In the context of consumer surplus and willingness to pay, what does it mean when a firm engages in market differentiation?

• A. The firm sets a single price for all consumers regardless of their willingness to pay.
• B. The firm reduces the variety of products offered to minimize production costs.
• C. The firm offers products with distinct features or qualities to appeal to different consumer preferences, potentially increasing consumer surplus.
• D. The firm only sells its products in one geographic market.

Answer: (C)

Verified step by step guidance

1. Understand the concept of consumer surplus, which is the difference between what a consumer is willing to pay for a good and what they actually pay.
2. Recognize that willingness to pay varies among consumers due to different preferences and valuations of product features.
3. Define market differentiation as a strategy where a firm offers products with distinct features or qualities to cater to these varying consumer preferences.
4. Analyze how differentiation can increase consumer surplus by allowing consumers to choose products that better match their preferences, potentially increasing their willingness to pay and satisfaction.
5. Contrast this with other options, such as setting a single price for all consumers or reducing product variety, which do not leverage differences in consumer preferences to increase consumer surplus.