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

If the entry fee is set equal to CS2, only the customer with consumer surplus CS2 will purchase the product, as the entry fee would eliminate the entire surplus for the customer with CS1, leaving them with no incentive to buy.

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