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Exam 12: Capturing Surplus

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Question 21

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A monopolist faces inverse demand $P = 400 - 4 Q ^ { d }$ and has constant marginal cost $M C = 80$ . If this monopolist changes from a policy of uniform pricing to a policy of first-degree price discrimination, deadweight loss will decrease by:

A) 0
B) 1,600
C) 3,200
D) 12,800

E) A) and C)
F) B) and D)

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Question 22

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An example of second-degree price discrimination is when you order 12 of something online and you pay less per unit than if you had bought only one.

A) True
B) False

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Question 23

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The seller captures the maximum producer surplus by engaging in block pricing.

Consider a monopoly's first-degree price discrimination. With first-degree price discrimination, consumer surplus is small, yet still greater than zero.

With ___________________, the firm tries to price each unit at the consumer's reservation price while with _____________________, the firm charges different uniform prices to different consumer groups or market segments.

With second-degree price discrimination:

Suppose that a firm faces a demand curve for its product of $P = 10 - Q ^ { d }$ . The corresponding marginal revenue curve is $M R = 10 - 2 Q$ . The firm has a constant marginal cost of $4 per unit. If the firm engages in first-degree price discrimination, how much producer surplus will it capture?

With ________ degree price discrimination, the firm tries to price each unit at the consumer's reservation price.

$\begin{array} { | l | l | l | } \hline \text { Customer } & \begin{array} { l } \text { Product A } \\\text { Reservation Price }\end{array} & \begin{array} { l } \text { Product B } \\\text { Reservation Price }\end{array} \\\hline 1 & 1,000 & 200 \\\hline 2 & 800 & 400 \\\hline \text { Marginal Cost } & 500 & 100 \\\hline\end{array}$ -Use the table above. If the firm does not bundle the products, what single price should the firm charge for product B to maximize profit?

A damaged good strategy is generally less profitable than a uniform pricing strategy for a high quality product.

A monopolist faces demand $P = 400 - 4 Q ^ { d }$ and has constant marginal cost $M C = 80$ . If this monopolist engages in first-degree price discrimination, consumer surplus will be:

An expenditure schedule in which the average outlay changes with the number of units purchased is called what?

The firm's use of advertising is motivated:

$\begin{array} { | l | l | l | } \hline \text { Customer } & \begin{array} { l } \text { Product A } \\\text { Reservation Price }\end{array} & \begin{array} { l } \text { Product B } \\\text { Reservation Price }\end{array} \\\hline 1 & 1,000 & 200 \\\hline 2 & 800 & 400 \\\hline \text { Marginal Cost } & 500 & 100 \\\hline\end{array}$ -Use the table above. If the firm bundles the products, what single price should the firm charge for the bundle to maximize profit?

Let the inverse demand curve for a monopolist's product be $P = 100 - 2 Q$ and the marginal cost of production be constant at $M C = 10$ . Suppose that the firm considers moving from a uniform pricing strategy to a two-block tariff where the first block provides 15 units at a price of $P _ { I } =$ $\$ 70$ and the second block provides an additional 15 units at a price of $P _ { 2 } = \$ 40$ . How much does the monopolist's profit rise with this scheme?

Which of the following statements is not correct regarding a "damaged goods strategy"?

Suppose that a firm faces a demand curve for its product of $P = 10 - Q ^ { d }$ . The corresponding marginal revenue curve is $M R = 10 - 2 Q$ . The firm has a constant marginal cost of $4 per unit. If the firm engages in uniform pricing, what price will the firm charge?

An example of second-degree price discrimination is when you get an "early bird" discount by eating at a restaurant before 7:00 pm.

$\begin{array} { | l | l | l | } \hline \text { Customer } & \begin{array} { l } \text { Product A } \\\text { Reservation Price }\end{array} & \begin{array} { l } \text { Product B } \\\text { Reservation Price }\end{array} \\\hline 1 & 1,000 & 200 \\\hline 2 & 800 & 400 \\\hline \text { Marginal Cost } & 500 & 100 \\\hline\end{array}$ -Use the table above. If the firm does not bundle the products, what single price should the firm charge for product A to maximize profit?

You own a small bookstore. You have hired a marketing firm to calculate your own price elasticity of demand and your advertising elasticity of demand. The firm has provided you with the relevant numbers regardless of minor adjustments in price or advertising budget. Your own price elasticity of demand is around -1.7, and your advertising elasticity of demand is around 0.05. Interpret the advertising elasticity of demand.