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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

An insurer introduces a perfectly price-discriminating scheme, charging each customer exactly their maximum willingness to pay. Compared with a single uniform price, which statement is correct for customers who buy?

Consumer surplus is eliminated and transferred to the insurer. Each buyer pays exactly their maximum willingness to pay, leaving no gap between value and price, while output expands to the efficient level so deadweight loss disappears.

  1. AConsumer surplus is eliminated and the insurer captures it as producer surplusCorrect
  2. BConsumer surplus doubles while producer surplus falls
  3. CConsumer surplus is unchanged because demand is unchanged
  4. DConsumer surplus rises because average prices fall for all buyers
  5. Deadweight loss rises because output falls

Explanation

Under perfect (first-degree) discrimination each buyer pays their reservation price, so no buyer retains surplus; it is transferred to the seller. Output expands to where price equals marginal cost, so deadweight loss is removed, not increased.

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