Question

A firm carries out price discrimination when it charges

a. the same price to all of their consumers.
b. a higher price when their marginal cost is lower.
c. a lower price to consumers whose demand is more elastic.
d. a higher price to consumers whose demand is more elastic.

Answer 1

Price discrimination occurs when a firm charges a lower price to consumers whose demand is more elastic, as they are more sensitive to price changes. So the correct answer is option c.

Step-by-step explanation:

A firm engages in price discrimination when it charges different prices to different consumers based on their willingness to pay, often related to the elasticity of their demand. The correct answer to the student's question on what constitutes price discrimination is option c, which states that a firm carries out price discrimination when it charges 'a lower price to consumers whose demand is more elastic.

' This is because consumers with more elastic demand are more sensitive to price changes, and would buy significantly less or none of the product if the price were higher. On the contrary, a firm charges 'a higher price to consumers whose demand is less elastic' as these consumers are less sensitive to price changes and are more likely to continue purchasing the product even at higher prices.

A firm carries out price discrimination when it charges a lower price to consumers whose demand is more elastic. A monopolistic competitor faces a downward-sloping demand curve which makes the demand curve more elastic compared to a monopoly. When a monopolistic competitor raises its price, it will lose more customers than a monopoly that raised its prices.

Answer 2

A firm practices price discrimination by charging a lower price to consumers with more elastic demand. This aims to maximize revenue by taking advantage of the different price sensitivities among customers.

Step-by-step explanation:

Price discrimination occurs when a firm charges different prices to different consumers for reasons not associated with costs. In the context of monopolistic competition and demand elasticity, price discrimination typically involves charging a lower price to consumers with more elastic demand.

Given the choices presented, the correct answer is that a firm engages in price discrimination when it charges 'c. a lower price to consumers whose demand is more elastic.' This strategy allows firms to capture more consumer surplus by adjusting prices according to how consumers will respond to changes in price.

Monopolistic competitors have a downward-sloping demand curve, meaning that they can still retain some customers after raising prices. However, they will lose more customers than a monopoly but fewer than a perfectly competitive firm if they choose to increase prices. Consumers facing higher prices may switch to substitute products offered by other firms, hence why firms target those with elastic demand for lower prices.