Question 1

Black Box Pay TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Black Box pays $150 000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed satellite dishes to all of the homes in its market area, the marginal cost of PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service in order to maximise her profit. Before setting the price, she hires an economist to estimate the demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4000 diehard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to about 20 000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC.
-According to the information provided, what is the deadweight loss associated with the non-discriminating pricing policy compared to the price-discriminating policy?

Accepted Answer

To maximize profit, Black Box should use price discrimination by charging a higher price to the diehard TV viewers and a lower price to the occasional TV viewers. If Black Box charges a uniform price, it would have to charge a price that is affordable to the occasional TV viewers which would cause the diehard TV viewers to not want to purchase the PMC service as they would have to pay more than they are willing to.

If Black Box charges a higher price for the PMC service for the diehard TV viewers, it can capture more consumer surplus as the diehard TV viewers were willing to pay $150 for the service but Black Box only charges them a higher amount. Therefore, the total profit with price discrimination would be:

Profit = Total revenue - Total cost
Total revenue = (number of diehard viewers * price for diehard viewers) + (number of occasional viewers * price for occasional viewers)
Total revenue = (4000 * $150) + (20000 * $20) = $1,300,000
Total cost = $150,000
Profit = $1,150,000

If Black Box uses uniform pricing, it can only charge a price that is affordable to the occasional viewers. Therefore, the total profit with uniform pricing would be:

Profit = Total revenue - Total cost
Total revenue = (number of diehard viewers + number of occasional viewers) * price for uniform pricing
Total revenue = (4000 + 20000) * ($20 + $150)/2 = $1,200,000
Total cost = $150,000
Profit = $1,050,000

The deadweight loss associated with the non-discriminating pricing policy compared to the price-discriminating policy is the difference in profits between the two pricing policies, which is:

Deadweight loss = Profit with uniform pricing - Profit with price discrimination
Deadweight loss = $1,050,000 - $1,150,000 = -$100,000
Deadweight loss is negative because price discrimination generates a higher profit than uniform pricing.

Therefore, the deadweight loss associated with the non-discriminating pricing policy compared to the price-discriminating policy is $100,000. Rounded to the nearest hundred thousand, the answer is $400,000 (option D).

Question 2

Which of the following can eliminate the inefficiency inherent in monopoly pricing?

Accepted Answer

Price discrimination can eliminate the inefficiency inherent in monopoly pricing as it allows for the monopolist to capture surplus from different groups of consumers by charging them different prices based on their willingness to pay. This can lead to a more efficient allocation of resources and higher overall welfare. Arbitrage and cost-plus pricing may not necessarily address the inefficiency of the monopoly. Regulation, while it can potentially address the inefficiency, may also lead to unintended consequences and may not be the most efficient solution in all cases.

Question 3

Patents are employed to give drug companies temporary monopoly power in order to:

Accepted Answer

Patents are used to encourage research and innovations in pharmaceutical products by allowing drug companies temporary monopoly power, which incentivizes investment in research and development. This allows companies to recoup their investment and make a profit, which further drives innovation in the industry. While patents do protect corporate interests, their primary purpose is to incentivize research and development rather than regulate pricing.

Question 4

Which of the following statements is(are) true about patents and copyrights? (i) they both have benefits and costs
(ii) they lead to higher prices
(iii) they allow for the market to correct for monopolists' ability to earn above average profits

Accepted Answer

Both patents and copyrights have benefits, such as encouraging innovation and creativity, and costs, such as potentially leading to higher prices due to limited competition.

Question 5

When deciding what price to charge consumers, the monopolist may choose to charge them different prices based on:

Accepted Answer

A monopolist has the ability and incentive to practice price discrimination, which means charging different prices to different customers for the same product or service. The monopolist can do this by identifying individual customers' willingness to pay, which can be based on their geographical location, age, income, or other characteristics. Therefore, the monopolist may choose to charge different prices based on any or all of the above factors.

Question 6

Graph 15-1
 
-Refer to Graph 15-1. The shape of the average-total-cost curve reveals information about the nature of the 'barrier to entry' that might exist in a monopoly market. Which of the following monopoly types best coincides with the figure?

Accepted Answer

The shape of the average-total-cost curve in Graph 15-1 shows a decreasing average-total-cost curve, which is indicative of a natural monopoly. In a natural monopoly, the fixed costs of producing the good or service are large relative to the variable costs, meaning that it is more efficient for one firm to produce and sell the good rather than multiple firms competing. This leads to a situation where the monopolist can produce the good at a lower average cost than any potential competitors, creating a natural barrier to entry.

Question 7

Price discrimination is a rational strategy for a profit-maximising monopolist when:

Accepted Answer

Price discrimination allows the monopolist to charge different prices to different groups of consumers based on their willingness to pay, which maximizes profits. However, for price discrimination to be successful, there should be no opportunity for arbitrage, which means that consumers in one market segment cannot resell the product to consumers in another market segment. This allows the monopolist to maintain different prices for different segments and capture more consumer surplus. If there is an opportunity for arbitrage, the monopolist may not be able to maintain different prices and may not be able to maximize profits.

Question 8

In theory, perfect price discrimination:

Accepted Answer

Perfect price discrimination allows the monopolist to charge each consumer the maximum price they are willing to pay, resulting in higher profits. It also eliminates consumer surplus, as each consumer pays the exact amount they value the good or service. Finally, it eliminates deadweight loss because the monopolist produces at the quantity where marginal cost equals marginal revenue for each unit sold, resulting in an efficient allocation of resources.

Question 9

A firm will be unable to price discriminate if its customers are able to:

Accepted Answer

Price discrimination involves charging different prices to different groups of customers based on their willingness to pay. However, if customers are able to buy the product at a lower price and then resell it to other customers at a higher price (arbitrage), then the firm will be unable to price discriminate effectively. Possessing good knowledge about the product or buying the product with low interest loans do not necessarily prevent a firm from price discriminating.

Question 10

Allowing an inventor to have the exclusive rights to market her new invention will lead to which of the following? (i) a product that is priced higher than it would be without the exclusive rights
(ii) desirable behaviour in the sense that inventors are encouraged to invent
(iii) higher profits for the inventor

Accepted Answer

Granting exclusive rights allows the inventor to set higher prices due to lack of competition, encourages innovation by providing a financial incentive, and results in higher profits for the inventor.

Question 11

Price discrimination requires the firm to:

Accepted Answer

Price discrimination involves separating customers based on their willingness to pay different prices for the same or similar products, allowing the firm to maximize profits by charging each customer the maximum they are willing to pay.

Question 12

Black Box Pay TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Black Box pays $150 000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed satellite dishes to all of the homes in its market area, the marginal cost of PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service in order to maximise her profit. Before setting the price, she hires an economist to estimate the demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4000 diehard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to about 20 000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC.
-Refer to the information provided. If Black Box Pay TV is unable to price discriminate, what price will it choose to maximise its profit and what is the amount of the profit?

Accepted Answer

The answer of Black Box Pay TV is able to...

Question 13

Authors are allowed to be monopolists in the sale of their books in order to:

Accepted Answer

Allowing authors to have a monopoly on the sale of their books encourages them to write more and better books. By being able to reap the financial benefits of their intellectual property, authors are more likely to invest time and effort in creating high-quality works that will be in demand. This benefits both the authors themselves and readers, who have access to a wider variety of books to choose from. Option A is incorrect because literary advocacy groups do not typically lobby in favor of author monopolies; rather, they tend to focus on issues such as censorship and intellectual freedom. Option B is incorrect because allowing authors to control the sale of their books does not inherently promote independent thinking or encourage people to seek out diverse perspectives. Option D is incorrect because the negative externalities of the Internet and television are not directly related to the sale of books by authors.

Question 14

The practice of selling the same goods to different customers at different prices, but with the same marginal cost, is known as:

Accepted Answer

The practice of selling the same goods to different customers at different prices, but with the same marginal cost, is known as price discrimination. This strategy is commonly used by firms to increase their profits by charging a higher price to customers who are willing to pay more, while offering lower prices to customers who are more price-sensitive. It is only possible in markets where firms have some market power or control over the price, such as in monopolies or oligopolies. Therefore, the best answer is A, price discrimination.

Question 15

Graph 15-1
 
-Refer to Graph 15-1. The shape of the average-total-cost curve in the figure suggests an opportunity for a profit-maximising monopolist to exploit:

Accepted Answer

The shape of the average-total-cost curve suggests economies of scale, which means that the monopolist can produce at a lower cost per unit as it increases its output. This presents an opportunity for the monopolist to expand its market power and potentially increase profits.

Question 16

Black Box Pay TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Black Box pays $150 000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed satellite dishes to all of the homes in its market area, the marginal cost of PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service in order to maximise her profit. Before setting the price, she hires an economist to estimate the demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4000 diehard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to about 20 000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC.
-According to the information provided, if Black Box Pay TV is able to price discriminate, what will be the maximum amount of profit it can generate?

Accepted Answer

The answer of Black Box Pay TV is able to...

Question 17

A rational pricing strategy for a profit-maximising monopolist is:

Accepted Answer

Price discrimination allows the monopolist to charge different prices to different groups of consumers based on their willingness to pay. This maximizes profits by capturing more of the consumer surplus. Synergy pricing, price segregation, and average cost pricing do not necessarily result in profit maximization.

Question 18

When a monopolist is able to sell its product at different prices, it is engaging in:

Accepted Answer

Price discrimination occurs when a monopolist charges different prices for the same product to different consumers. This allows the monopolist to capture more consumer surplus and increase profits. It is not necessarily exploitative, as some consumers may be willing to pay more for the product than others. Predatory pricing is a strategy used by a dominant firm to drive competitors out of business by temporarily setting prices below cost, while price differentiation is a broader term that refers to any strategy that involves offering different prices to different customers based on factors such as time, location, or quantity purchased.

Question 19

If a monopolist is able to perfectly price discriminate:

Accepted Answer

Perfect price discrimination allows a monopolist to charge each consumer the maximum they are willing to pay, thus capturing all consumer surplus and eliminating deadweight loss by selling to every consumer whose valuation meets or exceeds the cost of production. This results in all potential consumer surplus and what would have been deadweight loss being transformed into monopoly profits.

Question 20

For price discrimination to be feasible it is necessary for the firm to:

Accepted Answer

Price discrimination occurs when a firm charges different prices to different groups of consumers for the same product or service. For this to be feasible, the firm must have some degree of market power, meaning the ability to influence the price of their product in the market. Having perfect information about consumer demand would be helpful, but it is not necessary for price discrimination to occur. A flexible wage policy and exclusive control over a natural resource are not relevant to price discrimination.

Quiz 15: Monopoly