1. Which of the following statements is correct for a firm that can price-discri

Question

1. Which of the following statements is correct for a firm that can price-discriminate?
  
a)    It should adjust prices so that customers with price-inelastic demand pay higher prices than those with elastic

demand.
  
b)    It should adjust prices so that customers with price-inelastic demand pay lower prices than those with elastic

demand.
  
c)    It should adjust prices so that customers with price-elastic demand pay lower prices than those with inelastic

demand.
  
d)    It should adjust prices so that customers with price-elastic demand pay higher prices than those with inelastic

demand.

2. Suppose a monopoly can separate its customers into two groups. If the monopoly practices price discrimination, it will

charge the lower price to the group with:
  
a)    the fewer close substitutes.
  
b)    the lower price elasticity of demand.
  
c)    the higher price elasticity of demand.
  
d)    The answer cannot be determined with the information given.

3. Many hotel chains offer discounts for senior citizens. This is an example of ________ that is ________ in the United

States.
  
a)    single-price monopoly power; legal
  
b)    price discrimination; legal
  
c)    market power; illegal
  
d)    price discrimination; illegal

Explanation / Answer

Q1. When a monopoly firm engages in price discrimination based on elasticity of demand of two consumer groups (Third-degree price discrimination) then it generally charges lower price from consumers with elastic demand and higher price from consumers with inelastic demand.

So, if a monopoly, at present, is charging a single monopoly price and wants to engage in price discrimination based on elasticity of demand of two different consumer groups then it will adjust its prices in such a manner that customers with price-elastic demand pay lower prices than those with inelastic demand.

Hence, the correct answer is option (c).

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