Which of the following best explains how price discrimination can benefit both producers and consumers?

• A. It leads to a perfectly competitive market where prices are determined solely by supply and demand.
• B. It allows producers to increase profits by charging different prices to different groups, while some consumers pay lower prices than they would under uniform pricing.
• C. It forces all consumers to pay the highest possible price, maximizing producer surplus but reducing consumer welfare.
• D. It eliminates producer surplus entirely, resulting in lower prices for all consumers.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of price discrimination. Price discrimination occurs when a producer charges different prices to different consumers for the same good or service, based on their willingness to pay or other characteristics.
2. Step 2: Recognize the types of price discrimination: first-degree (perfect price discrimination), second-degree (based on quantity or versioning), and third-degree (based on consumer groups). Each type allows producers to capture more consumer surplus.
3. Step 3: Analyze how price discrimination affects producers. By charging different prices, producers can increase their total revenue and profits because they extract more consumer surplus than under a single uniform price.
4. Step 4: Analyze how price discrimination affects consumers. Some consumers may pay higher prices, but others—especially those with lower willingness or ability to pay—may benefit from lower prices than they would under uniform pricing, increasing overall consumption.
5. Step 5: Conclude that price discrimination can benefit both producers and consumers because it allows producers to increase profits while enabling some consumers to access goods at lower prices, which would not be possible under a single price system.