Consider a market with two groups of customers. The individual inverse demand for customers in group one equals: P1 = 20 - q1. The individual inverse demand for customers in group 2 equals: P2 = 20 - 2q2. The marginal cost of production is constant and equal to $2/unit. Assume an equal number of customers in each group. For purposes of the exercise, assume that there is one customer in each group. Assume that the market is served by a single firm with no entry.

1. Consider the case where the monopolist decides to sell its product to both groups of customers using a single two-part tariff (i.e., the per-unit charge and fixed fee is the same for both groups).

d. Discuss the trade-offs a firm faces when setting the profit-maximizing two-part tariff in this setting. Include an illustration. Under what conditions does an increase in the per-unit price increase total profit? Under what conditions does an increase in the per-unit price reduce total profit?