Which of the following is true for a monopolist that engages in perfect price discrimination Quizlet

A sample answer to this question. "Explain the conditions under which a business is able to engage in price discrimination"

Price discrimination is when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs.

Many different forms of price discrimination can take place such as 1st degree, 2nd degree, third degree, and the hurdle model of price discrimination. However, for all these to take place certain conditions must be met.

First the market must be a form of imperfect competition. If there was perfect competition then price discrimination would be not possible as a producer would not be able to control their prices. There must be some level of monopoly power to allow producers the ability to price set and not price take. For example Nurofen created higher prices on the same painkiller which had the same result. This was able to occur as there was asymmetric information among consumers and some monopoly power of nurofen.

Another condition for price discrimination is the prevention of re-sale. If consumers can simply buy a product at cheaper prices and sell it on for a profit to a consumer who would have paid a higher price then there is no price discrimination. This re-sale could take the form of second hand shops and re-sale ticket companies such as stub-hub. These companies capitalise on this arbitrage and re-sell the good creating a profit. Prevention of re-sale could be enforced in many different ways. For example students can only receive student discounts with a legitimate student ID. Furthermore airplane and train tickets are registered to one name and ID must be shown which certifies this.

A key condition for price discrimination to occur is the identification of different market segments. If this is possible different groups have different price elasticities of demand. Therefore the firm can charge different prices depending on the consumers sensitivity to price changes. For example they could charge higher for richer, inelastic consumers who continue buying no matter the price rise. The firm continues to gain profit as long as the marginal revenue is greater than marginal cost.

To gain knowledge of different groups of PED and different individual consume PED firms may have to gain information or market intelligence on consumers through means such as deep data digging in cookies and browser histories. Companies such as Amazon use this technique in order for them to suggest relevant items for each consumer with specialised deals put together based on individual consumer preference. Consumers leave a digital footprint every time they go online, this makes it cheaper and easier for many firms to engage in price discrimination.

Multiple Choice

Questions 1 - 16, 41, and 42 are relevant for our second exam on November 4, 2011.

1. 

A natural monopoly results when a firm has

A) a license   B) a patent   C) official approval to produce a product   D) decreasing average costs over the range of market demand   E) exclusive use of a natural resource

2. 

In Exhibit 0138, the marginal revenue of the third unit is

A) $20   B) $120   C) $100   D) $40   E) $30

3. 

The profit-maximizing output and price for the firm in Exhibit 0140, which charges the same price to all customers, are

A) 117 and $14   B) 150 and $22   C) 150 and $14   D) 117 and $22   E) 117 and $24

4. 

Suppose that at an output of 1,000 units, a monopolist has marginal cost of $40, marginal revenue of $30, average variable cost of $30, and average total cost of $50. In order to maximize profit or minimize loss in the short run, the firm should

A) shut down   B) continue to produce 1,000 units   C) produce fewer than 1,000 units but still operate   D) produce more than 1,000 units   E) increase its plant size to gain economies of scale

5. 

In the short run, the monopolist depicted in Exhibit 0151 should

A) shut down because P < AVC at some output levels   B) shut down because P < ATC at all output levels   C) continue producing because P > AVC at some output levels   D) continue producing because P > ATC at all output levels   E) continue producing because monopolists never shut down

6. 

Suppose that a price-discriminating monopolist divides its market into two segments. The firm will charge the lower price in the market segment where consumers

A) have relatively less elastic demand   B) have relatively more elastic demand   C) attach a higher marginal value to each unit of the good   D) have perfectly inelastic demand   E) attach higher average value to units of the good

7. 

When a monopolist practices perfect price discrimination,

A) consumers receive no consumer surplus   B) there is allocative inefficiency   C) there is a deadweight loss   D) profit is lower than for the nondiscriminating monopolist   E) total revenue is less than for the nondiscriminating monopolist

8. 

Which of the following characteristics does perfect competition share with monopolistic competition?

A) price-taking firms   B) zero long-run economic profit   C) homogeneous product   D) some barriers to entry   E) economies of scale in production

9. 

Monopolistic competitors are

A) price takers   B) price searchers   C) price maximizers   D) price ignorers   E) collusive price fixers

10. 

A firm could differentiate its product by all except one of the following means. Which is the exception?

A) making the product available at a number of different locations   B) increasing the number of services that accompany the product   C) making the product physically different from other products   D) using packaging or advertising to create a special subjective image of the product in the consumer's mind   E) emphasizing that the product provides the same benefits to consumers as the others on the market, even when it's really physically different

11. 

If the monopolist in Exhibit 0150 engages in perfect price discrimination, total revenue would be

A) $95,300   B) $104,000   C) $106,080   D) $187,408   E) equal to the area under the demand curve bounded by the horizontal axis and a quantity of 884 units

12. 

The demand curve facing Imelda's Shoe Boutique, a firm in monopolistic competition,

A) is horizontal because Imelda's is small relative to the market as a whole   B) is horizontal because Imelda's is large relative to the market as a whole   C) slopes downward because Imelda's is small relative to the market as a whole   D) slopes downward because Imelda's sells a differentiated product   E) slopes downward because Imelda's is the entire industry

13. 

In the short run, the firm in Exhibit 0159 should

A) shut down   B) produce 8 units at a price of $11 per unit   C) produce 8 units at a price of $10 per unit   D) produce 8 units at a price of $9 per unit   E) produce 10 units at a price of $9 per unit

14. 

At the profit-maximizing output level, total cost for the firm in Exhibit 0161 is

A) $5,200   B) $4,000   C) $3,600   D) $5,600   E) impossible to determine

15. 

At the profit-maximizing output level, the firm in Exhibit 0161 is

A) earning economic profit of $400   B) earning economic profit of $200   C) earning zero economic profit   D) suffering a loss of $200   E) suffering a loss of $400

16. 

As a result of the economic profit earned by the first videotape rental outlets,

A) existing firms were able to successfully lobby the government for patent protection   B) competitors were attracted to the industry, and their entry reduced economic profit   C) demand dried up   D) Blockbuster saw an opportunity to take over the industry   E) competitors were discouraged from entering the industry

17. 

In Exhibit 0171, economic rent at equilibrium equals

A) $0   B) $120   C) $1,000   D) $300   E) $1,300

18. 

The change in total revenue that results from a one-unit change in the amount of a variable resource used is

A) average resource cost   B) marginal resource cost   C) marginal product   D) marginal revenue product   E) average revenue product

19. 

A firm produces staples in a perfectly competitive market and hires workers in a perfectly competitive labor market. Which of the following is true?

A) The supply curve of staples is horizontal.   B) The firm's marginal resource cost of labor equals the wage rate.   C) The firm's demand curve for labor is horizontal.   D) The marginal revenue product of labor curve is horizontal.   E) The marginal product of labor curve is horizontal.

20. 

A profit-maximizing firm will hire units of an input to the point where

A) MRP > price of the input   B) MRP < MRC   C) MRP = the supply of the input   D) MRP = MRC   E) MRP < the supply of the input

21. 

Suppose a firm is a price searcher in the product market and hires labor in a perfectly competitive labor market. If the wage rate is $20, the marginal product of the last worker hired is 5, and the firm is hiring the profit-maximizing amount of labor, then the marginal revenue product of the last worker hired must be

A) $1   B) $1.50   C) $4   D) $5   E) $20

22. 

If the marginal product of labor increases (i.e., is due to an upward shift of the MP curve), that will likely cause

A) an increase in the price of output produced by labor   B) an increase in labor demand   C) an increase in labor supply   D) a fall in the wage paid to labor   E) a fall in the number of workers employed

23. 

The smaller the quantity and quality of complementary resources used in production,

A) the greater the demand for labor   B) the greater the marginal resource cost of labor   C) the lower the marginal resource cost of labor   D) the lower the marginal productivity of labor   E) the greater the marginal productivity of labor

24. 

The demand for architects

A) is derived from the demand for new building construction   B) is derived from the demand for computer-assisted design software   C) is derived from the demand for architectural education   D) is itself the source of the derived demand for commercial real estate   E) has been increasing rapidly, partly due to the increasing demand for new hospitals and health centers

25. 

Mr. "Rational Man" Eastwood maximizes utility by allocating his time among leisure, market work, and household work so that his

A) expected marginal utility from leisure is greater than his expected marginal utility from market work   B) expected total utility per hour is equal among all three   C) expected marginal utility per hour is equal among all three   D) expected marginal utility from market work is greater than his expected marginal utility from leisure   E) expected total utility of each use is equal

26. 

A stock market crash that reduces the value of an individual's trust fund would tend to

A) increase her supply of labor if the substitution effect outweighs the income effect   B) decrease her supply of labor if the substitution effect outweighs the income effect   C) have no impact on her labor supply decision   D) increase her supply of labor   E) decrease her supply of labor

27. 

By itself, the substitution effect of an increase in the wage rate will

A) always lead to an increase in the quantity of labor supplied   B) always lead to a decrease in the quantity of labor supplied   C) lead to an increase in the quantity of labor supplied only if leisure is like a normal good   D) lead to an increase in the quantity of labor supplied only if leisure is not a normal good   E) lead to an increase in the quantity of labor supplied only if the income effect works in the same direction

28. 

Consider Exhibit 0186. If the wage rate is $9, how many hours per week will this person work?

A) 30 hours   B) 36 hours   C) 40 hours   D) 45 hours   E) 48 hours

29. 

Most collective bargaining agreements in the United States are reached

A) only after binding arbitration   B) only after a strike   C) without a strike   D) only after a strike lasting at least three weeks   E) only after government intervention to avoid a strike

30. 

If an industrial union would strike if it does not receive a particular wage rate, then the supply curve of labor in this market

A) is horizontal at that particular wage rate until it intersects the original supply of labor curve   B) is vertical at that particular wage rate until it intersects the original supply of labor curve   C) shifts to the left   D) disappears   E) slopes downward

31. 

If an industrial union is able to negotiate a wage above the market-clearing wage, the non-union wage in other industries will

A) increase   B) decrease   C) increase, if the union can restrict the supply of labor   D) increase, if the union can increase the supply of labor   E) decrease due to the strike-breaking activity of the firm

32. 

Which of the following is an example of featherbedding?

A) a craft union's restricting entry into its profession   B) a union-imposed wage floor   C) an increase in labor productivity that results from a decrease in quit rates   D) attempts to reduce the sale of nonunion goods   E) a construction workers union's requiring an unnecessarily large number of workers to do a particular job

33. 

The production of capital is a form of roundabout production.

A) True   B) False

34. 

Increased saving today means

A) more consumption today and in the future   B) less consumption today and in the future   C) more consumption today and less in the future   D) less consumption today and more in the future   E) more income today, but the net effect of increased income on the balance between consumption and saving cannot be determined in advance

35. 

Which of the following does not reflect a positive rate of time preference?

A) Concert-goers yell and scream when the stage is still dark an hour after the concert was scheduled to start.   B) Borrowers have to pay interest on loans.   C) A dieter, allowed three ounces of butter per day, spends the whole allotment on her toast at breakfast.   D) A dieter, allowed three ounces of butter per day, promises himself some new clothes if he can break the habit of spending the whole allotment on his toast at breakfast.   E) A student stays up late every night for a week to finish her term paper two months before it is due.

36. 

If you will receive $5,000 two years from today, what is its present value if the discount rate is 5 percent?

A) $5,025   B) $4,500   C) $3,429   D) $4,535   E) $4,762

37. 

The Great Homebody Nationwide Sweepstakes promises its winners a choice between $200,000 now or $120,000 now and $100,000 in one year. The winners should take the $200,000 now

A) no matter what the interest rate is   B) no matter what the interest rate is, if their rate of time preference is high   C) no matter what the interest rate is, if their rate of time preference is low   D) only if the interest rate is above 25 percent   E) only if the interest rate is below 25 percent

38. 

If you are receiving $2,000 per year forever, the present value of that income stream when the prevailing interest rate is 7 percent is equal to

A) $20,000   B) $62,472   C) $100,087   D) $27,000   E) $28,571

39. 

You expect to rent out a vacation home in Sanibel Island for $800 a month as an investment. Upkeep is estimated at $3,000 a year. If the current market interest rate is 5 percent, you are willing to pay __________ for the house.

A) $132,000   B) $100,000   C) $160,000   D) $192,000   E) $800,000

40. 

If 400 million shares of stock are traded on the New York Stock Exchange today at an average price of $100, then the total amount of money raised today by the corporations whose stock traded on this exchange would be $40 billion.

A) True   B) False

Suppose that the governments of two countries, Oz and Lilliput, are each deciding whether or not to impose tariffs on all imported goods from the other country. Each government wants to choose the strategy that will benefit its country the most. The payoffs to each country

(Oz, Lilliput) for each combination of strategies are shown in the payoff matrix. Assume it is a non-cooperative game where players move simultaneously. NOTE: Payoffs are listed as with Oz first, Lilliput second. Positive numbers are gains (million dollars per year).

41. 

What is the dominant strategy for Oz?

A) Tariffs   B) No Tariffs   C) No dominant strategy   D) Both strategies are dominant

42. 

In the payoff matrix for Oz and Lilliput, what is the Nash equilibrium?

A) Both countries choose tariffs   B) Both countries choose no tariffs   C) Oz – Tariffs, Lilliput – No Tariffs   D) Oz – No Tariffs, Lilliput – Tariffs   E) No Nash equilibrium exists because Lilliput lacks a dominant strategy.

Which if the following is true for a monopolist that engages in perfect price discrimination?

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