citizen discounts.

This is a case of price discrimination. Senior citizens have a higher price elasticity of demand for restaurant meals (their demand for restaurant meals is more responsive to price changes) than other patrons. Restaurants lower the price to high-elasticity consumers (e.g. 10% discount to senior citizens on Tuesdays). Consumers with low price elasticity of demand will pay the full price

Is this price discrimination? Damaged merchandise is marked down.

This is not a case of price discrimination because the product itself is different and all consumers, regardless of their price elasticities of demand, value the damaged merchandise less than undamaged merchandise. So the price must be lowered to sell the merchandise.

Is this price discrimination? Airline tickets cost more during the summer peak flying season.

This is not a case of price discrimination, it is simply a case of supply and demand.

True or false? Under price discrimination, a customer with highly elastic demand will pay a lower price than a customer with inelastic demand.

True - Under price discrimination consumers are charged prices that depend on their price elasticity of demand. A consumer with highly elastic demand will pay a lower price than a consumer with inelastic demand.

True or false? Government policies on monopoly typically focus on preventing deadweight loss, not preventing price discrimination.

True - government policies on monopoly do not focus on preventing price discrimination because price discrimination can increase the efficiency of the market.

A price discriminating monopolist will charge a higher price to consumers with a) a more inelastic demand b) a less inelastic demand c) higher income d) lower willingness to pay e) less experience in the market

a - a more inelastic demand