Explain how a monopolist can increase profits by price discriminating. What are the conditions necessary for price discrimination?
What will be an ideal response?
A monopolist can increase profits by price discriminating, in which case it sells some units at a higher price and other units at a lower price. It sells to those whose demand for the good is relatively inelastic at a higher price and to those whose demand is relatively elastic at a lower price. To discriminate, the firm must have monopoly power, it must be able to distinguish different markets, and buyers in those markets must have different elasticities of demand. Finally, the monopolist must be able to prevent the lower-priced consumers from reselling the good in the higher-priced market.
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Refer to Table 16-3. Suppose Julie's marginal cost of providing this service is constant at $7 and she charges each customer according to his or her willingness to pay instead of a uniform price of $7. Which of the following statements is true?
A) Julie has converted the consumer surplus (from a uniform price) into economic profit. B) Julie's has converted the producer surplus (from a uniform price) into consumer surplus. C) Julie is worse off because the demand for her services is reduced. D) Julie's customers are better off because their consumer surplus has increased.
Over time Americans have chosen to cook less at home and dine out more. This change in behavior:
A) increases GDP. B) reduces GDP. C) does not affect GDP. D) none of the above
Discretionary expansionary fiscal policy may not lead to _____
a. decreased national saving b. decreased unemployment c. inflation d. lower interest rates e. crowding out
Economists use the percentage change in quantity rather than the absolute change in quantity because:
A. the measured elasticity is the same regardless of the unit of measurement for quantity. B. absolute changes are confusing to convert. C. absolute changes often result in negative numbers. D. percentage changes are easier to calculate than absolute changes.