Chapter 14 Price Discrimination

Assume a company practices perfect discrimination. The company is:

charging each customer their maximum willingness to pay.

Perfect price discrimination (PPD)

each customer is charged his or her max willingness to pay

Price discrimination is: Price discrimination is:

easy to find if you look for it

The quantity produced with perfect price discrimination is ______ the efficient quantity.

equal to

If a firm practices perfect price discrimination, the price of the last unit of the good sold will be _____ marginal cost:

equal to ( Each customer is charged their willingness to pay. Therefore, marginal revenue is equal to the price and the firm will sell additional goods if the price is greater than marginal cost. )

Which industry would be the easiest to prevent arbitrage: Which industry would be the easiest to prevent arbitrage:

haircuts

In industries with high fixed costs, price discrimination can

help cover the fixed costs

Price discrimination will: Price discrimination will:

increases total surplus if output increases in comparison to no price discrimination.

If a firm is able to divide their customers into two groups, the firm can maximize profits by setting _________ equal to marginal cost in each market.

marginal revenue

Suppose a McDonald's restaurant in an airport charges higher prices than a McDonald's restaurant on a street in the city. We can assume that the demand in the airport is likely _______ than the demand on a city street. Also the McDonald's _______ prevent arbitrage.

more inelastic; can

Typing

occurs when to use one good, the consumer must use a second goof that is sold ONLY by the same firm

Bundling is a form of price discrimination in which:

one good, called the base good, is tied to a second good called the variable good.

If a firm segments the market and practices price discrimination, which of the following statements is correct about the new prices relative to a single price monopoly:

one of the new prices is higher and one of the new prices is lower.

Bundling

requiring that products be bought together in a bundle or package

Price Discrimination

selling the same product at different prices to different customers

Arbitrage

taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another

Price discrimination occurs when a firm sells: Price discrimination occurs when a firm sells:

the same product at different prices to different customers.

If the demand curves of two separate markets are identical, a firm will find it most profitable to charge __________ prices in the two markets because the marginal revenue curves are ________ in the two markets.

the same; the same

If you purchase an iPhone at a store, you are required to also purchase a monthly mobile phone contract from AT&T. This is an example of:

tying

If a firm is unable to prevent arbitrage, the firm: If a firm is unable to prevent arbitrage, the firm:

will not be able to practice price discrimination effectively.

Which of the following are principles of price discrimination? I. It is more profitable to set different prices in different markets than a single price. II. The monopolist should set a higher price in markets with more inelastic demand. III. Arbitrage makes it difficult to practice price discrimination.

I, II, and III

If airlines were forced by regulators to charge all customers the same price, vacationers could expect:

If the monopolist is forced to charge one price then the price will typically increase in the market that has more elastic demand, in this case the vacationers. In addition, price discrimination typically will result in increased total output and therefore not allowing price discrimination will likely reduce the number of flights that airlines are willing to fly.

All of the following could be attempts to practice price discrimination EXCEPT:

Not a. greeting customers as Wal-Mart customers enter the store. b. asking customers to enter their zip code when they enter a website. c. a college requiring future students to submit their parent's tax returns. d. a car salesperson talking to you about a new car

To maximize profit, the monopolist should set ________ price in markets with more inelastic demand.

a higher

Which of the following is NOT an example of arbitrage

a. buying furniture at a low price in North Carolina and then taking it to Maine and selling it for a higher price. NOT b. going to a volume discount store and buying a 2 gallon container of mustard to use at home. c. going to a discount outlet and buying electronics and then selling them for a higher price on eBay. d. buying cases of bottles of water for $0.25 per bottle and selling them to tourists on the National Mall in Washington DC for $1.50 per bottle.