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27 May, 09:46

Suppose all individuals are identical, and their monthly demand for Internet access from a certain

leading provider can be represented as p = 5 - (1/2) q where p is price in $ per hour and q is hours per

month. The firm faces a constant marginal cost of $1. If the firm will charge a monthly access fee plus a per

hour rate, according to two-part tariff pricing, the total monthly access fee that the firm will collect from all

the buyers taken together equals?

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Answers (1)
  1. 27 May, 11:00
    0
    Solution:

    P = 5 - (q/2)

    P = 5 - 0.5q

    MC = 1

    In two-part pricing, the monopolist equates the hourly rate (p) with MC:

    5 - 0.5q = 1

    0.5q = 4

    q = 8

    p = MC = $1

    Total monthly access fee equals entire consumer surplus (CS).

    From demand function, when q = 0, p = $5 (Reservation price)

    Monthly Access fee = CS = Area between demand curve and market price = (1/2) x $ (5 - 1) x 8 = 4 $4 = $16
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