economics beginner 10 sample questions

Price Discrimination MCQ Practice Test

Charging different prices to customers

Q1. A firm sells a product that has a fixed cost of $100 and a variable cost of $10 per unit. It sells 100 units to a group of customers at a price of $20 per unit, and 200 units to another group at a price of $15 per unit. What is the profit-maximizing price discrimination strategy for this firm?

Explanation: The firm is practicing price discrimination by charging different prices to different groups of customers. Since the high-price group is willing to pay more, the firm maximizes profits by selling the entire quantity of 100 units to this group at the higher price of $20 per unit. The remaining units of 200 are sold to the low-price group at the lower price of $15 per unit.

Q2. A firm offers a basic model at $100 and a deluxe model at $150 so that customers self-select according to their willingness to pay. This pricing strategy is best described as:

Explanation: Offering different versions at different prices and letting customers self-select is second-degree (versioning) price discrimination. First-degree discrimination would require charging each customer exactly their maximum willingness to pay, which a menu of two versions does not do.

Q3. A coffee shop offers a discount of 10% for customers who pay with a college ID, but charges the regular price for customers who pay with a credit card. This is an example of:

Explanation: Price discrimination based on payment method occurs when a firm charges different prices to customers based on the method of payment. In this example, the coffee shop is charging a lower price to customers who pay with a college ID, but charging the regular price to customers who pay with a credit card.

Q4. A monopolist charges a higher price in the market segment with relatively inelastic demand and a lower price in the segment with relatively elastic demand. This is an example of:

Explanation: Charging different prices to identifiable segments with different demand elasticities is third-degree price discrimination: the inelastic segment bears the higher price, the elastic segment the lower one, raising total profit above a single uniform price.

Q5. A firm sells two versions of its product, a standard version for $100 and a deluxe version for $150. The demand for the standard version is 100 units, and the demand for the deluxe version is 50 units. The firm observes that the 50 buyers who prefer the deluxe version are willing to pay up to $120 for the standard version. What is the firm's maximum revenue from price discrimination?

Explanation: The firm's maximum revenue from price discrimination is the sum of the revenue from the standard version and the revenue from the deluxe version. The revenue from the standard version is 100 units * $100 = $10,000. The revenue from the deluxe version is 50 units * $150 = $7,500. However, the firm can also sell the deluxe version to the 50 buyers who prefer the standard version at $120 each, which is a total of 50 units * $120 = $6,000. Therefore, the firm's maximum revenue from price discrimination is $10,000 + $7,500 + $6,000 = $17,500.

Q6. A firm sells a product for $100 to customers who pay with cash, but for $90 to customers who pay with credit cards. This pricing strategy is an example of:

Explanation: Price discrimination occurs when a firm charges different prices for the same product to different customers based on their willingness to pay. In this case, the firm is charging a higher price to customers who pay with cash and a lower price to customers who pay with credit cards, which is an example of price discrimination based on payment method.

Q7. A monopolist sells two different versions of a product, one at a price of $10 and the other at $20. Both versions have the same marginal cost of $5. If the monopolist sells 100 units of the cheaper version and 50 units of the more expensive version, what is the primary reason for charging different prices for the same product?

Explanation: Price discrimination occurs when a firm charges different prices to different customers for the same product, based on their willingness to pay. In this case, the monopolist is charging a higher price for the more expensive version because it is likely that consumers who are willing to pay $20 are more price inelastic and will continue to purchase the product even at a higher price.

Q8. A firm selling tickets to a concert has a fixed cost of £10,000 and a variable cost of £10 per ticket. The demand for tickets is given by the equation Q = 100 - P, where Q is the quantity demanded and P is the price of the ticket. If the firm uses price discrimination to charge £19 for tickets to the general public and £10 for tickets to students, what is the maximum profit the firm can earn?

Explanation: To find the maximum profit, we need to find the quantity of tickets sold to both the general public and students, and then calculate the total revenue and total cost. The firm sells 81 tickets to the general public at £19 each and 19 tickets to students at £10 each. The total revenue is (81 * £19) + (19 * £10) = £1539 + £190 = £1729. The total cost is £10,000 (fixed cost) + (100 * £10) (variable cost) = £10,000 + £1000 = £11000. Therefore, the maximum profit the firm can earn is £1729 - £11000 = £29,291, but since we rounded some values, we can say £30,000.

Q9. A firm sells a product for $\100$ to customers who pay with cash and $\120$ to customers who pay with credit. If the marginal cost of production is $\60$, the consumer surplus lost by customers who pay with credit is

Explanation: The consumer surplus lost by customers who pay with credit is the difference between what they are willing to pay and what they actually pay. In this case, it is the difference between the credit price and the cash price. The cash price is $\100$, and the credit price is $\120$, so the consumer surplus lost is $\20$.

Q10. A monopolist practices price discrimination by selling two different products, Product A and Product B, to two distinct groups of consumers with different price elasticities of demand. The monopolist charges a higher price for Product A to Group A, who has a low price elasticity of demand, and a lower price for Product B to Group B, who has a high price elasticity of demand. What is the primary reason for the monopolist's pricing strategy?

Explanation: The monopolist's pricing strategy is an example of price discrimination. By charging a higher price to Group A, who has a low price elasticity of demand, the monopolist can maximize revenue because this group is less sensitive to price changes. Conversely, the monopolist charges a lower price to Group B, who has a high price elasticity of demand, to maximize revenue from this group, as they are more sensitive to price changes.

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Price Discrimination MCQ Practice Test | Mind Hustle