Asked by Alexa Gonzalez on Jun 11, 2024
Verified
A firm setting a two-part tariff with only one customer should set the entry fee equal to:
A) marginal cost.
B) consumer surplus.
C) marginal revenue.
D) price.
Consumer Surplus
The difference between what consumers are willing to pay for a good or service and what they actually pay, representing the benefit to consumers.
Marginal Cost
The cost of producing one additional unit of a product or service.
Two-part Tariff
A pricing strategy that includes a fixed fee plus a variable charge based on usage or consumption of a product or service.
- Calculate optimal pricing and tariffs based on consumer demand and marginal cost.
- Analyze the role of consumer surplus in setting entry fees for two-part tariffs.
Verified Answer
JA
Jamira AllenJun 16, 2024
Final Answer :
B
Explanation :
When setting a two-part tariff with only one customer, the firm should set the entry fee equal to the customer's willingness to pay for the product, which is represented by their consumer surplus. This ensures that the customer is paying the maximum amount they are willing to pay for the product without reducing their demand for the product. The usage fee should be set equal to the marginal cost of producing the product to maximize profit. Therefore, the correct answer is B, set the entry fee equal to consumer surplus.
Learning Objectives
- Calculate optimal pricing and tariffs based on consumer demand and marginal cost.
- Analyze the role of consumer surplus in setting entry fees for two-part tariffs.