A Level Economics AQA Practice Exam

What does 3rd degree price discrimination involve?

1. Charging the same price to all consumers

2. Charging different prices to different groups based on elasticity

3. Charging one price for bulk purchases

4. Charging lower prices for all consumers

The correct answer is: Charging different prices to different groups based on elasticity

Third degree price discrimination involves charging different prices to different groups of consumers based on their respective price elasticities of demand. This economic strategy allows businesses to maximize profits by recognizing that distinct consumer groups may have varying sensitivities to price changes. For instance, students or senior citizens might be more price-sensitive and thus are charged a lower price, while business travelers or premium customers, who exhibit less price sensitivity, may be charged higher rates. By tailoring prices according to the characteristics of these groups, firms can capture more consumer surplus, effectively improving overall profitability. This approach is commonly seen in various sectors, such as airlines, cinemas, and software providers, where different pricing strategies are employed based on customer segmentation. The other options presented do not capture the essence of third degree price discrimination; for instance, charging the same price to all consumers contradicts the fundamental principle of price discrimination aimed at maximizing revenue through differentiated pricing.