A firm with market power engages in price discrimination in order to:

• A. reduce its costs by producing at a lower average cost
• B. ensure that all consumers pay the same price for the product
• C. increase its profits by charging different prices to different consumers based on their willingness to pay
• D. eliminate all competition in the market

Answer: (C)

Verified step by step guidance

1. Understand the concept of price discrimination: it occurs when a firm with market power charges different prices to different consumers for the same product, based on their willingness to pay.
2. Recognize that price discrimination is not primarily about reducing costs or producing at a lower average cost; it focuses on revenue and profit maximization.
3. Note that price discrimination does not involve charging all consumers the same price; in fact, it involves charging different prices to different groups.
4. Consider the firm's objective: by charging different prices, the firm can capture more consumer surplus and convert it into additional profit.
5. Conclude that the main purpose of price discrimination is to increase the firm's profits by exploiting differences in consumers' willingness to pay, rather than reducing costs or eliminating competition.