Microeconomics Quiz: Price Discrimination
20 questions · exam conditions
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Price DiscriminationQuestion 1 of 20

A video game company releases a new game at a price of $70. Six months later, it permanently lowers the price to $30. This strategy is most effective if:

early adopters have a less elastic demand than later buyers.
the cost of producing the game decreases significantly over time.
all consumers have a similar price elasticity of demand for the game.
arbitrage between early adopters and later buyers is easy to conduct.
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Microeconomics Quiz

Microeconomics Quiz: Price Discrimination

Practice Price Discrimination in Microeconomics with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Price Discrimination, giving you a quick way to practice the rules, question types, and explanations that matter most for Microeconomics.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

A video game company releases a new game at a price of $70. Six months later, it permanently lowers the price to $30. This strategy is most effective if:

  1. early adopters have a less elastic demand than later buyers. (correct answer)
  2. the cost of producing the game decreases significantly over time.
  3. all consumers have a similar price elasticity of demand for the game.
  4. arbitrage between early adopters and later buyers is easy to conduct.
Explanation: This is an example of intertemporal price discrimination. The strategy works by separating consumers based on their impatience and willingness to pay. Early adopters are typically eager fans with low price elasticity (inelastic demand), who are willing to pay a premium to have the game immediately. Later buyers are more price-sensitive and patient (elastic demand). The firm maximizes profit by extracting high surplus from the inelastic group first, then selling to the elastic group at a lower price.

Question 2

An online retailer uses browsing history and location data to show different prices to different customers for identical products. A consumer advocacy group discovers that customers using mobile devices see prices averaging 8% higher than desktop users. This practice is best classified as:

  1. Efficient first-degree price discrimination that maximizes both producer and total welfare
  2. Second-degree price discrimination through self-selection mechanisms that reveal consumer preferences
  3. Dynamic pricing that responds to real-time changes in supply and demand conditions
  4. Third-degree price discrimination based on inferred differences in price sensitivity between user groups (correct answer)
Explanation: When you encounter pricing scenarios where firms charge different customers different prices for identical products, you're dealing with price discrimination. The key is identifying which of the three degrees applies based on how the firm segments customers. This scenario describes third-degree price discrimination because the retailer separates customers into distinct groups (mobile vs. desktop users) and charges each group a different price based on inferred price elasticity differences. The retailer assumes mobile users are less price-sensitive—perhaps because they're shopping on-the-go or have less ability to comparison shop—so they charge them 8% more. Answer A is incorrect because first-degree (perfect) price discrimination involves charging each individual customer their exact willingness to pay, not grouping customers. Also, price discrimination typically reduces consumer welfare even when it might increase total welfare. Answer B misidentifies this as second-degree price discrimination, which relies on self-selection where customers choose from different price-quantity bundles (like bulk discounts). Here, customers don't choose their device type to reveal preferences about the product itself. Answer C confuses this with dynamic pricing, which adjusts prices based on supply and demand fluctuations over time. This scenario shows consistent price differences between user groups regardless of market conditions. For price discrimination questions, remember the three degrees: first-degree targets individuals perfectly, second-degree offers choices that make customers self-select, and third-degree segments customers into groups based on observable characteristics that proxy for price sensitivity.

Question 3

A pharmaceutical company holds a patent on a life-saving drug. The company charges $1,000 per dose in wealthy countries and $100 per dose in developing countries. Critics argue this pricing is unethical, but economists point out that uniform global pricing would likely result in:

  1. Higher total consumer surplus due to increased access in developing countries despite higher prices
  2. Lower total quantity sold globally as developing country consumers are priced out of the market entirely (correct answer)
  3. Greater economic efficiency since the deadweight loss from price discrimination would be eliminated completely
  4. Reduced innovation incentives since pharmaceutical companies would earn lower profits from their research investments
Explanation: Under uniform pricing, the company would likely choose a price closer to the wealthy country level to maximize profits. This would price out most consumers in developing countries, reducing total quantity sold globally. Price discrimination actually increases total output compared to uniform monopoly pricing by serving markets that would otherwise be unprofitable.

Question 4

A software company offers three versions of its product: Basic (50,limitedfeatures),Professional(50, limited features), Professional (150, full features), and Enterprise ($400, full features plus support). If the marginal cost of additional features is $20 and support costs $30, what pricing inefficiency does this versioning strategy primarily address?

  1. It eliminates deadweight loss by ensuring all consumers pay their exact willingness to pay for each feature
  2. It prevents arbitrage between high-value and low-value consumers through physical product differentiation
  3. It reduces the information asymmetry problem when the firm cannot directly observe consumer valuations (correct answer)
  4. It maximizes network externalities by encouraging adoption across different user segments simultaneously
Explanation: This is second-degree price discrimination (versioning) where the firm creates different product versions to induce consumer self-selection when it cannot directly observe their willingness to pay. The firm designs the product line so that high-value consumers reveal themselves by choosing higher-priced versions, solving the information asymmetry problem about consumer types.

Question 5

A university bookstore sells textbooks at full price during the first month of each semester, then reduces prices by 20% in the second month, and by 40% in the third month. Students who need books immediately pay full price, while those who can wait get discounts. This strategy works because:

  1. Students self-sort based on their time preferences and opportunity costs of delaying purchase (correct answer)
  2. The bookstore can directly observe which students have higher willingness to pay for immediate access
  3. Inventory holding costs decrease over time, allowing the bookstore to pass savings to consumers
  4. Competition from online retailers intensifies over time, forcing the bookstore to match lower prices
Explanation: This is intertemporal price discrimination (a form of second-degree price discrimination) where consumers self-select based on their time preferences. Students with high opportunity costs of waiting (those who need books immediately for coursework) reveal themselves by paying full price, while price-sensitive students with lower time costs wait for discounts. The bookstore cannot directly observe these preferences but designs the pricing scheme to induce self-selection.

Question 6

A gym offers three membership options: Basic (30/month,gymaccessonly),Premium(30/month, gym access only), Premium (60/month, gym plus classes), and Elite ($100/month, gym, classes, and personal training). The gym's research shows that 40% choose Basic, 35% choose Premium, and 25% choose Elite. If the gym's marginal cost for classes is $15 per member and personal training is $25 per member, which constraint is most likely binding in this pricing scheme?

  1. The incentive compatibility constraint preventing Premium members from choosing Elite memberships
  2. The participation constraint ensuring Basic members find their membership worthwhile relative to not joining
  3. The incentive compatibility constraint preventing Elite members from downgrading to Premium memberships (correct answer)
  4. The individual rationality constraint ensuring all membership options generate positive consumer surplus
Explanation: In second-degree price discrimination (versioning), the binding constraint is typically the incentive compatibility constraint for high-value consumers. Elite members must prefer their option to Premium, which means the gym must ensure that Elite members value personal training enough to pay the 40premium(40 premium (100-$60) over just getting classes. This constraint limits how much the gym can extract from high-value consumers.

Question 7

A monopolist currently charges a uniform price of $40 and sells 1,000 units. The firm estimates that implementing perfect price discrimination would increase total revenue by 60% while increasing total quantity sold by 25%. What is the approximate consumer surplus under perfect price discrimination compared to uniform pricing?

  1. Consumer surplus increases by approximately 25% due to increased quantity availability
  2. Consumer surplus decreases by approximately 60% but remains positive due to quantity effects
  3. Consumer surplus remains unchanged since the same total value is created for consumers
  4. Consumer surplus decreases to zero since each consumer pays their maximum willingness to pay (correct answer)
Explanation: Perfect price discrimination is a pricing strategy where a monopolist charges each consumer exactly their maximum willingness to pay. This fundamentally changes how consumer surplus is distributed compared to uniform pricing. Under uniform pricing at $40 for 1,000 units, consumers who value the product above $40 enjoy consumer surplus—the difference between what they're willing to pay and what they actually pay. Some consumers might value the product at $60, $80, or even $100, but they all pay just $40, creating substantial consumer surplus. When the monopolist implements perfect price discrimination, they capture all this value by charging each consumer their exact willingness to pay. The consumer who values the product at $60 now pays $60, the one who values it at $80 pays $80, and so on. This eliminates the "bargain" that created consumer surplus under uniform pricing. Additionally, the monopolist can now profitably serve consumers with lower valuations (between the marginal cost and $40), explaining the 25% quantity increase. Option A incorrectly suggests consumer surplus increases with quantity—while more consumers are served, each pays their maximum willingness to pay. Option B assumes some consumer surplus remains positive, missing that perfect price discrimination extracts all consumer value. Option C misunderstands that total value creation doesn't determine consumer surplus distribution—the monopolist captures all the value that previously went to consumers. Remember: Perfect price discrimination always results in zero consumer surplus because consumers pay exactly what the product is worth to them, leaving no "consumer's bargain."

Question 8

A pharmaceutical company holds a patent on a new drug and sells it in two distinct markets, Country A and Country B. The price elasticity of demand for the drug is -2.0 in Country A and -4.0 in Country B. The firm's marginal cost of production is constant at $10 per unit. To maximize its total profit, what prices should the company charge in each country?

  1. Charge $20 in Country A and $13.33 in Country B. (correct answer)
  2. Charge $13.33 in Country A and $20 in Country B.
  3. Charge the same price of $15 in both countries, calculated by using the average elasticity.
  4. Charge a price equal to marginal cost ($10) in both countries to maximize social welfare.
Explanation: To maximize profit in each market, the firm should set marginal revenue (MR) equal to marginal cost (MC). The formula relating price (P), elasticity (E), and MR is MR=P(1+1/E)MR = P(1 + 1/E). Setting MR = MC gives P=MC/(1+1/E)P = MC / (1 + 1/E). For Country A (less elastic demand): P_A = \10 / (1 + 1/(-2.0)) = $10 / 0.5 = $20.ForCountryB(moreelasticdemand):. For Country B (more elastic demand): P_B = $10 / (1 + 1/(-4.0)) = $10 / 0.75 \approx $13.33$. The firm charges a higher price in the market with less elastic demand.

Question 9

A local utility company faces a demand curve for electricity given by P=100−QP = 100 - Q, where P is the price per megawatt-hour (MWh) and Q is the quantity in MWh. The marginal cost is constant at $20 per MWh. The company decides to implement a block pricing scheme, charging a price P1 for the first 20 MWh and a price P2 for any additional consumption. Among the following options, which pair of prices maximizes the utility's profit?

  1. P1 = $80, P2 = $50 (correct answer)
  2. P1 = $60, P2 = $60
  3. P1 = $80, P2 = $20
  4. P1 = $100, P2 = $80
Explanation: We need to calculate the profit for each option. Profit = Total Revenue - Total Cost. Total Cost = 20 * Q_total. A) P1=80forfirst20MWh.AtP2=80 for first 20 MWh. At P2=50, total demand is Q=100-50=50. So the second block is 30 MWh. Profit = (80-20)*20 + (50-20)*30 = 1200 + 900 = $2100. B) This is a single price. Q=100-60=40. Profit = (60-20)*40 = $1600. C) P1=80forfirst20MWh.AtP2=80 for first 20 MWh. At P2=20, total demand is Q=100-20=80. Second block is 60 MWh. Profit = (80-20)*20 + (20-20)*60 = 1200 + 0 = $1200. D) At P1=100,Q=0.AtP2=100, Q=0. At P2=80, Q=20. The first 20 units are sold at $80. Profit = (80-20)*20 = $1200. Option A yields the highest profit.

Question 10

A theme park offers a 50% discount to local county residents. The park's management finds that profits have not increased as expected because many non-residents are having their local friends purchase tickets for them. Which condition for successful price discrimination was most significantly compromised?

  1. The firm lacked the market power to set prices.
  2. The transaction costs of arbitrage were too low. (correct answer)
  3. The demand elasticities of local and non-local residents were identical.
  4. The firm was unable to identify and segment the different groups.
Explanation: The theme park's strategy is failing due to arbitrage: the low-price group (locals) is reselling the good to the high-price group (non-residents). For price discrimination to be successful, the firm must be able to prevent this. The fact that friends can easily buy tickets for others means the cost and difficulty of conducting this arbitrage are very low. This failure to prevent resale, due to low transaction costs for arbitrage, undermines the price difference.

Question 11

A monopolist faces a market demand curve of P=60−QP = 60 - Q and has a constant marginal cost of MC=20MC = 20. What is the increase in producer surplus if the firm switches from a single-price strategy to perfect price discrimination?

  1. $600
  2. $400
  3. $800
  4. $200 (correct answer)
Explanation: When analyzing monopoly pricing strategies, you need to compare producer surplus under different scenarios. Perfect price discrimination allows a monopolist to capture all consumer surplus as additional producer surplus. Under single pricing, the monopolist sets MR=MCMR = MC. With demand P=60−QP = 60 - Q, revenue is R=(60−Q)Q=60Q−Q2R = (60 - Q)Q = 60Q - Q^2, so MR=60−2QMR = 60 - 2Q. Setting MR=MCMR = MC: 60−2Q=2060 - 2Q = 20, giving Q=20Q = 20 and P=40P = 40. Producer surplus is the area above MC and below price: (40−20)×20=400(40 - 20) \times 20 = 400. Under perfect price discrimination, the monopolist produces where P=MCP = MC, so 60−Q=2060 - Q = 20, giving Q=40Q = 40. The firm captures all consumer surplus as producer surplus, which is the entire triangle under the demand curve above MC: 12×(60−20)×40=800\frac{1}{2} \times (60 - 20) \times 40 = 800. The increase in producer surplus is 800−400=200800 - 400 = 200. Choice A (600)incorrectlycalculatesonlytheconsumersurplusundersinglepricing.ChoiceB(600) incorrectly calculates only the consumer surplus under single pricing. Choice B (400) gives the original producer surplus under single pricing, not the increase. Choice C (800)representstotalproducersurplusunderperfectpricediscrimination,nottheincreasefromswitchingstrategies.ChoiceD(800) represents total producer surplus under perfect price discrimination, not the increase from switching strategies. Choice D (200) correctly identifies the additional surplus gained. Remember that perfect price discrimination questions always involve comparing the triangle of consumer surplus under single pricing (which becomes additional producer surplus) to the original producer surplus rectangle.

Question 12

A data analytics firm develops an algorithm that can predict, with high accuracy, the unique maximum price each individual visitor to an e-commerce website is willing to pay. If the e-commerce firm uses this algorithm to quote a personalized price to each visitor, it is attempting to implement a form of:

  1. second-degree price discrimination by using data to infer quantity tiers.
  2. third-degree price discrimination by creating millions of tiny market segments.
  3. first-degree price discrimination by tailoring prices to individual valuations. (correct answer)
  4. hurdle model pricing where the algorithm is a barrier to a lower price.
Explanation: First-degree price discrimination, or perfect price discrimination, is the theoretical ideal where a firm charges each customer their exact reservation price (maximum willingness to pay). While perfect execution is impossible, using sophisticated data analysis to estimate and charge a unique price to each individual based on their predicted valuation is the closest a firm can get to implementing this strategy. It goes beyond segmenting into groups (third-degree) or basing price on quantity (second-degree).

Question 13

Laws that prohibit price discrimination, such as requiring a business to charge the same price to all customers regardless of age or student status, could have which of the following unintended consequences?

  1. An increase in the firm's profits due to a simpler and less costly pricing structure.
  2. The firm ceasing to serve a market segment that it would have served at a discounted price. (correct answer)
  3. An increase in total consumer surplus by ensuring that everyone pays a single, fair price.
  4. An increase in the incentive for arbitrage between different consumer groups.
Explanation: If a firm is forced to charge a single price, it will set the profit-maximizing monopoly price. This price may be too high for certain groups with more elastic demand (like students or seniors). With price discrimination, the firm could have profitably served these groups at a lower price. Without it, these groups may be priced out of the market entirely, leading to a reduction in total output and a loss of surplus for both the firm and the excluded consumers.

Question 14

A monopolist with market demand P=120−QP = 120 - Q and zero marginal cost wants to sell exactly 60 units using a two-block tariff. The first block is for the first 30 units and the second block is for the next 30 units. What is the maximum possible revenue the firm can collect?

  1. $2,700
  2. $3,600
  3. $5,400
  4. $4,500 (correct answer)
Explanation: When you encounter a two-block tariff problem, you're dealing with a pricing strategy where a monopolist charges different prices for different quantity ranges to extract more consumer surplus than with uniform pricing. With demand P=120−QP = 120 - Q and zero marginal cost, the monopolist wants to maximize revenue from selling exactly 60 units across two 30-unit blocks. The key insight is that the firm should set the second block price equal to the marginal willingness to pay at the final unit (unit 60), which is P=120−60=60P = 120 - 60 = 60. This ensures the consumer is just willing to buy all 60 units. For the first block, the firm can charge up to the consumer's willingness to pay for the 30th unit, which is P=120−30=90P = 120 - 30 = 90, minus the consumer surplus they'd lose by paying the higher first-block price instead of the marginal prices. The consumer surplus from units 31-60 at price $60 is the triangle above the demand curve: $12×30×(90−60)=450\frac{1}{2} \times 30 \times (90-60) = 450 .Therefore,themaximumfirst−blockpriceis. Therefore, the maximum first-block price is 90−45030=7590 - \frac{450}{30} = 75 $. Total revenue: (75 \times 30) + (60 \times 30) = 2,250 + 1,800 = 4,050 . Wait - this suggests answer choice A (2,700)capturesjustoneblock,B(2,700) captures just one block, B (3,600) might reflect uniform pricing errors, and C ($5,400) overestimates the extractable surplus. The correct maximum revenue is $4,500 (D). Remember: in block pricing, always work backward from the final unit's willingness to pay, then extract remaining consumer surplus in earlier blocks.

Question 15

Consider two market structures for a good with a downward-sloping demand curve and an upward-sloping marginal cost curve: a perfectly competitive market and a monopoly that can practice perfect price discrimination. From the perspective of allocative efficiency:

  1. both markets are inefficient, but the monopoly is less efficient than the competitive market.
  2. the competitive market is efficient, but the monopoly is inefficient because it is a single seller.
  3. both markets are efficient, producing the quantity where marginal benefit equals marginal cost. (correct answer)
  4. the monopoly is efficient, but the competitive market is inefficient due to excessive competition.
Explanation: Allocative efficiency is achieved when the market produces the quantity of output where the marginal benefit to society (represented by the demand curve) equals the marginal cost of production. A perfectly competitive market achieves this because firms produce where P=MC. A perfectly price-discriminating monopolist also achieves this, as it is profitable to continue selling units as long as the price someone is willing to pay is greater than or equal to the marginal cost. Therefore, both produce the same, allocatively efficient quantity. The difference is in distribution: producer surplus is maximized under the monopoly, while consumer surplus exists in competition.

Question 16

A publisher sells an academic textbook for $150 in Northland and $70 in Southland, reflecting differences in willingness to pay. This strategy becomes unprofitable when a new online platform allows students to easily and cheaply buy the book from Southland and have it shipped to Northland. This outcome is an example of the failure of which necessary condition for price discrimination?

  1. The firm must have sufficient market power.
  2. The firm must be able to prevent arbitrage. (correct answer)
  3. The firm must face different demand elasticities in each market.
  4. The costs of serving each market must be different.
Explanation: Price discrimination requires three conditions: market power, ability to segment customers, and prevention of resale (arbitrage). The scenario describes a situation where customers in the high-price market (Northland) are able to buy the product from the low-price market (Southland). This is arbitrage. The ease of this arbitrage undermines the firm's ability to maintain different prices, causing the strategy to fail.

Question 17

A golf club has a single member whose demand for rounds of golf is given by P=100−2QP = 100 - 2Q, where Q is the number of rounds per month. The marginal cost to the club of a round of golf is $20. To extract the entire consumer surplus from this member using a two-part tariff, what is the optimal monthly membership fee and per-round price?

  1. Per-round price = $0, Membership fee = $2500
  2. Per-round price = $60, Membership fee = $400
  3. Per-round price = $20, Membership fee = $800
  4. Per-round price = $20, Membership fee = $1600 (correct answer)
Explanation: When a monopolist uses a two-part tariff to extract all consumer surplus, they set the per-unit price equal to marginal cost and capture the entire consumer surplus through the fixed fee. This maximizes total surplus while transferring all benefits to the firm. First, find the optimal quantity by setting price equal to marginal cost: P=MC=20P = MC = 20. Using the demand equation P=100−2QP = 100 - 2Q, we get 20=100−2Q20 = 100 - 2Q, so Q=40Q = 40 rounds per month. Next, calculate the consumer surplus that will become the membership fee. Consumer surplus is the triangle above the price line and below the demand curve: CS=12×base×height=12×40×(100−20)=12×40×80=1600CS = \frac{1}{2} \times base \times height = \frac{1}{2} \times 40 \times (100-20) = \frac{1}{2} \times 40 \times 80 = 1600. Therefore, the optimal tariff is a per-round price of $20 and a monthly membership fee of $1600. Answer A sets the per-round price at $0, which would lead to overconsumption (80 rounds) and doesn't maximize efficiency. Answer B uses a per-round price of $60, which is above marginal cost and creates deadweight loss while undercapturing consumer surplus. Answer C calculates the consumer surplus incorrectly—it uses half the actual triangle area, likely from a calculation error with the height or base. Remember: In two-part tariff problems, always set the per-unit price equal to marginal cost first, then calculate the consumer surplus triangle to determine the optimal fixed fee. This ensures you're extracting maximum value efficiently.

Question 18

An electric company charges residential customers 12 cents per kilowatt-hour (kWh) for the first 500 kWh used per month, 10 cents per kWh for the next 500 kWh, and 8 cents per kWh for all usage above 1000 kWh. This pricing strategy is best described as:

  1. third-degree price discrimination, because it separates heavy users from light users.
  2. second-degree price discrimination, because the price per unit depends on the quantity consumed. (correct answer)
  3. perfect price discrimination, because it captures the maximum possible surplus from electricity usage.
  4. peak-load pricing, because it encourages consumption during off-peak periods.
Explanation: This is a classic example of second-degree price discrimination, also known as block pricing. The price per unit of the good is not constant but depends on the quantity purchased. Consumers are not separated into groups based on their identity (like age or student status) but self-select into pricing tiers based on their level of consumption. Peak-load pricing would involve different prices at different times of day or seasons.

Question 19

A monopolist can perfectly segment its market into two groups. After extensive market research, it finds that the price elasticity of demand is exactly -2.5 for both groups at any potential price. The firm has a constant positive marginal cost. Which pricing strategy will maximize the firm's profit?

  1. Charge a higher price to the group with the higher average income.
  2. Charge different prices to each group based on which market is larger.
  3. Charge the same price to both groups, equivalent to the single-price monopoly price. (correct answer)
  4. Charge one group a price below marginal cost and the other group a very high price.
Explanation: The optimal price in third-degree price discrimination is determined by the formula P=MC/(1+1/E)P = MC / (1 + 1/E). If the marginal cost (MC) is the same for both markets and the price elasticity of demand (E) is also the same for both groups, this formula will yield the exact same profit-maximizing price for each group. Therefore, despite having the ability to segment the market, the firm has no incentive to charge different prices and will behave as a single-price monopolist.

Question 20

A movie theater serves two distinct groups of customers: adults and seniors. The demand for tickets is given by: Adults: QA=100−PAQ_A = 100 - P_A Seniors: QS=80−2PSQ_S = 80 - 2P_S The theater's marginal cost for each customer is constant at $10. To maximize profit, what prices should the theater charge adults (PAP_A) and seniors (PSP_S)?

  1. P_A = \55,, P_S = $25$ (correct answer)
  2. P_A = \30,, P_S = $20$
  3. P_A = \45,, P_S = $45$
  4. P_A = \25,, P_S = $55$
Explanation: To find the profit-maximizing prices, we must set the marginal revenue (MR) for each group equal to the marginal cost (MC) of $10. First, find the inverse demand and MR curves. Adults: PA=100−QAP_A = 100 - Q_A   ⟹  \implies MRA=100−2QAMR_A = 100 - 2Q_A. Set MRA=MCMR_A = MC: 100−2QA=10  ⟹  2QA=90  ⟹  QA=45100 - 2Q_A = 10 \implies 2Q_A = 90 \implies Q_A = 45. The price is P_A = 100 - 45 = \55.Seniors:. Seniors: P_S = 40 - 0.5Q_S \implies MR_S = 40 - Q_S.Set. Set MR_S = MC:: 40 - Q_S = 10 \implies Q_S = 30.Thepriceis. The price is P_S = 40 - 0.5(30) = $25$.