A recent study has concluded that working adults have a price elasticity of demand of 1.72 for train services, while pensioners have a price elasticity of demand of 3.74. If price discrimination is possible, then the company providing the train service will:
A) charge a lower price to working adults than to pensioners.
B) charge a lower price to pensioners than to working adults.
C) earn higher profits by charging everyone the same price.
D) lower prices for all customers because demand is elastic for both groups.

Question

Quizplus · Accepted Answer

Price discrimination involves charging different prices to different groups of consumers based on their willingness to pay. Here, we see that pensioners have a higher price elasticity of demand, indicating that they are more sensitive to changes in price compared to working adults. Thus, the company can charge a higher price to working adults while charging a lower price to pensioners, maximizing profits. This makes option B the best choice. Options A and C are incorrect because charging a lower or the same price to both groups does not take advantage of the difference in price elasticity. Option D is also incorrect as it suggests lowering prices for all customers, which may not maximize profits.

A Recent Study Has Concluded That Working Adults Have a Price