Question

Perfect price discrimination occurs when a firm is able to:

a) determine the difference between a seller's reservation price and the buyer's reserve price.
b) charge each buyer the highest price she or he is willing to pay for the good.
c) determine the prices that should be charged to generate the largest amount of consumer surplus.
d) prevent frequent reselling of its product.
e) identify at least two different groups of buyers.

Answer 1

Perfect price discrimination is when a monopolist charges each buyer the highest price that buyer is willing to pay, capturing all consumer surplus as profit, and thus results in the monopolist earning maximum profits.

Step-by-step explanation:

Perfect price discrimination occurs when a firm is able to charge each buyer the highest price they are willing to pay for a given quantity of goods or services. In this scenario, the monopolist adjusts the price for each consumer to their individual maximum willingness to pay, capturing what would otherwise be consumer surplus as additional profit. Therefore, the correct answer is b) charge each buyer the highest price she or he is willing to pay for the good.

In a perfectly competitive market, firms must accept the market-determined price and can sell any number of units at this price, facing a perfectly elastic demand curve. However, with perfect price discrimination, a monopolist can effectively turn what would be a single market price into individualized prices. This results in the monopolist earning the maximum possible profits.