Economics Ch. 7

If you purchased a new model of a digital camera right after it is released you will likely pay more than if you purchase it six months after release. Why is this an example of price discrimination on the part of the firm?

"Early adopters" who purchase the camera right away do so because they have immediate need (thus an inelastic demand) for the camera due to its new features. Other consumers might be willing to purchase the camera but only at a lower price. If price starts out high the consumers with immediate need will purchase the camera because they are unable to wait for price to drop. Once they make their purchases, the firm can drop the price so that other consumers with relatively elastic demands will also purchase cameras.

Which of the following is NOT a characteristic of a monopoly?

A monopolist is a price-taker.

What is a patent?

A right to sell a particular good for a certain period of time.

) Figure 7.4 shows prices, demands, and cost data for the only restaurant in a small town. If the restaurant charges the single price of $8 per meal, what is its profit from non-senior customers?

A) $1,200

Figure 7.4 shows prices, demands, and cost data for the only restaurant in a small town. If the restaurant charges the single price of $8 per meal, what is its profit from senior customers?

A) $1,200

Table 7.2 contains price, demand and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its profit from students under the single price policy?

A) $150

Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its profit from students under the student discount policy?

A) $200

Figure 7.1 shows a monopolist's demand curve. If the monopolist increases output from two to three units, what is its marginal revenue?

A) $3

Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The marginal revenue that Gladys receives from selling the fourth unit of output is

A) $3. (7x3=21 - 6x4=24)

Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its profit from non-students under the single price policy?

A) $300

When a monopolist sells two units of output its total revenues are $100. When the monopolist sells three units of output, its price per unit is $35. The monopolist's marginal revenue from selling the third unit of output is

A) $5.

Figure 7.2 shows a monopolist's demand curve. The marginal revenue from selling the third unit is

A) $6.

In which of the following situations can a firm or individual apply for a patent?

A) A firm develops a new tool that makes cutting grass much easier.

________ is a monopoly that exists in an industry where large economies of scale act as a barrier to entry.

A) A natural monopoly

At a price of $10, the marginal revenue of a monopolist is $6. If the marginal cost of production is $8, what should the monopolist do in order to maximize profits?

A) Increase its price.

Which conditions must hold if a firm is to engage in price discrimination?

A) It must be extremely difficult, if not impossible, for one consumer to resell a product to another.

)A monopolist will never produce at a quantity where the

A) MR < 0.

34) Figure 7.2 shows a monopolist's demand curve. Suppose that the marginal cost is $6 for all units and the current output level is 4 units. Then which of the following is TRUE?

A) The marginal revenue is less than the marginal cost.

Which of the following situations would be examples of price discrimination?

A) United Airlines charges customers who book 14 days ahead a lower price than those who don't

Facebook is a social networking Web site that is used by a growing number of individuals. Because of its popularity, it is now more difficult for new networking websites to enter and compete with Facebook. Facebook enjoys ________ as a barrier for others to enter the market.

A) a network externality

Why do pharmaceutical firms benefit most from patent protection?

A) because research and development of drugs require large expenditures that need to be recouped while the patent is still valid

A firm switching from a single price to a price discrimination scheme will ________ the price for the group of consumers with a relatively elastic demand and ________ the price for the group of consumers with a relatively inelastic demand.

A) decrease; increase

A monopolist maximizes profits by setting the quantity where

A) marginal revenue is equal to marginal cost.

The cost of producing a hardback book is only about 20 percent higher than producing a paperback book, yet the hardback price is typically three times the paperback price. This suggests that demand for paperback books is ________ than demand for hardback books.

A) more elastic

Which of the following firms rely on patents the most as the barrier to keep other firms from entering the industry?

A) pharmaceutical firms

Price discrimination always benefits

A) the firm and may benefit or harm the consumer.

If we observe a firm engaging in price discrimination, it must be TRUE that

A) the firm is enjoying higher total profits than it would have earned if it charged a single price for the product

The demand curve that a monopolist faces is

A) the market demand curve.

Figure 7.4 shows prices, demands, and cost data for the only restaurant in a small town. Which group's demand for meals is more price-elastic?

A) the senior customers

Which of the following firms have market power?

All of the above have market power.

At a price of $18, the marginal revenue of a movie seller is $12. If the marginal cost of a movie is $9, the firm should increase its price.

Answer: FALS

At a price of $15, a firm sells 80 CDs per day. If the slope of the demand curve is 0.10, marginal revenue is $5.

Answer: FALSE

How does a monopolist's marginal revenue change as output increases? Why?

As output increases, a firm must lower its price to sell additional units of the good. So the firm's marginal revenue from selling an additional unit of output decreases with output.

Figure 7.4 shows prices, demands, and cost data for the only restaurant in a small town. What is its profit from senior customers under the senior discount policy of a $7 senior price and a $10 non-senior price?

B) $1,500

Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its revenue from students under the single price policy?

B) $180

Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its revenue from non-students under the single price policy?

B) $360

Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its total profit under the student discount policy?

B) $550

Figure 7.4 shows prices, demands, and cost data for the only restaurant in a small town. Compared to the profit under the single price policy, how much additional profit does the restaurant earn under the senior discount policy of a $7 senior price and a $10 non-senior price?

B) $580

When a firm is awarded a patent, it is given monopoly rights to the production of that product for ________ years.

B) 20

Figure 7.1 shows a monopolist's demand curve. If the monopolist were to maximize its total revenue, it would produce ________ units of output and charge a price of ________.

B) 4; $4

At a price of $20, the marginal revenue of a monopolist is $12. If the marginal cost of production is $10, what should the monopolist do in order to maximize profits?

B) Decrease its price.

The firm in Figure 7.3 will produce

B) Q2.

Figure 7.2 shows a monopolist's demand curve. Suppose that the marginal cost is $6 for all units and the current output level is 4 units. Then what would you recommend to the firm?

B) Raise the price and sell fewer units.

Which of the following is an example of a barrier to entry?

B) The government grants licenses to taxicab drivers, without which it is illegal to operate a taxicab.

A school bookstore tried to engage in price discrimination by selling novels to students and faculty for different prices. Its strategy was to increase prices to faculty and decrease prices to students. What is the most likely reason that this strategy failed?

B) There was nothing to prevent students from purchasing novels and reselling them to faculty

In order to practice price discrimination a firm must

B) be able to divide consumers into groups with different demands for their product.

Because demand for air travel from people who are traveling on vacation is more ________, the airlines offer leisure travelers lower prices than business travelers.

B) elastic

In order to practice price discrimination a firm must

B) have some degree of market power.

For a monopolist, marginal revenue ________ for all units of output except the first unit.

B) is less than the price of output

Movie theaters often offer reduced rates for children under 10. This suggests that demand for adult admission is ________ than demand for children's admission.

B) less elastic

Suppose that a price discriminating monopolist is able to divide its market into two groups. If the firm sells its product for $50 to the group whose customers have the most elastic demand, what price are they likely to charge to the group whose customers have the least elastic demand?

B) more than $50

In order to engage in price discrimination, a monopolist has to be able to determine that there are different groups of consumers that have different ________ for the product.

B) price elasticities of demand

Price discrimination is based on differences in ________ among groups of consumers and the differences in ________ that will result.

B) price elasticities of demand; profits

Price discrimination is related to elasticity because

B) the firm can increase revenues by charging customers with elastic demands lower prices and charging customers with inelastic demands higher prices.

A network externality occurs when

B) the value of a product to a consumer increase with the number of other consumers who use it.

Why do barriers to entry create market power?

Barriers to entry create market power because it is difficult for firms to enter even if the incumbents are enjoying excessive profits (firms in the market would have the ability to determine price due to lack of competition). In a competitive market with no entry barriers, economic profits would be bid down to zero by entry.

What would happen if the government chooses to increase the number of years that a firm can enjoy patent protection from 20 years to 25 years? Answer: Because the time that a firm can enjoy monopoly rights increases, the firm will receive a larger profit with longer patent protection. This will entice more firms to invest in research and development, in the hopes of creating more patents and more profits. However, while this policy increases the creation of higher cost new products or technology, it will reduce the market efficiency for those products that would have been produced under the old 20 year rule. Those markets will display lower production and higher prices for a longer time.

Because the time that a firm can enjoy monopoly rights increases, the firm will receive a larger profit with longer patent protection. This will entice more firms to invest in research and development, in the hopes of creating more patents and more profits. However, while this policy increases the creation of higher cost new products or technology, it will reduce the market efficiency for those products that would have been produced under the old 20 year rule. Those markets will display lower production and higher prices for a longer time.

Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its profit from non-students under the student discount policy?

C) $350

Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its total profit under the single price policy?

C) $450

)Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. Gladys' marginal revenue becomes negative starting with the production of which unit?

C) 6

The firm in Figure 7.3 will charge

C) P3.

What is the most likely reason that milk sold in convenience stores is more expensive than milk sold in grocery stores?

C) People who buy milk at convenience stores tend to have a less elastic demand for milk.

What is the most likely reason that snack foods sold in vending machines are so much more expensive than snack foods sold in grocery stores?

C) People who purchase snack foods from vending machines tend to have less elastic demand for snack food

Which of the following best characterizes the tradeoff faced by a monopolist when deciding what quantity to produce?

C) The firm gets more revenue from new customers by increasing output, but gets less revenue from existing customers given that it lowered its price.

Which of the following would NOT be considered price discrimination?

C) charging higher rates for oil delivery to people who live farther from your business

Price discrimination is when a firm charges

C) different prices for the same goods to different consumers.

The government allows firms to engage in price discrimination unless the practice

C) drives rival firms out of business

When economists say a market has "barriers to entry", they refer to

C) factors that prevent other firms from challenging a firm with market power

In order to practice price discrimination a firm must be in a market such that the consumers in its market

C) have different price elasticities of demand.

Which of the following is NOT an artificial barrier to entry?

C) large economies of scale

Firms who are attempting to engage in price discrimination will offer customers with a ________ demand a higher price and customers with a(n) ________ demand a lower price

C) less elastic; more elastic

Suppose that a price discriminating monopolist is able to divide its market into two groups. If the firm sells its product for $25 to the group whose customers have the least elastic demand, what price are they likely to charge to the group whose customers have the most elastic demand?

C) less than $25

At the optimal production point, the firm in Figure 7.3 will

C) make a positive economic profit.

Many hotel chains offer senior citizen discounts to members of AARP. This suggests that the hotels believe that senior citizens have a ________ demand for hotel rooms than non-seniors.

C) more elastic

Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The marginal revenue that Gladys receives from selling the fifth unit of output is

D) $1, because Gladys earns $1 more in revenue by increasing her output to five units from four units.

) Figure 7.4 shows prices, demands, and cost data for the only restaurant in a small town. What is its profit from non-senior customers under the senior discount policy of a $7 senior price and a $10 non-senior price?

D) $2,560

Figure 7.2 shows a monopolist's demand curve. The marginal revenue from selling the fourth unit is

D) $2.

Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The total revenue that Gladys receives from selling four units of output is

D) $24 (6x4)

When a monopolist sells two units of output its total revenues are $100. When the monopolist sells three units of output its total revenues are $120. When the monopolist sells three units of output, the price per unit is

D) $40.

Figure 7.1 shows a monopolist's demand curve. If the monopolist increases output from four to five units, what is its marginal revenue?

D) -$1

The reason that the local telephone company is able to engage in price discrimination between business and residential customers in providing local phone service is that

D) All of the above are correct.

When governments grant patents

D) Both A and B are correct.

35) How do monopoly prices and quantities produced differ from perfectly competitive outcomes, all other things equal?

D) Monopoly prices are higher than competitive prices but monopoly quantities are lower than competitive quantities.

If a monopolist charges the same price for all of the units of the good that it sells, then beyond the first unit sold

D) P > MR because the monopolist must decrease price on all units in order to sell another unit.

Suppose that it would cost a firm $10 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $3 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most CORRECT?

D) The government should grant a patent to the firm, because the firm would not produce the drug at all without a patent.

Suppose that it would cost a firm $9 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $4 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most CORRECT?

D) The government should not grant a patent to the firm, because the firm would earn sufficient profits to develop the drug without the patent.

6) Which of the following is NOT a barrier to entry for monopoly?

D) a large number of existing firms in a market

A monopoly may arise due to

D) all of the above.

The merits of a patent system is

D) all of the above.

Which of the following would NOT be considered price discrimination?

D) charging more money for a large luxury car than a small economy car

If a monopolist is maximizing its profits, we know that it has

D) equated marginal cost and marginal revenue.

Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. Should the firm adopt the single price policy or the student discount policy?

D) the student discount policy because it is more profitable than the single price policy

Why is it important that a firm have market power if it wishes to engage in price discrimination?

If a firm does not have market power then it will face price competition from other firms in the industry if it tries to increase the price to one group of consumers. The competitors will charge a lower price to this group of consumers and the first firm will end up serving only the low price consumers. This will make it unprofitable to engage in price discrimination.

Why is it important that a firm can prevent resale of its product if it wishes to engage in price discrimination?

If the firm cannot prevent resale then consumers who are able to purchase the product at the lower price can do so and resell the product to the consumers to whom the firm will charge the higher price. This will prevent the firm from earning higher profits from price discrimination than from a single pricing strategy, since the single price will be higher than the lowest price charged with a price discrimination strategy.

Why is a monopolist's marginal revenue less than the price?

In order for the monopolist to sell more of a good, it must lower its price on all units sold.

Why do some markets have more firms than others?

It depends on a number of factors. One involves the costs of the industry—in some industries, given consumer demand for the product, it makes sense for there to be more firms in some markets than in others. Other factors include barriers to entry—some markets are easier to enter than are others.

What is a network externality?

It is when the value of a good to a consumer increases with the number of other consumers using the good.

Suppose that you own a golf course that is part of a Florida resort. You primarily serve two groups of people: local residents and tourists. Devise a price discrimination strategy that will increase your revenues compared to a single-pricing strategy.

Local residents can be given a free membership in the golf course if they show proof that they are from the area. Prices for these members (who probably have a relatively elastic demand since they can play golf all year) could be set lower than for tourists (who have an inelastic demand for golf since that is probably why they came to Florida in the winter). This would encourage the local residents to play golf all year round. Another possibility is that prices could be set higher during the tourist season than during the off-season.

Will a profit maximizing monopolist who is not subject to government regulation produce a quantity where the MR < 0?

Never. If the MR < 0, the firm would always be better off decreasing its production to raise prices. Doing so increases revenues and decreases costs, resulting in a higher level of profit.

Should a monopolist charge the highest price for its good that anyone in the market will pay?

No. The monopolist would not sell very many units of its good that way. It should lower price from the highest possible price and thus increase revenue. The monopolist should produce where marginal revenue

Bars often offer specials on appetizers during "happy hour." What does the concept of price discrimination suggest about why this might be profit-maximizing behavior?

People might have more elastic demand for appetizers during times when they could easily go home and eat dinner and less elastic demand for appetizers during the evening hours after dinner.

A firm that has market power has the ability

to affect the price of its own product

You own a local sub shop in a college town. You primarily serve two groups of people: local residents (both students and other local residents) and visitors to your town. Devise a price discrimination strategy that will increase your revenues compared to a single-pricing strategy.

People who live in town know all of the local restaurants well and have kitchens where they could cook their own meals. This means that they will have a relatively more elastic demand for your subs than visitors do. You could engage in price discrimination in a number of ways: by mailing coupons to local residents; by giving out cards so that they can get a meal free if they get enough punches on the card; or by participating in programs through which members of local banks and credit unions get discount cards that are honored in your restaurant. [Others may propose student discounts because college students have a higher price elasticity due to university food services and food being a higher percentage of a student's budget compared to people working full time.]

Why is it important that a firm have different groups of consumers with different demand elasticities if it wishes to engage in price discrimination?

Price discrimination works because a firm charges higher prices to individuals with a relatively more inelastic demand and lower prices to those with a relatively more elastic demand. If all consumers have the same elasticity of demand then charging different prices to different groups of consumers will not yield a higher profit to the firm.

Why does the government grant patents to companies that research new drugs?

Researching new drugs is a very risky and expensive business. If the government did not grant the firm a patent then all other firms would be able copy its innovation as soon as the FDA approved the drug. This competition would make the price of the drug so low that the research firm would not be able to recoup its investment. The result would be that no new drugs would be developed. By allowing firms with new drugs to hold patents the government encourages private research and development.

Why does the government grant patents universally rather than just to those products that would not be developed without a patent?

The government has no way to know which products would be developed without a patent.

As manager of the only video rental store in town, you have noticed that on Thursday through Sunday the demand for movie rentals is much less elastic than it is on Monday through Wednesday. If you are currently charging $3 for a two-night rental, give an example of a pricing policy that might increase your revenues compared to a single-pricing strategy.

Weekend movie rental prices could be increased to $4 per night and the Monday through Wednesday price could be cut to $2 per night.

When an electronics company advertises on the local newspaper a 10% discount coupon, is this an example of price discrimination? Why or why not?

Yes, it is price discrimination. The price sensitive individual would search for these coupons prior to making a purchase, and will end up paying the lower price. A price insensitive individual will not search for these coupons and will not get the lower price.

Which of the following firms have no market power?

gold panners during the gold rush

A market served by only one firm is called a(n)

monopoly