If the Japanese demand for computers is elastic and the Canadian demand for computers is inelastic, a profit-maximizing firm would charge a higher price to Canadian buyers than to Japanese buyers. True False
The correct answer and explanation is:
Answer: True
Explanation:
When a firm practices price discrimination, it charges different prices to different groups of consumers based on their price elasticity of demand.
- Price elasticity of demand measures how sensitive the quantity demanded is to a change in price.
- If demand is elastic, consumers are very responsive to price changes. A small increase in price leads to a large drop in quantity demanded.
- If demand is inelastic, consumers are less responsive to price changes. Even a large increase in price leads to a relatively small decrease in quantity demanded.
In this scenario:
- Japanese demand for computers is elastic: Japanese consumers are very sensitive to price changes. If prices increase, the quantity they buy will drop significantly.
- Canadian demand for computers is inelastic: Canadian consumers are less sensitive to price changes. They will continue buying almost the same quantity even if prices rise.
A profit-maximizing firm uses this information to maximize revenue:
- The firm will charge a lower price in Japan to maintain sales volume since Japanese consumers are sensitive to price increases.
- The firm will charge a higher price in Canada because Canadian consumers are less likely to reduce their purchases when prices rise.
This pricing strategy allows the firm to extract more consumer surplus (the difference between what consumers are willing to pay and what they actually pay) from the less price-sensitive group (Canada) and maintain sales volume in the more price-sensitive market (Japan).
Why does this increase profits?
- If the firm charged the same high price in Japan as in Canada, sales would drop sharply in Japan, reducing total revenue.
- If the firm charged the same low price in Canada as in Japan, it would lose potential profit because Canadian consumers would be willing to pay more.
By charging a higher price to Canadians (inelastic demand) and a lower price to Japanese (elastic demand), the firm maximizes its total profit across both markets.
Summary:
- Elastic demand → lower price to maximize quantity sold
- Inelastic demand → higher price to maximize revenue per unit sold
- Thus, the firm charges a higher price in Canada and a lower price in Japan.
Therefore, the statement is True.