Monopolists use the hurdle method of price discrimination in order to: A. separate consumers on the basis of their reservation prices. B. lower their marginal cost. C. increase the demand for their good. D. produce the socially optimal level of output.
The Correct Answer and Explanation is:
Correct Answer: A. separate consumers on the basis of their reservation prices.
Explanation:
The hurdle method of price discrimination is a pricing strategy used by monopolists to maximize profits by charging different prices to different consumers based on their willingness to pay, also known as reservation prices. In this method, the monopolist creates a “hurdle” that consumers must cross in order to receive a lower price. This hurdle can be in the form of extra effort, time, or inconvenience.
Consumers who are more price-sensitive and have lower reservation prices are more willing to jump over these hurdles to obtain a discount. On the other hand, consumers with higher reservation prices, who value convenience or time more than saving money, will typically choose to pay the higher price. This strategy allows the monopolist to segment the market without directly asking consumers about their willingness to pay.
Examples of hurdles include clipping coupons, waiting for sales, filling out rebates, or buying during off-peak times. These hurdles are designed to attract only the more price-sensitive consumers, allowing the monopolist to extract more consumer surplus from those willing to pay full price.
The main purpose of the hurdle method is to separate consumers based on their reservation prices, not to reduce costs or increase total demand. While it may result in a higher quantity sold overall, the primary goal is to capture more of the market’s willingness to pay by offering the same product at different effective prices. Therefore, option A is the correct answer.
Options B, C, and D are incorrect because they do not reflect the primary objective of price discrimination. Lowering marginal cost, increasing demand, or reaching the socially optimal output are not the direct goals of the hurdle method.
