Question

Suppose that the annual market demand for Bleebs is given by Q=3750-75P The average and marginal costs of producing Bleebs are $10/bleeb.

A) If the firm acts as a single-price monopoly, what are the monopoly quantity, price, and profit?

B) Suppose that there are three hundred identical customers in this market. What is the best two-part tariff that the monopolist can use? If the monopolist implements the two-part tariff, how much profit will it make?

C) It turns out that the monopolist was wrong about the makeup of the customers. At any price, 1/3 of the customers buy twice as much as the other two thirds. If the monopolist implements the two-part tariff in part b, how much profit will it make?

Answer 1

Part a) monopolist would produce at point where marginal revenue equals marginal cost

Part b)

There are 300 identical consumers in the market

monopolist by using two-part tariff ideally wants to capture the entire consumer surplus which is maximum when price equals marginal cost

3000 units would be consumed by each consumer and at a per unit price of $ 10

total units consumed will be 3000*300=900,000

fixed fee charged from each consumer is equal to consumer surplus for an individual consumer when price equals marginal cost

Part c)

At any price, 1/3 of the customers buy twice as much as the other two thirds.

This means at per unit price of $10, 200 customers consume 3000 units each and 100 customers consume 6000 units each