A monopolist has variable costs of VC = 2q2 and faces a demand curve of P = 30 – q, where P is price and q the quantity sold. (Consider that this demand curve is marginal benefit curve for an individual consumer.) The monopolist engages in first degree price discrimination using a two-part tariff, what is the fixed fee (F) and per-unit fee charged (p)?
(a) F = 16, p = 8
(b) F = 32, p = 16
(c) F = 18, p = 24
(d) F = 8, p = 4
(e) None of the above
From the variable cost function we find MC = 4q
Demand is P = 30 - q.
Under two part tariff, per unit charge is P = MC so we have
30 - q = 4q or q = 30/5 = 6
Hence per unit charge is 4*6 = $24
Fixed fee = CS at this price and quantity = 0.5*(max price - current price)*qty
= 0.5*(30 - 24)*6 = $18
Hence, per unit charge P is $24 and fixed fee is $18.
Select (c) F = 18, p = 24
A monopolist has variable costs of VC = 2q2 and faces a demand curve of P...