Question

Firms price discriminate

a) to increase profits.
b) to take advantage of customers.
c) to reduce the quantity sold so as to reduce production costs.
d) to increase total economic surplus.

Answer 1

Firms price discriminate to increase profits by capturing consumer surplus, not necessarily to take advantage of customers or reduce production. This is a strategic move in the short term, but long-term economic profits tend to become zero in monopolistically competitive markets.

Step-by-step explanation:

Firms engage in price discrimination primarily to increase profits. The concept involves offering the same product or service at different prices to different consumers, based on their willingness to pay. This business strategy is driven by the desire to capture consumer surplus and convert it into additional revenue for the firm. When executing price discrimination, firms are not necessarily looking to take advantage of customers or to reduce the quantity sold to lower production costs; rather, they aim to maximize the area between the price and the marginal cost curve, thereby increasing economic profit, especially in the short term. Over time, however, the entrance of other firms in response to economic profits can decrease demand for the original firm's product, leading to a reduction in both price and output. In the long run in monopolistically competitive markets, firms will typically earn zero economic profits. Thus, while price discrimination may temporarily increase a firm's profits, market dynamics tend to erode these gains over time.