A firm has two customers and creates a two-part tariff with a usage fee (P) that exceeds the marginal cost of production and leaves each customer with positive consumer surplus such that CS₂ CS₁ 0. If the firm sets the entry fee equal to CS₂, then the number of customers that actually buy the product is equal to: A) zero. B) one. C) two. D) We don't have enough information to answer this question.

Question

A firm has two customers and creates a two-part tariff with a usage fee (P) that exceeds the marginal cost of production and leaves each customer with positive consumer surplus such that CS₂ > CS₁ > 0. If the firm sets the entry fee equal to CS₂, then the number of customers that actually buy the product is equal to: A) zero. B) one. C) two. D) We don't have enough information to answer this question.

Quizplus · Accepted Answer

Since the entry fee is set equal to the highest level of consumer surplus, only the customer with the higher consumer surplus (i.e. CS₂) will choose to buy the product. The customer with the lower level of consumer surplus will not buy the product because the entry fee is higher than their consumer surplus, leaving the firm with one customer.

A Firm Has Two Customers and Creates a Two-Part Tariff