A firm has two customers with non-identical demands and a constant marginal cost of production. At any positive price, the consumer surplus values for the two customers are related as CS₂ ≥ CS₁ . What can we say about the optimal two-part tariff for the firm? A) The firm sets the price equal to MC and the optimal tariff is equal to CS₂. B) The firm sets the price equal to MC and the optimal tariff is equal to CS₁. C) The firm sets the price equal to MC and the optimal tariff is equal to zero. D) The optimal price is greater than MC and the optimal tariff is equal to CS₁.

Question

Quizplus · Accepted Answer

Since the two customers have non-identical demands, a two-part tariff could be optimal for the firm. The firm would set a per-unit price greater than marginal cost in order to capture some of the consumer surplus, but would also charge a fixed fee. Given the inequality relating the two customers' consumer surplus values, it makes sense to set the per-unit price equal to marginal cost, which ensures that the high-value customer (customer 1) pays more. The fixed fee would be set to CS₁, the lower of the two customer surplus values. This ensures that both customers are willing to participate in the market, since their surplus from participating (after paying the fixed fee) is still positive. Therefore, the optimal two-part tariff for the firm is a per-unit price equal to marginal cost and a fixed fee equal to CS₁.

A Firm Has Two Customers with Non-Identical Demands and a Constant