Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 15, Problem 2.3P
To determine
Why vertical differentiation brings price differences along with it when the horizontal differentiation does not do so.
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Suppose there are only two gas stations in the remote town of Nome, Alaska and they are competitors. If one of them goes out of business, what
will happen to the demand curve for the remaining gas station? In addition, what do you think will happen to prices?
The graph below shows a demand for gasoline, with the price of gas and the sales of gas shown below on the graph.
P
P1
14
22
P2
32
D2
D1
Q1 Q2
Q3
The demand curve will pivot from D1 to D2 and prices will rise as demand becomes more inelastic.
The demand will shift to the left, indicating lower demand when there are fewer stations.
The demand curve will not change since everyone needs gas no matter what the price.
The demand curve will pivot from D2 to D1 and prices will rise as demand becomes more inelastic.
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One of the observations that has been made about the pricing of products produced in an industry where production is highly concentrated is that the costs of production can change up or down and yet prices do not change much. The Sweezy model was developed to explain this observation. Present a Sweezy model, show a cost change, and show that the optimal choice for the firm is to leave the product price unchanged. Provide words to explain the basic reason why the price does not move up or down as costs change.
Caroline and Frances are debating the pricing strategy of several airlines. Caroline argues, “When airlines restrict discounted tickets to people who book well in advance and stay over on a Saturday, it is not price discrimination, because the restrictions have nothing to do with individual buyers' willingness to pay.” However, Frances says, “The airlines' stay-over restrictions are a form of price discrimination, because they roughly split the market into two separate groups that are willing to pay two different amounts.”
Economists generally agree with who?
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Principles of Economics (12th Edition)
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