S-1 MODERNPRINCIPLES : MICROECONOMICS MODERNPRINCIPLESOFECONOMICSFacts and Tools 1.True or false? A business that price discriminates will generally charge some cus- tomers more than marginal cost, and it will generally charge other customers less than marginal cost. 1.False: Price discrimination has little to do with charginglessthan marginal cost. The goal is to charge some customers a little more than MC and others a lot more than MC. 2.Two customers, Fred and Lamont, walk into a Grady’s Used Pickups. Who probably has a more inelastic demand for one of Grady’s pickups: people like Lamont, who are good at shopping around, or people like Fred, who know what they like and just buy it? 2.People like Fred, who make quick, impulsive decisions, have inelastic demand: They don’t shop around much and aren’t very sensitive to price. Customers like Fred are every business owner’s dream. 3.Who probably has more elastic demand for a Hertz rental car: Someone who reserves a car online weeks before a trip, or someone who walks up to a Hertz counter after he walks off an airplane after a 4-hour flight? Who probably gets charged more? 3.The person who shops in advance probably has a more elastic demand: If Hertz charges too much, it’s easy to go to another car rental website and quickly check other prices. But after a long flight, few people are willing to wait in the Hertz line, find out the price is high, and then jump in the National or Enterprise line. This second person probably gets charged more as a result. 4.When arbitrage is easy in a market of would-be price discriminators, who is more likely to get priced out of the market: those with elastic demand or those with inelastic demand? 4.When arbitrage is easy, it’s the person with the elastic demand who is likely to get priced out. Arbitrage turns this back into a normal monopoly market, and at the higher monopoly price, the price might rise above the elastic person’s cutoff level. 5.There are people who absolutely must have the latest fashions. Can you classify them as probably having elastic or inelastic demand? 5.They are inelastic. Solution Solution Solution Solution Solution Price Discrimination and Pricing Strategy 14 14S-1 Cowen3e_CH14_Solutions.indd129/06/1511:06 AM
