Calculate the level of consumer surplus retained

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Reference no: EM132102084

1. Suppose your firm is told that the demand curve it faces from its market is given by

Q = 8 − 0.5p

Its cost per unit is constant and equal to $1.5. Assume that it produces integer number of units (i.e. Q = 0,1,2, 3…and so on).

(a) Construct a table showing the Price, Demand, Marginal Revenue and Marginal Cost schedule for the firm.

(b) Using Marginal Analysis, obtain the profit-maximizing linear price for the firm and calculate its profit level.

(d) Now, imagine you are planning on introducing a two-part tariff that includes an upfront fixed payment F and a per-unit price p. Suppose you choose p to be equal to the price you obtained in (b) above. How would you describe the consumer surplus retained by consumers from purchasing under this two-part tariff?

(e) Suppose you know that consumers would buy the product so long as their consumer surplus after purchasing the product and paying the two-part tariff is at least zero. What should be the optimal value of the fixed payment F in the two-part tariff?

(f) Calculate the profit level from this two-part tariff. Explain the difference in profit level earned from the two-part tariff compared to that earned from the linear price in (b).

(g) Show that the firm’s profit can be even higher if the per-unit price is chosen to be lower, say $2.

Reference no: EM132102084

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