Which of the following statements about price discrimination is correct?

• A. Price discrimination requires that resale of the product between consumers is easy and unrestricted.
• B. Price discrimination is only possible in perfectly competitive markets.
• C. Price discrimination always leads to a decrease in producer surplus.
• D. Price discrimination occurs when a seller charges different prices to different consumers for the same good, based on their willingness to pay.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of price discrimination. Price discrimination occurs when a seller charges different prices to different consumers for the same good or service, based on differences in their willingness to pay or other characteristics.
2. Step 2: Analyze the conditions required for price discrimination. One key condition is that resale between consumers must be difficult or restricted; otherwise, consumers who buy at a lower price could resell to those facing higher prices, undermining the price discrimination strategy.
3. Step 3: Evaluate the market structure where price discrimination can occur. Price discrimination is generally not possible in perfectly competitive markets because firms are price takers and cannot influence prices; it is more common in markets with some degree of market power, such as monopolies or oligopolies.
4. Step 4: Consider the effects of price discrimination on producer surplus. Price discrimination typically increases producer surplus because it allows the seller to capture more consumer surplus by charging higher prices to consumers with a higher willingness to pay.
5. Step 5: Summarize the correct statement. The correct understanding is that price discrimination involves charging different prices to different consumers based on their willingness to pay, and it requires market power and restrictions on resale.