AP_Krugman_Textbook

of the units for which the willingness to pay (as indicated by the height of the de-
mand curve) exceeds the marginal cost are produced and sold. Consider a drug that
is disproportionately prescribed to senior citizens, who are often on fixed incomes
and so are very sensitive to price. A policy that allows a drug company to charge sen-
ior citizens a low price and everyone else a high price will serve more consumers and
create more total surplus than a situation in which everyone is charged the same
price. But price discrimination that creates serious concerns about equity is likely to
be prohibited—for example, an ambulance service that charges patients based on the
severity of their emergency.

module 63 Price Discrimination 629

Section 11 Market Structures: Perfect Competition and Monopoly

Module 63 AP Review

Check Your Understanding

1. True or false? Explain your answer.
   a. A single-price monopolist sells to some customers that
   would not find the product affordable if purchasing from a
   price-discriminating monopolist.
   b. A price-discriminating monopolist creates more inefficiency
   than a single-price monopolist because it captures more of
   the consumer surplus.
   c. Under price discrimination, a customer with highly elastic
   demand will pay a lower price than a customer with inelastic
   demand.
   2. Which of the following are cases of price discrimination
   and which are not? In the cases of price discrimination,
   identify the consumers with high price elasticity of demand
   and those with low price elasticity of demand.
   a. Damaged merchandise is marked down.
   b. Restaurants have senior citizen discounts.
   c. Food manufacturers place discount coupons for their
   merchandise in newspapers.
   d. Airline tickets cost more during the summer peak flying
   season.

Solutions appear at the back of the book.

Tackle the Test: Multiple-Choice Questions

1. Which of the following characteristics is necessary in order for a
   firm to price discriminate?
   a. free entry and exit
   b. differentiated product
   c. many sellers
   d. some control over price
   e. horizontal demand curve


2. Price discrimination
   a. is the opposite of volume discounts.
   b. is a practice limited to movie theaters and the airline
   industry.
   c. can lead to increased efficiency in the market.
   d. rarely occurs in the real world.
   e. helps to increase the profits of perfect competitors.


3. With perfect price discrimination, consumer surplus
   a. is maximized.
   b. equals zero.
   c. is increased.
   d. cannot be determined.
   e. is the area below the demand curve above MC.
   4. Which of the following is a technique used by price
   discriminating monopolists?
   I. advance purchase restrictions
   II. two-part tariffs
   III. volume discounts
   a. I only
   b. II only
   c. III only
   d. I and II only
   e. I, II, and III
   5. A price discriminating monopolist will charge a higher price to
   consumers with
   a. a more inelastic demand.
   b. a less inelastic demand.
   c. higher income.
   d. lower willingness to pay.
   e. less experience in the market.