ch12_Solutions - Chapter 12 Capturing Surplus Solutions to...

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Chapter 12 Capturing Surplus Solutions to Review Questions 1. If a firm has no market power it will not be able to price discriminate to increase profits. Without market power the firm is a price taker and has no ability to set different prices for different units of output. As the firm attempts to set higher prices for some units, consumers will simply purchase elsewhere if the firm has no market power. 2. No, a firm does not need to be a monopolist to price discriminate. The firm simply needs to have market power and face a downward sloping demand curve. 3. If the firm cannot prevent resale, then customers who buy at a low price can act as middlemen and resell the goods to customers willing to pay more. In this case the firm won’t earn the additional surplus; the middlemen will capture the surplus instead of the firm. 4. With first-degree price discrimination, the firm charges each consumer a price close to the consumer’s maximum willingness to pay. In this way, the firm is able to extract virtually all the available surplus for itself. With second-degree price discrimination, the firm offers quantity discounts. This induces some customers to purchase more than they would if all units were priced the same. With third- degree price discrimination the firm charges different prices to different market segments. For example, the firm might charge a lower price to students and senior citizens to induce them to purchase when they might not otherwise. 5. With perfect first-degree price discrimination the marginal revenue and demand curves are the same. This is because with perfect first-degree price discrimination the firm charges each consumer their maximum willingness to pay, as measured by the demand curve. Therefore, the demand curve represents the additional revenue the firm will bring in for each additional unit it sells, or marginal revenue. Note, with perfect first-degree price discrimination the firm charges each individual a different price, so as it lowers its price to gain marginal customers it doesn’t lose revenue on the inframarginal customers who would have paid a higher price. 6. With perfect first-degree price discrimination there is no deadweight loss. The outcome is economically efficient because every consumer who purchases the Page 12 - 1
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good has a willingness to pay meeting or exceeding the marginal cost of production and every consumer who does not receive the good has a willingness to pay below marginal cost. Note, however, that while there is no deadweight loss, all of the surplus is captured by the firm leaving no consumer surplus. 7. With a uniform price the firm sells every unit to every consumer at the same price. With non-uniform or nonlinear pricing, the firm charges different prices for different units of output. For example, a telephone company might charge each user a subscription fee of $10 and then a usage fee of $0.05 per call. Nonlinear pricing is one type of second-degree price discrimination. With second-degree
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This homework help was uploaded on 02/19/2009 for the course PAM 2000 taught by Professor Evans,t. during the Fall '07 term at Cornell University (Engineering School).

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ch12_Solutions - Chapter 12 Capturing Surplus Solutions to...

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