Chapter 12 Pricing and Advertising: Microeconomics: Theory and Applications With Calculus, 4e, Global Edition (Perloff)

Microeconomics: Theory and Applications with Calculus, 4e, Global Edition (Perloff)
Chapter 12 Pricing and Advertising
12.1 Conditions for Price Discrimination
1) Which of the following conditions must be TRUE so that a firm can price discriminate?
A) There are no other firms in the market.
B) The good is a nondurable.
C) The good cannot be easily resold.
D) All of the above.
Answer: C
2) Why do firms engage in price discrimination?

A) to decrease cost
B) to increase profits
C) to increase consumer surplus
D) to prohibit the resale of their products
Answer: B
3) When firms price discriminate they turn ________ into ________.

A) producer surplus, revenue
B) consumer surplus, profit
C) total cost, profit
D) producer surplus, consumer surplus
Answer: B
4) Theatres charge lower prices for a matinee and usually don't accept coupons for the night
showing of movies because
A) consumers that attend the matinee have a higher price elasticity of demand.
B) consumers that attend the night show have a lower price elasticity of demand.
C) it increases profits compared to charging a single price.
Answer: D
5) At many municipal golf courses, local residents pay a lower fee to play than other golfers do.
One necessary condition for the golf course to be able to successfully price discriminate
according to residency is that
A) they can check the identification cards of golfers.
B) local resident golfers and other golfers have the same price elasticity of demand to play at the
municipal course.
C) there are many golf courses nearby from which golfers can choose.
D) they require all golfers to rent a cart.
Answer: A
6) If consumers are identical, then

A) price discrimination is impossible.
B) price discrimination can occur if each consumer has a downward-sloping demand curve for
the product.
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C) perfect price discrimination is the only form of price discrimination that can increase a
monopoly's profit.
D) tie-in sales cannot increase a monopoly's profit.
Answer: B
7) Charging a higher price for a motel room to customers with dogs or cats than to customers
with no pets is most likely an example of
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) actual cost differences.
Answer: D
8) Which of the following is NOT an example of firms trying to prevent resale?

A) Movie theatres check student ID for students' discounted tickets.
B) An aluminum company starts its own wire production firm to sell to the aircraft parts at a
higher price.
C) Government limits the sale of international edition textbooks in the U.S. market.
D) Milk producers sell the milk to processed dairy products producers at a lower price.
Answer: D
9) "Kids eat free" in a fast food restaurant is an example of

D) no price discrimination.
Answer: C
10) A coffee shop sells a small cup of coffee at $3, while a large cup, which is twice as big, at $5.
This is an example of
D) actual cost differences.
Answer: B
11) Which of the following is NOT an example for third-degree price discrimination?
A) discounted coupons for toothpastes in the newspapers
B) discounts for Saturday night stayovers
C) discounts for bulk orders
D) discounts for senior citizens at amusement parks
Answer: C
12.2 Perfect Price Discrimination
1) A perfect price discriminator

A) charges each buyer her reservation price.
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B) charges different prices to each customer based upon different costs of delivery.
C) generates a deadweight loss to society.
D) charges lower prices to customers who buy greater quantities.
Answer: A
2) A perfect-price-discriminating monopoly's marginal revenue curve

A) lies below the demand curve.
B) is the demand curve.
C) varies for each consumer.
D) is the same as the monopolist's marginal revenue curve.
Answer: B
3) Which of the following sellers is most able to perfectly price discriminate?

A) a college or university
B) the post office
C) a clothing store
D) a grocery supermarket
Answer: A
4) The deadweight loss generated by a perfect-price-discriminating monopoly

A) equals the deadweight loss of a single-price monopoly.
B) is greater than the deadweight loss of a single-price monopoly.
C) equals zero.
D) equals the sum of all lost consumer surplus.
Answer: C
5) A perfect price discriminating equilibrium maximizes

A) consumer surplus.
B) the associated deadweight loss.
C) the market inefficiency.
D) total welfare.
Answer: D
6) Perfect price discrimination is

A) realistic.
B) practiced by many firms.
C) a purely theoretical possibility.
D) very common.
Answer: C
7) When a firm has a monopoly in a market and also perfectly price discriminates, total welfare
A) is maximized.
B) is lower than in a perfectly competitive market.
C) is higher than in a perfectly competitive market.
D) is minimized.
Answer: A
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8) If a market is controlled by a perfect-price-discriminating monopoly, then
A) a deadweight loss is generated.
B) there is no consumer surplus.
C) consumer surplus is the same as under perfect competition.
D) output is less than that of a single-price monopoly.
Answer: B
9) The above figure shows the market for a particular good. If the market is controlled by a
perfect-price-discriminating monopoly, consumer surplus equals
A) A.
B) A + B + C.
C) C.
D) zero.
Answer: D
perfect-price-discriminating monopoly, social welfare equals
A) A.
B) A + B + C.
C) A + B + C + D + E.
D) zero.
Answer: C
perfect-price-discriminating monopoly, compared to a monopoly who charges a single price, the
change in consumer surplus is
A) A.
B) A + B + C.
C) A + B + C + D + E.
D) zero.
Answer: A
perfect-price-discriminating monopoly, compared to a perfectly competitive market, the change
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in consumer surplus is
A) A.
B) A + B + C.
C) A + B + C + D + E.
D) zero.
Answer: B
perfect-price-discriminating monopoly, producer surplus equals
A) A + B + C + D + E.
B) D + E.
C) E.
D) zero.
Answer: A
perfect-price-discriminating monopoly, the deadweight loss equals
A) C + E.
B) A + B + C.
C) C.
D) zero.
Answer: D
change in total surplus is
A) A + B + C.
B) A + B + D.
C) A.
D) C + E.
Answer: D
change in producer surplus is
A) B + D.
B) A.
C) A + C + E.
D) B + C + D + E.
Answer: C
perfect-price-discriminating monopoly, compared to a perfectly competitive market, the change
in producer surplus is
A) B + C.
B) D + E.
C) A + B + C.
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D) A + B + C + D + E.
Answer: C
18) A monopoly will NOT be able to perfectly price discriminate if

A) obtaining information about each buyer's reservation price is too costly.
B) demand is very elastic.
C) demand is very inelastic.
D) resale is impossible.
Answer: A
19) A monopoly will NOT be able to perfectly price discriminate if

A) each consumer does not reveal her reservation price.
B) demand is very elastic.
C) the firm's marginal cost curve is upward sloping.
Answer: A
12.3 Group Price Discrimination
1) Bob is the only carpet installer in a small isolated town. The above figure shows the demand
curves of two distinct groups of customers-residential and business. If the marginal cost of
installing carpet is a constant $1 per sq yard, what price does Bob charge each segment?
A) $1 in each market
B) $5.50 in the residential market and $8 in the business market
C) $1 in the residential market and $5 in the business market
D) $10 in the residential market and $15 in the business market
Answer: B
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2) Which of the following is an example for group price discrimination?
A) a BMW selling for more than a VW
B) local residents receiving a discount at the local golf course
C) the fact that a razor is cheap and blades are expensive
D) a hotel charging more for a room if the customers bring pets
Answer: B
3) Bob is the only carpet installer in a small isolated town. The above figure shows the demand
curves of two distinct groups of customers-residential and business. Bob is likely to price
discriminate because
A) elasticities differ across markets.
B) the installation of carpets cannot be resold.
C) Bob can probably identify which consumers belong to which segment.
Answer: D
4) If two identifiable markets differ with respect to their price elasticity of demand and resale is
impossible, a firm with market power will
A) set a higher price in the market that is more price elastic.
B) set a lower price in the market that is more price elastic.
C) set price so as to equate the elasticity of demand across markets.
D) set price equal to marginal cost in both markets.
Answer: B
5) A group price discriminator sells its product in Florida for three times the price it sets in New
York. Assuming the firm faces the same constant marginal cost in each market and the price
elasticity of demand in New York is -2.0, the demand in Florida
A) has an elasticity of -6.0.
B) is more price elastic than the demand in New York.
C) has an elasticity of -1.2.
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D) has an elasticity of -0.67.
Answer: C
6) Suppose group price discrimination is possible; however, a firm sets the same price in each
market. As a result,
A) price elasticity of demand is the same in each market.
B) the price-inelastic market will buy zero units.
C) marginal revenue in the more price-elastic market exceeds marginal revenue in the less price-
elastic market.
D) the deadweight loss is less than if the firm price discriminated.
Answer: C
7) If the demand for air travel were to change so that business travelers and vacationers have the
same price elasticity of demand for air travel,
A) airlines would charge the same price to each type of flyer.
B) airlines would still charge business flyers a higher fare since the traveler's employer pays
anyway.
C) airlines would be driven out of business.
D) airlines would counter by charging vacationers a higher fare.
Answer: A
8) If somebody posing as a vacationer were able to purchase large numbers of airline tickets
from the airlines and later resell them to business travelers,
A) group price discrimination on the part of airlines would no longer be profitable.
B) group price discrimination on the part of airlines would no longer be profit maximizing.
C) the airlines would respond by raising further the price charged to business flyers.
D) this person would not earn any economic profit.
Answer: B
9) Relative to a single-price monopoly, the effect of group price discrimination on social welfare
is
A) beneficial.
B) detrimental.
C) neutral.
D) ambiguous.
Answer: D
10) Coupons represent a form of price discrimination because they offer a low-cost way for firms
to
A) identify customers with apparently more elastic demand and offer them a lower price.
B) retain loyal customers who are not price sensitive.
C) offer discounts to consumers who buy larger quantities.
D) perfectly price discriminate.
Answer: A
11) Airlines offer lower prices to vacationers than to business travelers because
A) of government regulations requiring them to do so.
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B) business travelers do not care at all about costs.
C) business travelers are less flexible in their travel plans than vacationers are.
D) airlines know that business travelers enjoy flying more than vacationers do.
Answer: C
12) Suppose a profit-maximizing monopoly is able to employ group price discrimination. The
marginal cost of providing the good is constant and the same in both markets. The marginal
revenue the firm earns on the last unit sold in the market with the higher price will be
A) greater than the marginal revenue the firm earns on the last unit sold in the market with the
higher price.
B) less than the marginal revenue the firm earns on the last unit sold in the market with the
higher price.
C) equal to the marginal revenue the firm earns on the last unit sold in the market with the higher
price.
D) greater than the marginal cost of the last unit.
Answer: C
13) Pizza joints often offer substantially lower prices for pizza picked up at the shop compared to
delivered pizza prices. This may be an attempt at
A) perfect price discrimination.
B) group price discrimination.
C) quantity discrimination.
D) second-degree price discrimination.
Answer: B
22) Consider a weapons producer that is selling guns to two countries that are at war with one
another. Guns can be produced at a constant marginal cost of $10 per gun. The demand for guns
in each of the countries is given by:
p = 50 - 0.5Q (Country A)
p = 20 - 0.25Q (Country B)
a. If the weapons producer can charge different prices to each country, what price and quantity
will it sell to each?
b. If the weapons producer cannot price discriminate, what price and quantity of guns will it sell
to each country?
c. Will the weapons manufacturer make more profit from price discriminating? Briefly explain.
Why is it that the manufacturer will likely be able to price discriminate?
d. Which country will benefit from price discrimination? Which country will be worse off from
price discrimination? Explain briefly.
e. Is the deadweight loss higher under price discrimination or a single-price? Show
mathematically.
Answer:
a. QA = 40, PA = 30
QB = 20, PB = 15
b. Write demand curves as
QA = 100 - 2p
QB = 80 - 4p
Total demand is
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Q = 180 - 6p (for p < 20)
Write inverse demand:
p = 30 - Q/6
MR = 30 - Q/3 = 10 = MC
Q = 60, p = 20(!)
But at p = 20, the firm is only selling to country A. The firm is better selling at p = 30 since
only country A is buying! On a graph:
NOTE: It's always possible to simply charge the monopoly price to the higher demanders,
thereby pricing the low demanders out of the market. The optimal pricing will be based on
whether it's more profitable to price out the low demand or price so both types purchase.
c. Price discriminating is more profitable because the weapons seller can now sell to country B.
Countries at war with each other typically don't trade arms, so resale is not a problem.
d. Country A is indifferent, Country B is better because they can now purchase weapons.
e. It's easy to see in this case—the DWL to country A is no different. The DWL to country B
was 200 w/out price discrimination (they didn't purchase weapons), but with price discrimination
it is 50.
This is a case where price discrimination can actually reduce deadweight loss.
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12.4 Nonlinear Pricing
1) If a monopoly charges higher prices to consumers who buy smaller quantities than to
consumers who buy larger quantities, then
A) consumer surplus is larger than under single-price monopoly.
B) social welfare is larger than under perfect competition.
C) the monopoly's profits are larger than under single-price monopoly.
D) the monopoly's profits are larger than under perfect price discrimination.
Answer: C
2) If a monopoly charges higher prices to consumers who buy smaller quantities than to
consumers who buy larger quantities, then
A) consumers that buy larger quantities have a higher price elasticity of demand.
B) consumers that buy larger quantities have a lower price elasticity of demand.
C) consumers that buy smaller quantities have a lower price elasticity of demand.
D) Both A and C.
Answer: D
3) Quantity discrimination makes sense if

A) buyers of smaller quantities are more price sensitive than buyers of larger quantities.
B) buyers of smaller quantities are less price sensitive than buyers of larger quantities.
C) demand for the good is perfectly elastic.
D) the lower price for larger quantities encourages all consumers to purchase the larger quantity.
Answer: B
4) The more block prices a monopoly can set instead of setting a single price, the
A) smaller the deadweight loss.
B) the more producer surplus.
C) the larger the total welfare.
Answer: D
12.5 Two-Part Pricing
1) Two-part tariffs offer a mechanism whereby the firm can

A) charge two different prices to distinct groups of customers.
B) collect two times as much from consumers as a single-price monopoly can.
C) capture some or all of the consumer surplus.
D) reduce some of its fixed costs.
Answer: C
2) At the current price of a good, Al's consumer surplus equals eight, and Ben's consumer surplus
equals 15. By charging a two-part tariff, a monopolist could increase his profit by
A) 8.
B) 16.
C) 15.
D) 30.
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Answer: B
3) At the current price of a good, Al's consumer surplus equals 15, and Ben's consumer surplus
equals 15. By charging a two-part tariff, a monopolist could increase his profit by
A) 8.
B) 16.
C) 15.
D) 30.
Answer: D
4) Many theme parks charge an entrance fee and a per-ride fee equal to zero. This is an example
of
A) bundling.
B) a two-tier tariff.
C) multimarket price discrimination.
D) perfect price discrimination.
Answer: B
5) Suppose all individuals are identical, and their monthly demand for Internet access from a
certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q
is hours per month. The firm faces a constant marginal cost of $1. Potential consumer surplus
equals
A) $4.
B) $8.
C) $16.
D) $32.
Answer: C
is hours per month. The firm faces a constant marginal cost of $1. The profit-maximizing two-
part tariff yields total revenue of
A) $24.
B) $40.
C) $16.
D) $32.
Answer: A
is hours per month. The firm faces a constant marginal cost of $1. The profit maximizing two-
part tariff yields results in the firm selling
A) 4.5 hours.
B) 10 hours.
C) 5 hours.
D) 8 hours.
Answer: D
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is hours per month. The firm faces a constant marginal cost of $1. If the firm will charge a
monthly access fee plus a per hour rate, the monthly access fee will equal
A) $1.
B) $5.
C) $8.
D) $16.
Answer: D
9) Suppose there are two types of consumers with two different demand curves, and the marginal
cost of the monopoly is $10. What could be the possible price under two-part pricing that will
maximize the monopoly profit?
A) $8
B) $9
C) $10
D) $12
Answer: D
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Chapter 12 Pricing and Advertising: Microeconomics: Theory and Applications With Calculus, 4e, Global Edition (Perloff)

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Microeconomics: Theory and Applications with Calculus, 4e, Global Edition (Perloff)

Chapter 12 Pricing and Advertising

12.1 Conditions for Price Discrimination

2) Why do firms engage in price discrimination?

3) When firms price discriminate they turn into .

6) If consumers are identical, then

8) Which of the following is NOT an example of firms trying to prevent resale?

9) "Kids eat free" in a fast food restaurant is an example of

12.2 Perfect Price Discrimination

1) A perfect price discriminator

2) A perfect-price-discriminating monopoly's marginal revenue curve

3) Which of the following sellers is most able to perfectly price discriminate?

4) The deadweight loss generated by a perfect-price-discriminating monopoly

5) A perfect price discriminating equilibrium maximizes

6) Perfect price discrimination is

18) A monopoly will NOT be able to perfectly price discriminate if

19) A monopoly will NOT be able to perfectly price discriminate if

12.3 Group Price Discrimination

3) Quantity discrimination makes sense if

12.5 Two-Part Pricing

1) Two-part tariffs offer a mechanism whereby the firm can

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