Question

The goal of price discrimination is to increase _____ by charging more to those who have _____ demand.

1. producer surplus; less elastic

2. consumer surplus; less elastic

3. consumer surplus; more elastic

4. producer surplus; more elastic

Please explain why, thank you in advance.

Answer 1

Answer - producer surplus; less elastic

Reason -

The goal of price discrimination is to increase producer surplus by charging more to those who have less elastic demand.

Price discrimination means charging different price to different consumers for identical profits. Here basically the producer is shifting some of the consumer surplus to producer surplus by charging higher prices from whose who have a higher utility and inelastic demand.

Like airlines companies charges different prices from normal customers and business class customers by providing identical services to them with regards to few other facilities and obtains a higher producer surplus in the same market.

The customers paying higher can only be charged a higher price when they have a less elastic demand, because in an elastic demand market the consumer will bargain and gain consumer surplus. So price differentiation is dependent upon the elasticity of demand.