Pure Price-Gouging

EconEye Admin

3 years ago

Danaher Corp. holds a virtual monopoly on single-use test cartridges for TB infection. An independent analysis says the cost of a cartridge ranges from $3 to $4.50, but Danaher charges a price between $10 and $15, a markup of up to 400 percent. It’s pure price gouging.—cbc.ca

Answer the following questions to check your understanding of the story.

1) Is Danaher practicing price gouging?

a) To charge a price higher than cost is exploiting vulnerable, low-income people.

b) TB tests should be available for free.

c) Danaher is maximizing profit by setting marginal cost equal to marginal revenue and charging the highest price people are willing to pay.

d) Danaher is providing an efficient quantity of test cartridges and the cartridges are being allocated by market price.

Wrong! - Danaher is a monopoly. How does it determine the price to charge? Is price gouging occurring?

Good Job! - Price gouging is the practice of offering an essential item for sale at a price much higher than its normal price. Danaher is a monopoly. It determines the price to charge by setting marginal cost equal to marginal revenue and charging the highest price people are willing to pay. This pricing decision is not price gouging.

2) If the cost of a cartridge is $3 and the price of a cartridge is $15, what is Danaher’s markup?

Danaher’s markup is _____________.

a) $12 per cartridge, the difference between average total cost of $3 and price of $15

b) $12 per cartridge, the difference between marginal cost of $3 and marginal revenue of $15

c) $12 per cartridge, the difference between marginal cost of $3 and price of $15

d) $15 per cartridge, which is equal to the firm’s marginal benefit from a cartridge

Wrong! - What is markup?

Well Done! - A firm’s markup is the amount by which price exceeds marginal cost. Danaher’s markup is $12 per cartridge, the difference between marginal cost of $3 and price of $15.

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