Sample Questions Exam 4

Chapters 16, 17, 9, & 7

Price Discrimination

• Price discrimination Charging different prices to different customers for the same product when the price differences are not due to differences in cost.

• Which of the following are necessary for price discrimination?

• Zero transaction costs• Perfect competition• Imperfectly competitive market• At least two different markets with different price elasticities of

demand.• At least two different markets with different price elasticities of

supply.

Price Discrimination• Buying a good in one place at a low price and selling in

another at a high price is• Odd pricing• Price discrimination• Arbitrage• Prohibited by antitrust laws

• A firm that price discriminates charges a higher price to customers

• With more elastic demand• With less elastic demand• In smaller markets• In larger markets

• Who is charged the lower price?

Price Discrimination

• A firm that perfectly price discriminates will• Charge every buyer a different price• Use odd pricing• Allow resale of its product• Charge a price based on quantity sold

• Perfect price discrimination results in• No deadweight loss• No producer surplus• Increased consumer surplus• A single price

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Price Discrimination: Charging Different Prices for the Same Product

Perfect Price DiscriminationPerfect Price Discrimination

1. Profits increase.2. Consumer surplus decreases.

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Find Price Discrimination Prices and Quantities on a Graph

Price Discrimination by a Movie Theater

Pricing Strategies

• Firms practice odd pricing ($2.99 instead of $3.00) because

• They believe consumers will buy more at an odd price

• A two-part tariff is used when• A buyer pays one price to enter the market and an

additional fee for each unit purchased

Labor Markets

• Labor demand is derived from• The demand for the product that uses labor in the

production process

• Marginal Revenue Product for a perfectly competitive firm is

• Price times marginal product of labor

• The firm’s demand curve for labor is• The MRPL curve

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Find the Profit-maximizing Quantity of Labor from a Graph

The Marginal Revenue Product of Labor

The Marginal Revenue Product of Labor and the Demand for Labor

Labor Demand• An increase in a firm’s demand for labor could be

caused by• An increase in demand for the firm’s product• An increase in quantity of labor supplied• A decrease in the market wage• A decrease in marginal product of labor

• Which of the following will NOT increase labor demand

• Increase in price of firm’s product• Increase in market wage• Increase in human capital of the workforce• Technological improvements that increase MPL

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The Supply of LaborLEARNING OBJECTIVE2

The Labor Supply Curve

A Backward-Bending Supply Curve for Labor

Labor Market

• What happens to the wage and quantity of pilots hired if government imposes a mandatory retirement age of 62?

• Wage down and quantity up• Wage up and quantity up• Wage down, quantity down• Wage up, quantity down

• Define Compensating differentials• Higher wages paid to compensate workers for

unpleasant aspects of a job

Economic Discrimination

• Define:• Paying different wages to different workers based on

characteristics unrelated to job performance

• Define Comparable Worth: • paying the same wage on jobs rated “comparable”

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The Markets for Capital and Natural Resources

Monopsony

Monopsony The sole buyer of a factor of production.

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DefineTariff A tax imposed by a government on imports.

Imports Goods and services bought domestically but produced in other countries.

Exports Goods and services produced domestically but sold to other countries.

Autarky A situation in which a country does not trade with other countries.

International trade

• Who benefits from a tariff?• Both producers and consumers• Domestic consumers• Domestic producers• Everyone is worse off

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What Happens when Trade is Allowed?

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Find the DWL from a Tariff on a GraphTariffs

Find Comparative Advantage

PRODUCTION PER YEAR OF LABOR

CLOTH WINE

PORTUGAL 100 150

ENGLAND 90 60

Information

• Asymmetric information in the insurance market

• Drivers know more about the likelihood of an accident than insurance company does

• Moral hazard with regard to insurance occurs• When people change their behavior after buying

insurance

• Adverse selection can result in • A “lemons” market

Information• True or False?

• Adverse selection in the used car market can be reduced by car dealers building reputations for quality

• Moral hazard can occur in financial markets• Once a firm raises funds, it can use them in ways that reduce

profits, but benefit the firm’s managers• Define the Winner’s Curse

• The winner of an auction may overestimate the value of the good and end up worse than the losers

• When does the winner’s curse not occur?• Private value auctions?• or• Common value auctions?