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S-40    SOLUTIONS TO AP  REVIEW  QUESTIONS




        Tackle the Test:                                      Tackle the Test:
        Free-Response Questions                               Multiple-Choice Questions
        2.     Price, cost,                                   1.   d
               marginal
                revenue                                       2.   c
                                                              3.   b
                    b
                                                              4.   e
                                                              5.   a
                               e
                                                              Tackle the Test:
                    d
                                                              Free-Response Questions
                                g
                    f
                                                              2.                      Perfect Price Discrimination
                                                      ATC               Price,
                                           c                             cost
                    a                                 MC                               Profit with perfect
                              h
                                MR           D                                         price discrimination
                                                    Quantity
            a. triangle bca
           b. triangle bed
                                                                                                        MC = ATC
            c. rectangle degf
           d. triangle ech                                                                             D
        Module 63                                                                                 Q M    Quantity

        Check Your Understanding
                                                                   Consumer surplus is zero because each consumer is
        1. a. False. The opposite is true. A price-discriminating monop-  charged the maximum he or she is willing to pay.
              olist will sell to some customers that would not find the
              product affordable if purchasing from a single-price  Module 64
              monopolist—namely, customers with a high price elastici-
              ty of demand who are willing to pay only a relatively low  Check Your Understanding
              price for the good.                             1. a. This will decrease the likelihood that the firm will collude
           b. False. Although a price-discriminating monopolist does  to restrict output. By increasing output, the firm will gen-
              indeed capture more of the consumer surplus, less ineffi-  erate a negative price effect. But because the firm’s cur-
              ciency is created: more mutually beneficial transactions  rent market share is small, the price effect will fall mostly
              occur because the monopolist makes more sales to cus-  on its rivals’ revenues rather than on its own. At the
              tomers with a low willingness to pay for the good.   same time, the firm will benefit from a positive quantity
            c. True. Under price discrimination consumers are charged  effect.
              prices that depend on their price elasticity of demand. A  b. This will decrease the likelihood that the firm will collude
              consumer with highly elastic demand will pay a lower  to restrict output. By acting noncooperatively and raising
              price than a consumer with inelastic  demand.
                                                                   output, the firm will cause the price to fall. Because its
        2. a. This is not a case of price discrimination because the  rivals have higher costs, they will lose money at the lower
              product itself is different and all consumers, regardless of  price while the firm continues to make profits. So the
              their price elasticities of demand, value the damaged mer-  firm may be able to drive its rivals out of business by
              chandise less than undamaged merchandise. So the price  increasing its output.
              must be lowered to sell the merchandise.           c. This will increase the likelihood that the firm will col-
           b. This is a case of price discrimination. Senior citizens have  lude. Because it is costly for consumers to switch prod-
              a higher price elasticity of demand for restaurant meals  ucts, the firm would have to lower its price substantially
              (their demand for restaurant meals is more responsive to  (with a commensurate increase in quantity) to induce
              price changes) than other patrons. Restaurants lower the  consumers to switch to its product. So increasing output
              price to high-elasticity consumers (senior citizens).  is likely to be unprofitable, given the large negative price
              Consumers with low price elasticity of demand will pay  effect.
              the full price.                                    d. This will increase the likelihood that the firm will col-
            c. This is a case of price discrimination. Consumers with a  lude. It cannot increase sales because it is currently at
              high price elasticity of demand will pay a lower price by  maximum production capacity, making attempts to
              collecting and using discount coupons. Consumers with a  undercut rivals’ prices as under the Bertrand model fruit-
              low price elasticity of demand will not use coupons.  less due to the inability to produce the output needed to
           d. This is not a case of price discrimination; it is simply a  steal the rivals’ customers. This makes the option to
              case of supply and demand.                           cooperate in restricting output relatively attractive.
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