Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A firm has total cost of C(Q) = 500+ 20Q when producing quantity Q. There are six high-income consumers, each with inverse demand P(Q) =

A firm has total cost of C(Q) = 500+ 20Q when producing quantity Q. There are six high-income consumers, each with inverse demand P(Q) = 100 5Q and four low-income consumers, each with inverse demand P(Q) = 100 80Q.

(a) What is the socially efficient price to charge each consumer? How much must the firm be subsidized (assume the firm cannot use a two-part tariff)?

(b) Now assume the regulated monopolist is considering using a two-part tariff. What is the largest fixed fee (Fpoor) that a low-income consumer would pay for the right to purchase the product at a per-unit price equal to marginal cost? What is the corresponding largest fixed fee (Frich) that a high-income consumer would pay?

(c) Suppose the two-part tariff is implemented. The per-unit price is set equal to the firm's marginal cost, and the fixed fee is set equal to Fpoor. How much profit would the firm earn if it operated under this tariff?

(d) Now suppose that price discrimination is legal, consumers cannot resell the product after purchasing it, and the monopolist can distinguish between high- and low-income consumers. Further suppose that the monopolist sets a per-unit price equal to its marginal cost for all consumers. In addition, the monopolist charges each consumer a fixed fee equal to one-fourth of the maximum amount he or she is willing to pay for the right to purchase at marginal cost. How much profit will the monopolist earn under these discriminatory two-part tariffs? How much deadweight loss will arise?

If possible please answer with the mathematical work.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Energy, Trade And Finance In Asia A Political And Economic Analysis

Authors: Justin Dargin, Tai Wei Lim

1st Edition

1317322711, 9781317322719

More Books

Students also viewed these Economics questions