Question

ABC Corp., a producer of XYZ, has stores both in the bustling commercial city of Nashton, as well as the nearby small town of Oakville. In an attempt to exploit the differences in the income levels between the two cities, ABC Corp decides to charge customers in Nashton a much higher price than those in Oakville. The company expects to earn more profits as a result of this price discrimination. However, sales reports revealed that their profits post discrimination have not increased as expected. Suppose that ABC's profits actually fell following the price discrimination. Which of the following, if true, would explain this result?
A. News reports of the price discrimination resulted in negative publicity for ABC Corp.
B. A major substitute good for XYZ stopped competing in the market.
C. Customers in Nashton were more likely than customers in Oakville to view XYZ as a luxury good.
D. The advertisements for XYZ in Oakville focused on health benefits, whereas the advertisements for XYZ in Nashton focused on the endorsement of celebrities.
E. Confusing packaging and labeling made it difficult to compare prices of XYZ in different places.

Answer 1

Answer:

C. Customers in Nashton were more likely than customers in Oakville to view XYZ as a luxury good.

Explanation:

If Nashton customers viewed the product as luxury good, their demand was more elastic. So by charging higher price in the more elastic segment, company had a decrease in total revenue.