When a firm with market power practices third-degree price discrimination,it charges the highest price to the group that
A) has the most elastic demand.
B) has the most inelastic demand.
C) purchases the highest quantity.
D) purchases the lowest quantity.

Question

Quizplus · Accepted Answer

When a firm practices third-degree price discrimination, it charges different prices to different groups of customers based on their price elasticity of demand. The group with the most inelastic demand (i.e. the group that is not price sensitive and will continue to purchase even when the price is increased) will be charged the highest price. This is because they are the least likely to switch to a substitute product or reduce their quantity demanded in response to the higher price. Therefore, the firm can extract the highest amount of consumer surplus from this group.

When a Firm with Market Power Practices Third-Degree Price Discrimination,it