Assume a natural monopoly with total cost s C = 500 + 20Q. Market demand is Q = 100 – P.Now consider two-part pricing.
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Assume a natural monopoly with total cost s C = 500 + 20Q. Market demand is Q = 100 – P.Now consider two-part pricing. Each consumer must pay a fixed fee regardless of consumption level plus a price per unit. There are six “rich” consumers with each having inverse demands : p = 100 – 6.3q; also there are four “poor” consumers each with demands: p = 100 – 80q.
<a.> What is the largest fixed fee that a poor consumer would pay for the right to buy at marginal cost?
<b.> Because the poor consumers would not be willing to pay the uniform fixed fee of $50 necessary for the monopolist to break even, the rich consumers would have to pay a fixed fee of $83.33. What is the deadweight loss in this case?
<c.> Third-degree price discrimination could be a solution. That is, if it is legal and if resale is not feasible and if consumers could be identified by the monopolist as being rich or poor, the monopolist could charge different fixed fees to the two consumer types. If the price per unit is still equal to marginal cost, what are two fixed fees that are feasible? In this case, what is the deadweight loss?
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