Question

-answer all of the questions.

- type answers on a computer. Do not print by hand!

You are the manager of a monopoly. A typical consumer's inverse demand function for your firm's product is P 250-40 Q, and your cost function is C (Q) 10 O. Determine the optimal two-part pricing strategy. a. b. How much additional profit do you earn using a two-part pricing strategy compared with charging this consumer a per unit profit maximizing price?

Answer 1

A) two part tariff policy,

Use   P = MC, & charge fixed fee as Consumer surplus

so at P = 10,

Q = (250-P)/40 = 240/40 = 6

so CS = .5*(250-10)*6 = 720. = Fixed fees

profit = (P-MC)*Q + fixed fees

= 720

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B) at monopoly eqm, MR = MC

as P = 250-40Q

So MR has twice the slope of demand curve,

MR: P = 250-80Q

at eqm , 250 - 80 Q = 10

so 240= 80Q

Q^{​​​​​​M} = 3

P^{​​​​​​M}= 250-40*3 = 130

π^{​​​​​​M} = (130-10)*3 = 360

extra profit = 720-360 =$ 360