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Why are kids eating free at restaurants an example of third-degree price discrimination?
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Because families, particularly those with children, are typically more price-sensitive and benefit from lower prices.
What is the key requirement for a firm to implement price discrimination?
The ability to divide customers by their willingness to pay.
Give an example of how airlines use price discrimination.
Airlines charge lower prices for advance purchases and higher prices for last-minute purchases.
What is third-degree price discrimination?
Charging different prices to different groups based on their price sensitivity, such as student or senior discounts.
How does a price discriminating monopoly differ from a single price monopoly?
A price discriminating monopoly charges different prices based on willingness to pay and increases economic profit, while a single price monopoly charges one price for all consumers.
In price discrimination, what happens to the marginal revenue (MR) curve of a monopoly engaging in perfect price discrimination?
The MR curve merges with the demand curve, as the firm charges each consumer their maximum willingness to pay.
What is first-degree price discrimination and provide an example.
Charging each customer the maximum they are willing to pay, such as financial aid packages in colleges.
Provide an example of second-degree price discrimination.
Bulk discounts, where larger quantities are sold at a lower price per unit compared to smaller quantities.
How does a price-discriminating monopoly increase its profit compared to a single-price monopoly?
By charging higher prices to consumers with higher willingness to pay and lower prices to others, thus extracting more consumer surplus.
What impact does perfect price discrimination have on economic profit and consumer surplus?
Perfect price discrimination increases the firm's economic profit by converting all consumer surplus into economic profit.
In the context of price discrimination, why is preventing resale important?
To ensure that consumers who purchase at a lower price do not resell to those who are charged a higher price, maintaining effective price segmentation.
Describe the profit-maximizing condition for a single price monopoly.
The profit-maximizing quantity is where Marginal Revenue (MR) equals Marginal Cost (MC).
What is the impact of price discrimination on allocative efficiency in a monopoly?
With perfect price discrimination, the monopoly becomes allocatively efficient, eliminating deadweight loss.
Why is elastic demand associated with lower prices in price discrimination?
Because consumers with elastic demand are more sensitive to price changes, prompting firms to charge lower prices.
Explain the relationship between willingness to pay and elasticity of demand in price discrimination.
Higher willingness to pay is linked to inelastic demand (less price sensitive), and lower willingness to pay to elastic demand (more price sensitive).
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