Question
A firm's total cost of producing Q units of output is C(Q)= 500+20Q. There are ten potential consumers of the firm's product: six rich consumers,
A firm's total cost of producing Q units of output is C(Q)= 500+20Q. There are ten potential consumers of the firm's product: six "rich" consumers, each with inverse demand P(Q)= 100-5Q; and four "poor" consumers, each with inverse demand P(Q)= 100-80Q.
(a) What is the largest fixed fee (Fpoor) that a poor 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 rich consumer would pay?
(b) Suppose a 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?
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