CH 12

Browning/Zupan – Microeconomics, 11e Test Bank
File: Ch12; Chapter 12: Product Pricing with Monopoly Power
Multiple Choice
1. Which of the following is true of price discrimination?

A) It refers to the illegal movement of commodities from one country to another.
B) It refers to the practice of charging different prices to different consumers for the same product.
C) It is practiced by competitive firms to enjoy long run profits.
D) It refers to the practice of buying a good at a low price and selling it at a higher price.
Answer: B
Difficulty Level: Easy
Section Reference: Price Discrimination
Page: 349
2. The strategy of charging different prices to different customers, for the same product, based on
the differences in their demand elasticities is referred to as:
A) predatory pricing.
B) price skimming.
C) arbitrage.
D) price discrimination.
Answer: D
Page: 349
3. Which of the following is an example of price discrimination?

A) Both Andy and Beth pay $7 for a ticket to the same movie, although the show timings are
different.
B) Ann purchases a coach ticket on an airline for $250 while Bill purchases a first class ticket on
the same flight for $900.
C) Aaron purchases a hardback copy of Harry Potter and the Deathly Hallows for $25 while
Barbara waits and purchases a copy of the same book six months later for $8.
D) Audrey buys a front-row seat at a concert with back-stage access for $1,200, while Ben pays
$500 for seats further away from the stage.
Answer: C
Page: 350
4. Which of the following is not an example of price discrimination?

A) A restaurant sets a fixed cover charge in addition to menu charges.
B) A phone company charges different rates to residential and business users.
C) An electric company charges different rates to senior citizens and younger adults.
D) An airline sets different fares for adults and children.
Answer: A
Difficulty Level: Medium
Page: 350
The following figure shows the downward sloping demand and marginal revenue [MR] curves of a
monopolist. The MR curve intersects the marginal cost [MC] curve at point B. MC is constant at
the price level P1.
Figure 12-1
5. In Figure 12-1, if the monopolist cannot price discriminate it will produce:

A) Q2 and sell at price P1.
B) Q2 and sell at price P2.
C) Q1 and sell at price P1.
D) Q1 and sell at price P2.
Answer: D
Page: 350
6. Suppose Amazon.com were to charge each consumer a different price, according to his or her
willingness to pay for the latest novel in the Twilight series. The firm would be engaging in:
A) peak-load pricing.
B) first-degree price discrimination.
C) second-degree price discrimination.
D) third-degree price discrimination.
Answer: B
Page: 350-351
The following figure shows the downward sloping demand and marginal revenue [MR] curves and
the upward sloping marginal cost [MC] curve of a monopolist.
Figure 12-2
7. Refer to Figure 12-2. A monopolist practicing first-degree price discrimination will sell _____
quantity of output.
A) OL
B) OK
C) OJ
D) KL
Answer: B
Page: 350-351
8. Refer to Figure 12-2. Compared to perfect competition, monopoly pricing introduces efficiency
loss equal to the area:
A) VWE.
B) ZVN.
C) HEF.
D) JHFK.
Answer: C
Page: 350-351
9. First-degree price discrimination is _____.

A) perfect because it benefits consumers the most
B) called first-degree because it does not apply to resale of products
C) also known as perfect price discrimination
D) the easiest form of price discrimination to implement
Answer: C
Page: 351
10. Which of the following is the closest example of perfect price discrimination?
A) An airline providing discounts to its frequent-flyers as they fly more
B) At an auction of antique furniture, each piece of furniture is sold to the highest bidder
C) A golf-club imposing a very high entry fee to reduce membership requests
D) An electric utility charging higher rates to the customers in the summer season than in the winter
season
Answer: B

Page: 351
11. Economists generally view the practice of perfect price discrimination favorably because it:
A) maximizes consumer surplus.
B) forces rich people to pay higher prices.
C) deters monopoly pricing.
D) eliminates deadweight loss.
Answer: D
Page: 351
The following figure shows the downward sloping demand and marginal revenue [MR] curves of a
monopolist. The MR curve intersects the marginal cost [MC] curve at point B. MC is constant at
the price level P1.
Figure 12-1
12. Refer to Figure 12-1. If the monopolist cannot price discriminate, consumer surplus will be
_____.
A) P3AP2
B) P3CP1
C) P2ABP1
D) ABC
Answer: A
Page: 351
13. Refer to Figure 12-1. If the monopolist practices perfect price discrimination, consumer surplus
will be equal to:
A) the area P3AP2.
B) the area P3CP1.
C) the area ABC.
D) zero.
Answer: D
Page: 351
14. Refer to Figure 12-1. If the monopolist cannot price discriminate, deadweight loss will be
equal to:
A) the area P3AP2.
B) the area P3CP1.
C) the area ABC.
D) zero.
Answer: C
Page: 351
15. Refer to Figure 12-1. If the monopolist perfectly price discriminates, deadweight loss will be
equal to:
A) area P3AP2.
B) area P3CP1.
C) area ABC.
D) zero.
Answer: D

Page: 351
16. Refer to Figure 12-1. If the monopolist cannot price discriminate, profit will be equal to:
A) the area P3AP2.
B) the area P2AQ1O.
C) the area P2ABP1.
D) zero.
Answer: C
Page: 351
17. Refer to Figure 12-1. If the monopolist perfectly price discriminates, profit will be equal to:
A) the area P3AP2.
B) the area P3CP1.
C) the area ABC.
D) zero.
Answer: B
Page: 351
The following figure shows the downward sloping demand and marginal revenue [MR] curves and
the upward sloping marginal cost [MC] curve of a monopolist.
Figure 12-2
18. Refer to Figure 12-2. What will be the consumer surplus when the monopolist practices first-
degree price discrimination?
A) WVE
B) CVF
C) ZVN
D) Zero
Answer: D
Page: 351
19. Refer to Figure 12-2. Compared to the situation when there is no price discrimination, first-
degree price discrimination causes the consumer surplus to decline by the area:
A) ZVN.
B) CVF.
C) VWE.
D) EIF.
Answer: C
Page: 351
20. Refer to Figure 12-2. Comparing the result of perfect competition with that of a perfectly price-
discriminating monopolist, there is an efficiency loss equal to:
A) area VWE.
B) area HEF.
C) area JHFK.
D) zero. There will be no efficiency loss in either case.
Answer: D
Page: 351
21. Refer to Figure 12-2. With perfect price discrimination, the monopolist will receive producer
surplus equal to the area:
A) ACFH.
B) BCFH.
C) AVFH.
D) AWEH.
Answer: C
Page: 351
22. Under perfect price discrimination, _____.

A) each customer pays the same price but receives a different quantity
B) each customer pays a different price based on their willingness to pay
C) efficiency loss is maximized
D) price is always above marginal revenue
Answer: B
Page: 351
23. Which of the following situations allows monopolists to capture the entire consumer surplus as
their profit?
A) When they can charge a single price for their product
B) When they are subject to a per unit excise tax
C) When they are subject to an excess profit tax
D) When they can practice perfect price discrimination
Answer: D
Page: 351
24. With perfect price discrimination, a monopolist:

A) must lower the price on all units to increase sales.
B) will charge each consumer the maximum price they are willing to pay.
C) does not have a definite profit-maximizing level of output.
D) has a marginal revenue curve that lies below the demand curve.
Answer: B
Page: 351
25. A perfectly price-discriminating monopolist:

A) restricts output more than an ordinary monopolist does.
B) sells the last unit of output where price equals marginal cost.
C) charges all consumers the same price but sells different quantities to each.
D) obtains less producer surplus than does an non-price discriminating monopolist.
Answer: B
Page: 351
26. Which of the following is true of the comparison between a non-price discriminating monopoly
and a perfectly price discriminating monopoly?
A) The non-price discriminating monopolist will produce a higher amount of output.
B) The non-price discriminating monopolist will have more producer surplus.
C) The non-price discriminating monopolist will impose a greater efficiency loss.
D) The non-price discriminating monopolist will capture more consumer surplus.
Answer: C
Difficulty Level: Hard
Page: 351
27. Consumer surplus is completely transferred to the price discriminating monopoly firm as profit
under _____.
A) first-degree price discrimination
B) predatory pricing
C) third-degree price discrimination
D) block pricing
Answer: A
Page: 351
28. Under first-degree price discrimination, the marginal revenue curve:

A) is a horizontal straight line.
B) slopes upward.
C) coincides with the monopoly firm's demand curve.
D) is identical to the marginal revenue curve facing a non-price discriminating monopolist.
Answer: C
Page: 351
29. A monopolist practicing second-degree price discrimination and facing a constant marginal
cost:
A) should charge a higher price to the market segment that has the more elastic demand.
B) sets the price schedule according to the number of units purchased by the consumers.
C) need not worry about preventing resale of the product.
D) will supply more output than a perfectly price discriminating monopolist.
Answer: B
Page: 352
30. Block pricing by electric utilities is an example of:

A) predatory pricing.
B) second-degree price discrimination.

C) third-degree price discrimination.
D) perfect price discrimination.
Answer: B
Page: 352
31. With block pricing, firms differentiate price according to _____.

A) each consumer's ability to pay
B) the average cost of producing the output
C) the quantity of output purchased
D) the marginal cost of producing a particular unit of output
Answer: C
Page: 352
32. With block pricing, consumers typically pay a price that:

A) reduces for additional quantities of output being purchased.
B) remains the same regardless of the quantity purchased.
C) is equal to the average cost of producing the output.
D) increases for additional quantities of output being purchased.
Answer: A
Page: 352
33. Which of the following is the closest example of block pricing?

A) An airline providing discounts to its frequent-flyers as they fly more
B) At an auction of antique furniture, each piece of furniture is sold to the highest bidder
C) A golf-club imposing a very high entry fee to reduce membership requests
D) An electric utility charging higher rates to the customers in the summer season than in the winter
season
Answer: A

Page: 352-353
343. A popular restaurant chain, Grill n’ Chill, offers its customers a 0.5% discount on a bill of
$100-$200, a 1% discount on a bill of $201-$300, a 1.5% discount on a bill of $301-$400, and so
on. Thus, customers enjoy a higher discount when they order more food. Which of the following
forms of price discrimination is being practiced by this restaurant chain?
A) Third-degree price discrimination
B) Intertemporal price discrimination
C) First-degree price discrimination
D) Second-degree price discrimination
Answer: D
Page: 352-353
35. Park and Fly, a chain that operates off-terminal parking lots near major airports in several U.S.
cities, has a “frequent-parker” program that offers customers a week’s free parking after they have
paid for 35 days. Which of the following types of price discrimination is the company practicing?
A) Perfect price discrimination
B) Predatory pricing
C) Third-degree price discrimination
D) Block pricing
Answer: D
Page: 353
36. The local zoo has a pricing policy in which senior citizens pay a lower price than younger
adults. This policy is:
A) a form of perfect price discrimination.
B) a form of third-degree price discrimination.
C) certain to reduce total revenues for the zoo.
D) certain to reduce the number of visitors to the zoo.
Answer: B
Page: 354
37. Identify the correct statement about price discrimination.

A) Price discrimination is costless.
B) Price discrimination is effective only if demand for the product is perfectly inelastic.
C) Price discrimination is effective when producers face a downward-sloping demand curve.
D) Price discrimination increases consumer surplus.
Answer: C
Section Reference: Three Necessary Conditions for Price Discrimination
Page: 354
38. Lewis owns an exclusive fashion accessories store and charges all consumers a uniform price
for a particular product. Recently, however, he has realized that some of his customers are actually
willing to pay a higher price for the items he sells, while some others feel that his prices are a little
too high. Given this information, which of the following will not affect his ability to discriminate
prices between these two consumer segments?
A) His level of monopoly power in this market
B) His total investment in this business
C) His ability to segment the market into high demand and low demand users
D) His ability to prevent arbitrage
Answer: B
Page: 354-355
39. Which of the following is needed for successful price discrimination?

A) The firm must have a high market share.
B) The firm must have more than one product line.
C) The firm must be able to engage in arbitrage.
D) The firm must have some consumers whose demand is relatively price inelastic.
Answer: A
Page: 354-355
40. Under third-degree price discrimination, a producer makes profit by:

A) reducing the price of the good for every additional unit being purchased.
B) charging a higher price to the market segment with the more inelastic demand.
C) rationing the good to be sold to consumers in different markets.
D) keeping the price level steady in all markets.
Answer: B
Page: 354-355
41. Which of the following is true of arbitrage?

A) It is the revenue from the sale of a used product.
B) It is the resale of a product among market segments.
C) It is the profit from initial sales of a product.
D) It is the ability of a firm to discriminate prices among customers.
Answer: B
Page: 355
42. Which of the following conditions will allow a monopolist to charge different prices in
different markets?
A) Having the ability to prevent resale of its product
B) Incurring a constant marginal cost of producing output
C) Catering to a different number of consumers in each market
D) Facing a positively sloped marginal revenue curve
Answer: A
Page: 355
43. Price discrimination is more common for firms selling services than for manufacturing firms
because:
A) it is easier to prevent arbitrage of a service than of a manufactured product.
B) monopoly is more common in the production of services than in production of manufactured
goods.
C) price elasticities of demand differ more among consumers of services than customers of
manufactured goods.
D) firms selling services are more likely to have constant marginal cost curves.
Answer: A
Page: 355
44. Which of the following is not a prerequisite for practicing third-degree price discrimination?
A) Some degree of monopoly power
B) Ability to separate customers into two or more identifiable groups
C) Some mechanism to prevent resale of the product among groups
D) A perfectly competitive market for inputs
Answer: D
Page: 355
45. Which of the following products/services provides the least scope for arbitrage?
A) Sports shoes
B) Live concerts
C) Jewelry
D) Books
Answer: B
Page: 355
46. We would expect price discrimination to be most successful in the market for:
A) haircuts.
B) DVD’s.
C) cars.
D) jeans.
Answer: A
Page: 355
47. When a monopolist practices third-degree price discrimination, price will be:
A) the same in each market if resale is not possible.
B) higher in the market with the less elastic demand.
C) higher in the market with the higher average cost.
D) higher in the market will less number of consumers.
Answer: B
Page: 355
48. In case of third-degree price discrimination in two markets with differing demand elasticities,
price will:
A) converge in the two markets if resale is possible.
B) be higher in the market with the more elastic demand.
C) be higher in the market with the higher average cost.
D) differ between the two markets only if the number of consumers varies.
Answer: A
Page: 355
49. Consider two markets segments, X and Y, for product A. The price elasticity of demand for
product A in market X is 1.5, while the same in market Y is 3. The monopolist is selling product A
in both the markets at a price of $300. Which of the following statements is true about the marginal
revenue earned by the non-price discriminating monopolist from the two markets?
A) The monopolist earns $77.78 more from market Y.
B) The monopolist earns $99.9 more from market X.
C) The monopolist earns $88.89 more from market Y.
D) The monopolist earns $11.11 more from market X.
Answer: A
Section Reference: Price and Output Determination with Price Discrimination
Page: 357
50. A profit-maximizing monopoly firm that sells output in two distinct markets, A and B, will be
in equilibrium when:
A) the price in each market is equal to its marginal cost of production.
B) the marginal revenue in each market is equal to the price in that particular market.
C) the marginal revenue in each market is equal to its marginal cost of production.
D) the gap between price and marginal cost is maximized in each market.
Answer: C
Page: 357
51. Which of the following is true of a price-discriminating monopolist who is selling output in
two distinct markets?
A) Price will be higher in the market in which demand is unit-elastic.
B) Price will be lower in the market in which demand is more elastic.
C) Price will be equal in each market, as long as there is a constant marginal cost.
D) Price will be lower in the market for which there are fewer substitute goods.
Answer: B
Page: 357
52. Consider a monopolist selling her output in two markets, A and B. The price elasticity of
demand in market A is 1.5, while the same in market B is 2.5. Calculate the marginal revenue [MR]
from each market, if the monopolist charges $300 for the product in both the markets.
A) MRA = 13.3; MRB = 24.8
B) MRA = 6.11; MRB = 35.8
C) MRA = 11.11; MRB = 64.8
D) MRA = 15.3; MRB = 74.8
Answer: C
Page: 357
53. Consider a monopolist selling her output in two markets, A and B. The price elasticity of
demand in market A is 1.5, while the same in market B is 2.5. Calculate the price charged in each
market, if the marginal revenue [MR] from market A is 15 while the same from market B is 30.
A) PA = 200; PB = 169.89
B) PA = 500; PB = 208.29
C) PA = 105; PB = 108.39
D) PA = 405; PB = 138.89
Answer: D
Page: 357
54. Comparing a price-discriminating monopoly firm with a single-price monopoly, one tends to
find that price discrimination:
A) increases the inefficiency of the market.
B) reduces economic profits.
C) typically increases total output.
D) results in lower input prices.
Answer: C
Page: 360
55. Which of the following consumer segments are benefited by price discrimination?
A) Consumers with high income
B) Consumers with perfectly inelastic demand
C) Consumers with highly elastic demand
D) Consumers with more than one source of income
Answer: C
Page: 360
56. A firm charges a higher price for its product in the domestic market than it charges abroad.
Which of the following pricing strategies is the firm using?
A) Targeting
B) Block pricing
C) Dumping
D) Price skimming
Answer: C
Page: 360
57. Which of the following is true of intertemporal price discrimination?

A) In this form of price discrimination each consumer is charged his/her full willingness to pay.
B) In this form of price discrimination groups are charged different prices according to the time of
purchase.
C) In this form of price discrimination monopolists capture the entire consumer surplus.
D) In this form of price discrimination a consumer is charged a fixed fee in each time period.
Answer: B
Section Reference: Intertemporal Price Discrimination and Peak-Load Pricing
Page: 360
58. Intertemporal price discrimination is a form of:

A) first-degree price discrimination.
B) block pricing.
C) third-degree price discrimination.
D) dumping.
Answer: C
Page: 360
59. Which of the following is the best example of intertemporal price discrimination?
a) Awarding financial aid to offset college tuition fees
b) Releasing movies on DVD six months after they are released in a theater
c) Charging less for a second pizza after the consumer has paid the full price for the first pizza
d) Charging people with health care insurance more for medical care relative to those without
insurance
Answer: B

Page: 360
60. When airlines charge different fares for seats on the same flight depending on how far in
advance an airline ticket has been purchased, it is using a(n) _____ strategy.
A) dumping
B) block pricing
C) first-degree price discrimination
D) intertemporal price discrimination
Answer: D
Page: 361
61. Peak-load pricing is typically introduced when:

A) there are several competing firms.
B) resale of the product is relatively easy.
C) production costs vary in different time periods.
D) consumer demands are highly stable.
Answer: C
Page: 362
62. With peak-load pricing, a firm charges a different price in each period, because:
A) its supply is perfectly inelastic.
B) its marginal cost of production varies in each period.
C) the number of consumers change every period.
D) the demand for the good is perfectly price elastic.
Answer: B
Page: 362-363
63. Under peak-load pricing, the price in each period is set:

A) equal to the average cost of production in that period.

B) above the marginal cost of production in that period.
C) where the marginal cost intersects the demand for that period.
D) where the average cost intersects the demand for that period.
Answer: C
Page: 363-364
64. Which of the following is an advantage of peak-load pricing?

A) It allows a firm to reduce its total cost by reallocating its production.
B) It allows a firm to capture the entire consumer surplus.
C) It allows a firm to clearly identify each consumer's willingness to pay.
D) It reduces monopoly profits and increases consumer surplus.
Answer: A
Page: 364
65. Which of the following price discrimination strategies allows a monopolist to distribute a
product/service most efficiently between two periods of time?
A) Predatory pricing
B) Peak-load pricing
C) Block pricing
D) Two-part tariff
Answer: B
Page: 364
66. Traffic congestion can be controlled by charging fees for the use of roadways. The fees vary
with the demand for roadways at different hours of the day. It is usually very high during the
business hours and low at other times of the day. This form of pricing strategy is referred to as:
A) price gouging.
B) peak-load pricing.
C) marginal use pricing.
D) second-degree price discrimination.
Answer: B
Page: 364-365
67. The efficiency gains from peak-load pricing depend largely upon:
A) the amount of regulation in the market.
B) the ability of users to cut back on consumption during peak periods.
C) the pricing strategy followed by the firm in the past.
D) the productivity of the inputs used in producing the output.
Answer: B
Page: 365
68. A two-part tariff is a form of:

A) first-degree price discrimination because average cost falls with quantity purchased.
B) second-degree price discrimination because average price paid by the consumer falls with higher
quantity purchased.
C) block pricing because marginal cost rises with quantity sold.
D) third-degree price discrimination because different customers pay different prices.
Answer: B
Section Reference: Two-Part Tariffs
Page: 366
69. A two-part tariff involves:

A) a fixed entry fee plus a variable per-unit price.
B) a variable entry fee plus a variable per-unit price.
C) a fixed entry fee plus a fixed per-unit price.
D) a variable entry fee plus a fixed per-unit price.
Answer: C
Page: 366
70. Which of the following best describes a two-part tariff?

A) A discount provided to frequent shoppers
B) A price that varies with the quantity of output consumed
C) A price that varies with each individual consumer’s ability to pay
D) An entry fee followed by a constant per-unit price
Answer: D
Page: 366
71. With a two-part tariff, consumers pay:

A) a constant "average" price per unit of output.
B) higher prices for purchasing greater quantities of output.
C) an "average" price per unit of output that declines with the quantity purchased.
D) a flat fee followed by an increasing per unit price.
Answer: C
Page: 366
72. Consider a profit-maximizing monopolist whose consumers have identical demand curves.
Which of the following will be true if the firm employs a two-part tariff pricing strategy for these
consumers?
A) The firm will produce less output compared to a firm that is not using this pricing strategy.
B) The firm will capture the entire consumer surplus.
C) The firm will charge a tariff that also maximizes revenues.
D) The firm will charge consumers a different entry fee, but a constant per-unit price.
Answer: B
Page: 366
The following figure shows the indifference curves U1 and U2 of a consumer choosing between
hours devoted at a tennis club and other goods. All consumers in this market have identical demand
curves. IZ is the original budget line of a representative consumer, which shifts to AB when the
club begins to charge an entry fee.
Figure 12-3
73. Refer to Figure 12-3. What is the amount of entry fee the club is charging the consumer?
A) OZ
B) IA
C) OI
D) OA
Answer: B
Page: 366-367
74. Refer to Figure 12-3. The price of a court hour to the consumer, in terms of other goods, is:
A) OI/OZ.
B) OI/BZ.
C) OI/OB.
D) AI/BZ.
Answer: A
Page: 366-367
75. In Figure 12-3, the consumer is indifferent between purchasing:

A) OF court hours and OE court hours.
B) OZ court hours and OB court hours.
C) zero court hours and OF court hours.
D) zero court hours and OE court hours.
Answer: D
Page: 366-367
76. In Figure 12-3, if the fee goes above _____, the consumer will purchase no court hours.
A) OZ
B) IA
C) EF
D) OE
Answer: B
Page: 366-367
77. When a two-part tariff is employed on consumers with identical demand curves, the maximum
entry fee the firm can charge:
A) is represented by the total area below the demand curve.
B) is equal to the total consumer surplus.
C) is equal to the total cost.
D) is equal to the average total cost.
Answer: B
Page: 367
78. A profit-maximizing monopolist employing a two-part tariff on consumers having different

demands, _____.
A) should simply set price to maximize total revenue
B) should charge a single price, with no entry fee, like a regular monopolist
C) should set price equal to average cost plus a constant profit margin
D) does not have a clearly defined profit-maximizing pricing scheme
Answer: D
Page: 368
79. Which of the following strategies will allow a monopolist to earn higher profits by employing a
two-part tariff on consumers with different demands?
A) Setting price equal to the marginal cost
B) Setting price above the marginal cost
C) Setting an entry fee equal to the consumer surplus
D) Setting an entry fee higher than the consumer surplus
Answer: B
Page: 368
80. Which of the following is true of a price discriminating monopolist employing a two-part tariff
on consumers having different demands?
A) They earn less profit than the non-price discriminating monopolists.
B) They supply an output which is higher than the non-price discriminating monopoly output.
C) They set a price that is higher than the non- price discriminating monopoly price.
D) They set an entry fee which is more than the total consumer surplus.
Answer: B
Page: 370
81. Suppose a restaurant has two types of customers, group A and group B. Group A customers
have a price elasticity of demand equal to 6, while group B customers have a price elasticity of
demand equal to 2. If the firm seeks to maximize profits by discriminating prices, and it charges
group B customers $40 per meal, what price should it charge group A customers?
A) $20
B) $22
C) $24
D) $26
Answer: C
Section Reference: The Mathematics behind Price Discrimination
Page: 371-372
82. A monopolist has segmented its customers into three groups, A, B, and C, and is discriminating
prices between them. Each type A customer has a price elasticity of demand equal to 1.2; each type
B customer has a price elasticity of demand equal to 6; and each type C customer has a price
elasticity of demand equal to 11. If the firm charges type C customers $11 per unit, what prices
should it charge its type A and type B customers in order to maximize profit?
A) Type A = $1.20 per unit and type B = $6.00 per unit
B) Type A = $1.33 per unit and type B = $1.66 per unit
C) Type A = $12.00 per unit and type B = $6.00 per unit
D) Type A = $60.00 per unit and type B = $12.00 per unit
Answer: D
Page: 371-372
83. A book publisher faces two different markets with different price elasticities of demand for its
books. In market A the price elasticity of demand is 6 and in market B the elasticity is 1.5. If the
marginal cost of producing a book is $10, how should the firm price its books in the two markets?
A) market A = $12 and market B = $30
B) market A = $60 and market B = $15
C) market A = $15 and market B = $60
D) market A = $30 and market B = $12
Answer: A
Page: 371-372
Short Answers
84. Why is popcorn so expensive at the movies? Make a case for each of the following - that the
high price of popcorn is price discrimination and that it is not price discrimination. Identify all the
factors that are or are not present, enabling price discrimination by the theatre owner.1
1
This question is based on Steven Landsburg (1995), The Armchair Economist: Economics and Everyday Life.
Answer: Price discrimination requires 3 main factors:

(a) Some monopoly power (Lerner index > 0)
(b) An ability to identify two different types of customers, with different elasticities (note the
producers are trying to approximate a buyer’s willingness-to-pay)
(c) A method for preventing arbitrage
Yes, expensive theater popcorn is price discrimination:
Popcorn available at the movie theatres is expensive because those who are willing to pay
more for “an evening out at the movies” are often also willing to pay a higher price for popcorn.
Eating popcorn is certainly a part of the experience of going to the movies for many people, and
therefore they are willing to pay a higher price for it.
But in addition, the theater owner must have a monopoly in the theatre market in order to prevent
customers from going across town to a different theater, which sells popcorn for less (i.e., why
don’t we see popcorn price wars?). Several arguments could be made here. Theaters can arguably
have a monopoly, enabling price discrimination, due to:
(a) their location (i.e., more convenient to your dormitory, apartment, or house),
(b) the selection and type of movies they show (“artsy” theaters can sell expensive popcorn because
artsy-moviegoers can’t see their movies anywhere else)
(c) moviegoers traveling in social “groups” are made up of popcorn eaters and non-popcorn eaters,
which cannot be broken up.
No, expensive theater popcorn is not price discrimination:
One could also argue that expensive popcorn is indeed not price discrimination if, for example,
popcorn-eaters make big messes while watching the movie (it is dark in there after all) and
therefore the theater owner must pay for more labor hours to clean up after the popcorn eaters have
left the theatre.
Section Reference: Price Discrimination; Three Necessary Conditions for Price Discrimination
Page: 349-350; 354-355
85. Why is it difficult to implement first-degree price discrimination?
Answer: The implementation of first-degree price discrimination requires some mechanism by

which a monopolist can determine the maximum amount each potential buyer is willing to pay for
the product. This type of price discrimination is easy in case of an auction where the bid price gives
an indication of the buyer’s ability and willingness to pay. However, in most other cases, the
monopolist is unable to identify the buyer’s willingness to pay. Asking potential customers is no
good because customers have an incentive to understate what they are willing to pay if they will be
charged accordingly. Furthermore, there tends to be no indirect means of securing such information
from potential customers.
Page: 351
86. Within the context of price discrimination, explain why airlines charge higher fares to their
customers during Christmas but offer significant discounts at other times of the year.
Answer: The demand for air travel varies at different times of year. During a festive season like
Christmas, the demand for air travel increases rapidly, and the airlines find it difficult to match it
with an equal increase in the number of seats per flight. This leads to a shortage in the market for
air travel. On the other hand, at other times of the year the demand is not very high and the airlines
are forced to run flights even with a few empty seats. Economists refer to the period when demand
is the highest as the “peak” period and when it is the lowest as the “off-peak” period.
The demand for ground staff as well as cabin crew increases substantially during the peak-load
period, leading to a rise in each airline’s cost of operation. Thus airlines charge different prices at
different points in time because, in addition to demand, the cost of providing the “same” service
varies with the time it is being provided. This pricing policy in which different prices are charged
for peak and off-peak periods is referred to as peak-load pricing.
Page: 363
87. What is peak-load pricing and why is it advantageous compared to charging a single price?
Answer: Peak-load pricing occurs when different prices are charged for peak and off-peak periods
of demand. It is advantageous compared to uniform pricing because it creates a more efficient
distribution of consumption or usage. In other words, the total cost of producing a given amount of
a good is lower under peak-load pricing because consumers will purchase less at the higher peak-
period price and more at the lower off-peak-period price. A second advantage of peak-load pricing
is realized by the producer since the level of demand will be less during the peak period (because of
the higher price) and the producer therefore needs a smaller plant and production capacity which
translates into lower costs.
Page: 363-364
88. What is a two-part tariff? Make up a numerical example to support your definition.
Answer: A two-part tariff is a form of second-degree price discrimination in which a firm charges
consumers a fixed fee per time period for the right to purchase the product at a set price per unit.
For example, assume that a health club charges $50 per month to be a member as it assumes that all
its customers have an identical demand curve. So if you want to play racquetball, you must pay $10
per hour. The first hour of racquetball costs $60, two hours cost (50 + 20)/ 2 = $35 per hour, three
hours cost (50 + 30)/3 = $26.67 per hour, and four hours cost (50 + 40)/4 = $22.50 per hour.
Clearly, the average cost per unit (per hour of racquetball) is declining as in second-degree price
discrimination.

Page: 366-368
89. Derive the first-order conditions for profit maximization for a monopolist practicing price-
discrimination.
Answer: Assume the monopoly sells in two markets, A and B. The profit [π] of the monopolist is
the sum of revenues [RA and RB] from sales in the two markets, less total cost of production [C].
π = RA + RB – C = PAQA + PBQB – C. Total cost is a function of total output, QA + QB.
The first-order conditions for profit maximization involve setting the two partial derivatives of the
profit function with respect to QA and QB equal to zero. This implies the marginal profit from output
in each market must be zero.
∂π/∂QA = ∂RA/∂QA – ∂C/∂QA = 0.
∂π/∂QB = ∂RB/∂QB – ∂C/∂QB = 0.
These two equations indicate that the monopolist should operate where the marginal revenue from
selling in market A (∂RA/∂QA) equals the marginal cost of producing for that market (∂C/∂QA). An
equivalent condition holds for market B.
We know that the marginal cost of selling to either market is the same. Therefore, both marginal
revenues must equal the same marginal cost, so the profit-maximizing condition can be written
concisely as: MRA = MRB = MC.
Page: 371

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Browning/Zupan – Microeconomics, 11e Test Bank

File: Ch12; Chapter 12: Product Pricing with Monopoly Power

1. Which of the following is true of price discrimination?

3. Which of the following is an example of price discrimination?

4. Which of the following is not an example of price discrimination?

5. In Figure 12-1, if the monopolist cannot price discriminate it will produce:

9. First-degree price discrimination is _____.

Section Reference: Price Discrimination

Section Reference: Price Discrimination

22. Under perfect price discrimination, _____.

D) When they can practice perfect price discrimination

24. With perfect price discrimination, a monopolist:

25. A perfectly price-discriminating monopolist:

28. Under first-degree price discrimination, the marginal revenue curve:

30. Block pricing by electric utilities is an example of:

B) second-degree price discrimination.

31. With block pricing, firms differentiate price according to _____.

32. With block pricing, consumers typically pay a price that:

33. Which of the following is the closest example of block pricing?

Section Reference: Price Discrimination

37. Identify the correct statement about price discrimination.

39. Which of the following is needed for successful price discrimination?

40. Under third-degree price discrimination, a producer makes profit by:

41. Which of the following is true of arbitrage?

57. Which of the following is true of intertemporal price discrimination?

58. Intertemporal price discrimination is a form of:

Section Reference: Intertemporal Price Discrimination and Peak-Load Pricing

61. Peak-load pricing is typically introduced when:

63. Under peak-load pricing, the price in each period is set:

A) equal to the average cost of production in that period.

64. Which of the following is an advantage of peak-load pricing?

68. A two-part tariff is a form of:

69. A two-part tariff involves:

70. Which of the following best describes a two-part tariff?

71. With a two-part tariff, consumers pay:

75. In Figure 12-3, the consumer is indifferent between purchasing:

78. A profit-maximizing monopolist employing a two-part tariff on consumers having different

D) does not have a clearly defined profit-maximizing pricing scheme

Answer: Price discrimination requires 3 main factors:

85. Why is it difficult to implement first-degree price discrimination?

Answer: The implementation of first-degree price discrimination requires some mechanism by

Difficulty Level: Medium

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