Question

3. Compared with perfect competitors, other things equal, imperfect competitors who cannot practice price discrimination will tend to produce ____________ and charge a ______________ price.

a. less lower

b. less higher

c. more same

d. more lower

e. more higher

4. Sometimes firms are able to charge different prices to different consumers. We call this “price discrimination.” Why might it be in a firm’s interest to charge some consumers a lower price than other consumers?

5. The demand for airline tickets is less elastic for business travelers than it is for vacationers. Discuss how this might affect airline pricing strategies.

6. Define the term, “arbitrage,” and explain why opportunities for arbitrage prevent monopoly firms from practicing price discrimination.

7. Define the term, “natural monopoly.”

8. Is it better for a government to break up a natural monopoly into smaller firms (trust-busting), or to leave the natural monopoly intact while regulating the price it charges? Explain why the approach you choose is preferable.

9. In long run equilibrium, economic profits tend to zero in a perfectly competitive market and also in a monopolistically competitive market. This is true because both market structures share a crucial characteristic. What is the characteristic that causes economic profits to get pushed towards zero in both perfect competition and monopolistic competition?

Answer 1

3. d. More lower

4. Reasons:

i. The producer charges the absolute maximum price that the consumer is ready to pay for the product.

ii. Price depends on the quantity demanded for the product

iii. Price depends on various attributes of the product like age, sex,, location, economic status , etc.

5. The vacation seasons keep on changing, therefore, the demand for air tickets by vacationers (who demand cheap economy airline tickets) are more elastic than that of business travellers who are more prominent to have trips and travel frequently by airlines.

6. Arbitrage is the changing of price for the same asset on the basis of trading of securities, currencies or commodities. The arbitrage prevent monopoly from practising price discrimination because in a monopoly market any trading of securities or currencies would not lead to much change in the price of the product because there is no competition for that product in any of the market.

7.A natural monopoly has a really high fixed cost, they take off in a really big way and the marketing is done in such way that the customers tend to put their faith in it and therefore it captures the economy.

8. It should be kept intact because the monopoly cannot be called monopoly when the parent company gets separated into different parts. There would be controlling issues, leading to disturbances in the natural monopoly status of the firm.

9. Both the markets have the feature that the prices are not controlled by the producers, but by the industry. This feature doesn't allow them to keep a profit margin for the organisation and the whole of the control is on product selling.