If a firm engages in perfect price discrimination, it charges:

• A. different prices to different groups based on observable characteristics
• B. each customer the maximum price they are willing to pay for each unit
• C. a lower price for the first unit and higher prices for subsequent units
• D. all customers the same single price for all units

Answer: (B)

Verified step by step guidance

1. Understand the concept of perfect price discrimination: it occurs when a firm charges each consumer the maximum price they are willing to pay for each unit of the good, capturing all consumer surplus.
2. Recognize that under perfect price discrimination, the firm does not charge a single price to all customers or different prices only based on observable groups; instead, it tailors the price individually for each unit and each customer.
3. Recall that charging a lower price for the first unit and higher prices for subsequent units describes a form of nonlinear pricing or second-degree price discrimination, not perfect price discrimination.
4. Note that charging different prices to different groups based on observable characteristics is an example of third-degree price discrimination, which differs from perfect price discrimination.
5. Conclude that the defining feature of perfect price discrimination is charging each customer the maximum price they are willing to pay for each unit, thereby eliminating consumer surplus and maximizing the firm's profit.