Tackle the Test:
Multiple-Choice Questions
- d
- c
- b
- e
- a
Tackle the Test:
Free-Response Questions
Consumer surplus is zero because each consumer is
charged the maximum he or she is willing to pay.
Module 64
Check Your Understanding
- 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
- 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. - 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