AP_Krugman_Textbook

Tackle the Test:

Multiple-Choice Questions

1. d


2. c


3. b


4. e


5. a
   Tackle the Test:
   Free-Response Questions


6. 
   

Consumer surplus is zero because each consumer is

charged the maximum he or she is willing to pay.

Module 64

Check Your Understanding

1. a.This will decrease the likelihood that the firm will collude
   to restrict output. By increasing output, the firm will gen-
   erate a negative price effect. But because the firm’s cur-
   rent market share is small, the price effect will fall mostly
   on its rivals’ revenues rather than on its own. At the
   same time, the firm will benefit from a positive quantity
   effect.
   b.This will decrease the likelihood that the firm will collude
   to restrict output. By acting noncooperatively and raising
   output, the firm will cause the price to fall. Because its
   rivals have higher costs, they will lose money at the lower
   price while the firm continues to make profits. So the
   firm may be able to drive its rivals out of business by
   increasing its output.
   c.This will increase the likelihood that the firm will col-
   lude. Because it is costly for consumers to switch prod-
   ucts, the firm would have to lower its price substantially
   (with a commensurate increase in quantity) to induce
   consumers to switch to its product. So increasing output
   is likely to be unprofitable, given the large negative price
   effect.
   d.This will increase the likelihood that the firm will col-
   lude. It cannot increase sales because it is currently at
   maximum production capacity, making attempts to
   undercut rivals’ prices as under the Bertrand model fruit-
   less due to the inability to produce the output needed to
   steal the rivals’ customers. This makes the option to
   cooperate in restricting output relatively attractive.

Quantity

Price,

cost

MC = ATC

D

Profit with perfect

price discrimination

Perfect Price Discrimination

QM

Tackle the Test:

Free-Response Questions

a.triangle bca

b.triangle bed

c.rectangle degf

d.triangle ech

Module 63

Check Your Understanding

1. a.False. The opposite is true. A price-discriminating monop-
   olist will sell to some customers that would not find the
   product affordable if purchasing from a single-price
   monopolist—namely, customers with a high price elastici-
   ty of demand who are willing to pay only a relatively low
   price for the good.
   b.False. Although a price-discriminating monopolist does
   indeed capture more of the consumer surplus, less ineffi-
   ciency is created: more mutually beneficial transactions
   occur because the monopolist makes more sales to cus-
   tomers with a low willingness to pay for the good.
   c.True. Under price discrimination consumers are charged
   prices that depend on their price elasticity of demand. A
   consumer with highly elastic demand will pay a lower
   price than a consumer with inelastic demand.


2. a.This is not a case of price discrimination because the
   product itself is different and all consumers, regardless of
   their price elasticities of demand, value the damaged mer-
   chandise less than undamaged merchandise. So the price
   must be lowered to sell the merchandise.
   b.This is a case of price discrimination. Senior citizens have
   a higher price elasticity of demand for restaurant meals
   (their demand for restaurant meals is more responsive to
   price changes) than other patrons. Restaurants lower the
   price to high-elasticity consumers (senior citizens).
   Consumers with low price elasticity of demand will pay
   the full price.
   c.This is a case of price discrimination. Consumers with a
   high price elasticity of demand will pay a lower price by
   collecting and using discount coupons. Consumers with a
   low price elasticity of demand will not use coupons.
   d.This is not a case of price discrimination; it is simply a
   case of supply and demand.

Quantity

Price, cost,

marginal

revenue

ATC

MC

MR D

d

b

f

e

c

g

h

a

S-40 SOLUTIONS TO AP REVIEW QUESTIONS