When a firm engages in perfect price discrimination, what happens to consumer surplus?

• A. Consumer surplus decreases but does not disappear entirely.
• B. Consumer surplus remains unchanged because prices do not change.
• C. Consumer surplus is eliminated because the firm captures all surplus as profit.
• D. Consumer surplus increases because consumers pay lower prices.

Answer: (C)

Verified step by step guidance

1. Understand the concept of consumer surplus: it is the difference between what consumers are willing to pay for a good and what they actually pay.
2. Recall that perfect price discrimination means the firm charges each consumer their maximum willingness to pay, capturing all the surplus.
3. Analyze the effect of perfect price discrimination on consumer surplus: since the firm charges each consumer exactly their willingness to pay, consumers do not gain any surplus.
4. Recognize that the entire area that was previously consumer surplus is now converted into producer surplus (profit) for the firm.
5. Conclude that under perfect price discrimination, consumer surplus is completely eliminated because the firm captures all the surplus.