Tackle the Test: Free-Response Questions

1. Question

   
   

   1. Define price discrimination.

      
      
   
   

   2. Why do firms price-discriminate?

      
      
   
   

   3. In which market structures can firms price-discriminate? Explain why.

      
      
   
   

   4. Give an example of price discrimination.

      
      
   
   

   Rubric for FRQ 1 (5 points)

   1 point: Price discrimination is the practice of charging different prices to different customers for the same product.

   1 point: Firms price-discriminate to increase their profit.

   1 point: In order to price-discriminate, firms must be in the monopoly, oligopoly, or monopolistic competition market structure.

   1 point: Because rather than being price-takers, firms in these market structures have some degree of market power, which gives them the ability to charge more than one price.

   1 point: An example is different prices for movie tickets charged for people of different ages.

   (6 points)

2. Question

   Draw a correctly labeled graph showing a monopoly with a horizontal average total cost curve practicing perfect price discrimination. On your graph, identify the monopoly’s profit. What does consumer surplus equal in this case? Explain.

   Rubric for FRQ 2 (6 points)

   

   1 point: Axes are correctly labeled as “$ per unit” or “Price, cost” and “Quantity.”

   1 point: The demand curve is labeled and downward-sloping.

   1 point: The profit-maximizing quantity is labeled on the horizontal axis where MC = D.

   1 point: The monopoly’s profit is identified as the area above average total cost and below the demand curve.

   1 point: Consumer surplus is zero.

   1 point: Because each consumer is charged the maximum he or she is willing to pay for each unit.