Which of the following best describes the process of market segmentation in the context of consumer surplus and willingness to pay?

• A. Increasing consumer surplus by lowering prices for all consumers.
• B. Setting a single price for all consumers regardless of their willingness to pay.
• C. Dividing a market into groups of consumers based on their willingness to pay, allowing firms to capture more consumer surplus through price discrimination.
• D. Eliminating consumer surplus by charging each consumer the same price as their willingness to pay.

Answer: (C)

Verified step by step guidance

1. Understand the concept of consumer surplus, which is the difference between what consumers are willing to pay for a good or service and what they actually pay.
2. Recognize that market segmentation involves dividing consumers into distinct groups based on characteristics such as their willingness to pay.
3. Analyze how firms use market segmentation to implement price discrimination, charging different prices to different groups to capture more consumer surplus.
4. Compare this approach to setting a single price for all consumers, which does not maximize the firm's ability to capture consumer surplus.
5. Conclude that market segmentation allows firms to increase profits by tailoring prices to different consumer groups, rather than simply lowering prices for everyone or charging everyone the same price.