Question

Suppose you are a producer that sells products to two groups of buyers. These groups of buyers have no contact with one another. Group 1 has a relatively elastic demand curve and group 2 has a relatively inelastic demand curve. If your goal is to maximize total revenue you should

A. charge both groups the same price
B. charge group 1 a lower price than group 2
C. charge group 2 a lower price than group 1
D. increase the price to both groups

Answer 1

B. charge group 1 a lower price than group 2

Step-by-step explanation:

Price discrimination is when a producer charges different prices for the same good to different groups of consumers.

Price discrimination is carried out by producers to maximise total revenue.

Consumers are usually distributed into groups based on their elasticities of demand.

Elasticity of demand measures the degree of responsiveness of quantity demanded to changes in price.

Demand is elastic if a small change in price has a greater effect on the quantity demanded.

Demand is inelastic if a change in price has little or no effect on quantity demanded.

If price is increased and demand is elastic, the quantity demanded would reduce and total revenue of the seller would fall.

If price is increased and demand is inelastic, there would be no change in quantity demanded and total revenue of the seller would increase.

Thus, in price discrimination, the seller should charge the higher price to the group with the relatively inelastic demand.

I hope my answer helps you