BR10B: Bridge: Price Discrimination
Question 1
Tom is a junk remover who occasionally finds rare antiques to sell. He uses an online auction site to sell each antique at the highest possible price customers are willing to pay. Tom is engaging in _____, which leads to _____ consumer surplus.
A. imperfect price discrimination; very high
B. perfect price discrimination; zero
C. imperfect price discrimination; zero
D. perfect price discrimination; very high
Hint
Price discrimination occurs when sellers charge different prices to different customers. Consumer surplus is the difference between the price a consumer is willing to pay and the price the consumer actually pays.Answer
B. perfect price discrimination; zero Price discrimination occurs when a seller is able to charge different groups of customers different prices, where such prices reflect each group's willingness to pay. Perfect price discrimination occurs when a seller charges a different price to each person where the price is equal to each person's willingness to pay. Therefore, by selling each antique to each customer at the highest possible price, Tom is engaging in perfect price discrimination. Because every one of Tom's customers pays a price equal to his or her willingness to pay, consumer surplus is zero.Question 2
At the wholesale club, one can buy toothpaste at a lower unit price if one buys six tubes of toothpaste at once. This is an example of ____, which ____ producer surplus.
A. imperfect price discrimination; increases
B. perfect price discrimination; decreases
C. imperfect price discrimination; decreases
D. perfect price discrimination; increases
Hint
Price discrimination occurs when sellers charge different prices to different customers; producer surplus is the difference between the price a consumer pays for an item and the cost to a firm of producing that item.Answer
A. imperfect price discrimination; increases Perfect price discrimination occurs when a seller sells one’s product to each customer at a price equal to that individual’s willingness to pay. Imperfect price discrimination occurs when a seller sells an item to different groups of consumers at prices that roughly reflect each group's willingness to pay. Since the price of toothpaste is not tailored to each consumer but to groups of consumers, this is an example of imperfect price discrimination. Producer surplus is the difference between the price a consumer pays for an item and the cost to a firm of producing that item. Therefore, by selling at a price that is relatively close to consumers' willingness to pay, the producer obtains a larger producer surplus.Question 3
The value of deadweight loss for a perfect price discriminator is _____ an imperfect price discriminator.
A. the same as
B. greater than
C. unknown compared to
D. less than
Hint
A perfect price discriminator charges each customer their exact willingness to pay. Thus, the perfect price discriminator is not forced to reduce the price on all units when they choose to sell an additional unit and, instead, is able to produce the socially optimal quantity.Answer
D. less than Perfect price discrimination results in an elimination of consumer surplus and an increase in producer surplus. Deadweight loss is equal to zero under perfect price discrimination since the market equilibrium quantity is equal to the quantity that would prevail under perfectly competitive conditions.Question 4
The movie theater in your neighborhood charges lower ticket prices to senior citizens than to other patrons. Assuming that this pricing strategy increases the profits of the movie theater, we can conclude that senior citizens must have ________ for movie tickets than other patrons.
A. greater demand
B. more elastic demand
C. lower demand
D. less elastic demand
Hint
Elasticity refers to an individual's or group's price sensitivity. A high degree of price sensitivity is deemed elastic demand, whereas a low degree of price sensitivity is deemed inelastic (or less elastic) demand. Higher and lower levels of demand correspond with shifts of the demand curve to the right and left, respectively.Answer
B. more elastic demand Lowering the price of all movie tickets would decrease the price received for all tickets purchased, regardless of an individual's willingness to pay. However, since the theater has determined senior citizens are highly responsive to movie ticket prices, they are able to entice additional senior citizens to frequent the theater by offering them a discounted price. The revenue loss from the reduction in price on the tickets sold to senior citizens (price effect) is more than offset by the additional tickets sold to senior citizens (quantity effect) since their demand is highly elastic.Question 5
The goal of price discrimination is to increase _____ by charging more to those who have _____ demand.
A. producer surplus; more elastic
B. consumer surplus; less elastic
C. consumer surplus; more elastic
D. producer surplus; less elastic