4.1.5.7 Price discrimination Quiz: AQA Economics, Unit 1

The 20 questions

1. Price discrimination occurs when:

   • Firms set prices equal to marginal cost in all markets
   • A firm charges different prices to different consumers for the same good, not reflecting cost differences
   • A firm charges the same price to all consumers for every product it sells
   • The government sets different prices for each region of the country

2. The main condition necessary for price discrimination is that the firm:

   • Has no information about its customers' willingness to pay
   • Faces a perfectly elastic demand curve in all markets, which means that buyers in each market are equally willing to switch to rivals
   • Has some market power and can separate its markets, preventing resale between groups
   • Operates in perfect competition with identical products

3. Which is an example of third-degree price discrimination?

   • A single price for all customers regardless of purchase quantity
   • Student discounts at a cinema for the same film and seat
   • Lower prices for bulk purchases of the same product
   • Charging each customer the maximum price they are willing to pay

4. Peak and off-peak pricing for train travel is an example of:

   • Predatory pricing to drive rivals out of the market
   • Cost-plus pricing with no market power
   • Perfect competition, since all tickets sell at the same price on every route and at every time of the day across the whole network
   • Price discrimination based on time, separating consumers by willingness to pay and timing

5. Dumping, which means selling abroad below the domestic price, is an example of:

   • Price discrimination between domestic and foreign markets
   • A cartel setting a common export price, which means that member firms agree a shared minimum price for their goods sold overseas
   • Predatory pricing against domestic rivals only, where the firm sells below cost at home to drive local competitors out of business
   • Perfect competition in international markets, where many exporters sell identical goods at the same world price in every country

6. A monopolist can sell to group A (price elasticity -2) and group B (price elasticity -4). Which group should be charged the higher price to maximise profit?

   • Neither group should pay more, since price discrimination requires perfectly elastic demand in both groups before it can be profitable
   • Group B, whose demand is more elastic
   • Both groups should pay the same price, since demand is identical in the two groups and so a single price maximises the firm's profit
   • Group A, whose demand is less elastic (elasticity -2 compared with -4 for group B)

7. Compared with a single-price monopoly, price discrimination may:

   • Always reduce output, since the monopolist restricts supply to high-paying customers
   • Raise output only if the practice is illegal
   • Leave output unchanged in every case
   • Increase output, as customers who would have been priced out now buy the good

8. A key advantage of price discrimination for a firm is that it:

   • Reduces its marginal cost to zero
   • Guarantees a fixed level of demand for its product, so that the firm can predict its sales exactly regardless of changes in price
   • Eliminates all competition in the market, since a firm that discriminates on price is able to drive every rival out of the market
   • Can capture more consumer surplus, increasing its total revenue and profit

9. Which is a disadvantage of price discrimination for consumers?

   • It leads to permanent productive efficiency in the market
   • All consumers always pay lower prices than under monopoly
   • Some consumers pay higher prices than they would under a single uniform price
   • Consumer surplus rises for every customer group

10. A firm sells the same product for £20 domestically and £15 abroad. Which condition best supports this pricing?

    • Costs differ by 5 between the two markets
    • The firm has no market power in either country, since it sells the same product at two different prices in two competitive markets
    • Foreign demand is perfectly inelastic at 15, so that overseas buyers will pay 15 whatever price the firm chooses to set in that market
    • The firm can prevent resale, and foreign demand is more price elastic than domestic demand

11. Diagrammatically, first-degree (perfect) price discrimination results in:

    • The monopolist capturing the entire consumer surplus, with output equal to the competitive level
    • Consumer surplus at its largest and output below the monopoly level
    • A dead-weight loss larger than under a single-price monopoly
    • No change in consumer surplus compared with a single-price monopoly

12. A cinema charges students £6 and adults £10. Which evaluation is most appropriate?

    • It guarantees allocative efficiency because prices differ between groups
    • It shows the cinema has no market power
    • It is always inefficient, since different prices can never be justified in any market
    • It may widen access and fill seats, but adults pay more, so the net welfare effect depends on elasticities and costs

13. Which pricing practice sets a high initial price and then lowers it over time to capture different willingness to pay?

    • Predatory pricing
    • Price skimming
    • Cost-plus pricing
    • Penetration pricing

14. A firm charges a higher price to customers with inelastic demand and a lower price to customers with elastic demand. This raises profit if:

    • Both groups have identical price elasticities of demand
    • The firm has no information about either group's demand
    • The firm can separate the groups and the gain in revenue outweighs the cost of keeping them apart
    • Marginal cost rises steeply for both groups at the same output

15. Group X has demand Q = 100 - 5P and group Y has Q = 60 - 3P. The firm charges X £10 and Y £12. The quantities demanded are:

    • 50 units for group X and 36 units for group Y
    • 100 units for group X and 60 units for group Y
    • 50 units for group X and 24 units for group Y
    • 10 units for group X and 24 units for group Y

16. Which is an example of second-degree price discrimination?

    • Charging different prices to students and pensioners at the same cinema, based on each buyer's age group
    • Charging each customer the maximum price they are willing to pay
    • Volume discounts, where the price per unit falls as more units are bought
    • Charging different prices for the same good in different countries, with each national market set at the level its own buyers can pay

17. Which is the best example of predatory pricing rather than price discrimination?

    • A firm sells in two markets at prices that match local demand, so that buyers in each area pay the price their own conditions support
    • A firm sets a very low price temporarily to drive a rival out of the market, then raises prices
    • A firm charges students a lower price for the same theatre seat
    • A firm offers a bulk discount to large retailers that buy in volume

18. Why might price discrimination help a firm with high fixed costs?

    • It reduces average fixed cost to zero at every output
    • It can help cover fixed costs by selling to customers who would not buy at a single high price
    • It increases marginal costs
    • It eliminates fixed costs by charging a higher price to all buyers

19. Why might a single-price monopolist not set the same profit-maximising price for students and older customers?

    • Students and older customers have identical elasticities of demand, so a single price would be optimal for both groups in every period
    • The monopolist's marginal cost differs for each customer group
    • Their price elasticities of demand differ, so the profit-maximising price for each group is different
    • The monopolist is legally required to charge the same price to all customers, whatever the differences between the groups it serves

20. Which statement best evaluates the impact of price discrimination on consumers?

    • It is irrelevant to consumers since they never notice prices
    • It always raises consumer surplus for every group, because each buyer pays a price that is tailored to their own willingness to pay
    • Some consumers pay more and others less, and total welfare depends on output changes and which groups gain
    • It always reduces total output compared with a single price, since the firm restricts sales to the groups that it can charge the most

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