A price-discriminating monopolist can increase profits by:

• A. producing at the point where marginal cost equals average cost
• B. charging different prices to different groups of consumers based on their willingness to pay
• C. setting a single price for all consumers regardless of demand
• D. offering the product only to consumers with the highest incomes

Answer: (B)

Verified step by step guidance

1. Understand the concept of price discrimination: it occurs when a monopolist charges different prices to different consumers or groups based on their willingness to pay, rather than charging a single uniform price.
2. Recall that a monopolist maximizes profit by producing where marginal revenue (MR) equals marginal cost (MC), not where marginal cost equals average cost (AC). So producing where MC = AC is not profit-maximizing.
3. Recognize that charging a single price for all consumers ignores differences in demand elasticity and willingness to pay, which limits the monopolist's ability to extract maximum consumer surplus.
4. Note that offering the product only to consumers with the highest incomes restricts the market unnecessarily and may reduce total profits compared to segmenting the market and charging different prices.
5. Conclude that the monopolist increases profits by charging different prices to different groups based on their willingness to pay, effectively capturing more consumer surplus and increasing total revenue.