Economics 2302 Chapter 11: Price Discrimination

If the owners charge a higher price of $16 for each movie, then they will have a total profit of (1). If the owners charge a lower price of $12 for each movie, then they will have a total profit of (2). If the owners choose to charge only a single price, then they should charge the (3) price; however, if the owners are able to price discriminate and charge both $12 and $16, then they will earn a profit of (4).

1. 1,200 2. 1,600 3. lower 4. 2,000

Under price discrimination, (1) decreases because the number of consumers able to purchase the good or service increases. This always has the effect of increasing (2). Depending on the nature of the price discrimination, (3) may decrease, but total welfare for society will (4).

1. deadweight loss 2. producer surplus 3. consumer surplus 4. increase

Airlines can price discriminate by determining people's (1) to pay for luggage accommodations. Some customers will check a bag, others will not. Although not all customers will pay to check a bag, the airline makes more (2) because it can divide customers into (3) groups. Those who do not want to pay to check a bag have (4) demand and will pack everything in a carry-on. Customers who have (5) demand for checked luggage will pay to check their bags.

1. willingness 2. revenue 3. two 4. elastic 5. inelastic

Which of the following are examples of price discrimination?

A computer producer offers a mail-in rebate after purchase.

Firms are able to price-discriminate when resale is impossible and groups of individuals are difficult to distinguish.

False

Which of the following is not a reason for the firm in question to price-discriminate?

A fast-food chain cannot distinguish between consumers who really like its food from those who think it is merely fine.

Which of the following occurs if a monopolist firm changes from uniform pricing to perfect price discrimination?

The prior consumer surplus is transferred to the producer. The producer's revenue increases.

Both private and public universities are able to price-discriminate among entering students.

True

Students who are accepted through early decision to a college or university, which represents a binding agreement to attend that college, are less likely to receive financial aid.

True

Label each type of behavior as reflecting either elastic or inelastic demand.

buying in bulk to get a low price - ELASTIC seeing a movie showing at 1:30 in the afternoon - ELASTIC taking kids to a restaurant that offers discounts for children under a certain age - ELASTIC attending an out-of-state public university - INELASTIC avoiding the Black Friday sales the day after Thanksgiving - INELASTIC

Select the options that illustrate the ways in which firms get consumers to reveal their demand elasticity.

making people show a coupon in order to receive a discount limiting outside food and drink at the movie theater locating discount outlets far from major population centers

Which of the following are ways in which firms price-discriminate?

sales on holiday weekends senior citizen discounts

Which of the following is an effect of implementing price discrimination?

Quantity sold increases

A market is more efficient, and society is better off, whenever a price-making firm is able to price-discriminate, even when consumer surplus is converted to producer surplus.

TRUE

Suppose there are five prospective passengers for a helicopter ride. Each person's age and maximum willingness to pay is listed below. If the helicopter company charges three prices: Youth (16 or below), Adult, and Senior (55+), what is their maximum possible net profit? The marginal cost of taking on additional passengers is a constant $10.

$280 [ 2 × $50 + 2 × $70 + $40 = $280. ]

The graph on the left shows a market in which a monopolist airline does not price-discriminate and charges $300 per ticket. This generates a net revenue of $20,000. The graph on the right shows a market in which the monopolist price-discriminates and charges $200 to customers who buy their tickets at least two weeks in advance, and $400 to customers who do not. This generates a net revenue of $25,000. How much net revenue would this airline generate if it were able to practice perfect price discrimination?

$4,000 [½ × 200 × ($500 - $100) = $40,000.]

Different market and firm structures operate at different levels of efficiency. Using the graph below, match the types of firms with the correct efficiency labels for consumer and producer surplus and deadweight loss.

A, B, and C are all producer surplus. - PERFECT PRICE DISCRIMINATION A is consumer surplus, B is producer surplus, and C is deadweight loss. - SINGLE PRICE MONOPOLY A, B, and C are all consumer surplus. - PERFECT COMPETITION

Which of the following firms would be able to price discriminate most successfully?

An amusement park that is the only one in the state

When firms price-discriminate, they charge different groups of consumers different prices based on the consumers' varying willingness to pay for a good or service. Which of the following are instances of price discrimination?

A night club has a Ladies' Night for which women do not pay a cover charge while men do. Firms offer clip-out coupons that provide a discount to customers who present them in the store.

Match the condition that allows price discrimination to the characteristic of the product or service.

A software firm sells software that can only be installed on three computers. - PREVENT SALE A movie theater can ask for proof of a consumer's age. - DISTINGUISH GROUP OF BUYERS A headphone maker issues a rebate to those who mail in a form. - DISTINGUISH GROUP OF BUYERS

The graph below represents a non-price-discriminating monopolist. Properly identify each area of the graph.

A: consumer surplus B: producer surplus C: deadweight loss

Compared to a single-price monopoly, a firm that operates in a perfectly competitive market is similar to a monopoly firm that is able to perfectly price discriminate in which of the following ways?

Deadweight loss is eliminated. Quantity sold would be the same. Total surplus is maximized.

The city government of Santa Fe, New Mexico, has implemented a highly successful tiered water pricing system to encourage water conservation. Why was this water conservation strategy successful?

The city government was able to divide people into groups according to their elasticity of demand for water.