B.**Consider again the set-up in part B of exercise 23.3. Suppose that a fraction g of the population is of type 1, with the remainder 11 2 g2 of type 2. In analyzing second degree price discrimination, let the total payment P n

made by type n be in the form of a two-part tariff P n 5 F n 1 p n

x n

.

a. Begin by assuming that the monopolist will set p 2 5 p and p 1 5 MC1 5 8. Express the level of insurance x 2

for type 2 consumers as a function of p. Then express consumer surplus for type 2 consumers as a function of p and denote it CS2 1p2.

b. Why would a second degree price-discriminating monopolist set F 2

equal to CS2 1p2 once she has figured out what p should be? What would the payment P 2

1p2 made by type 2 consumers to the monopolist be under p and F 2

1p2 ?