In two-part pricing with identical consumers, a firm
A)charges a lump-sum fee equal to the consumer surplus.
B)sets unit price below marginal cost.
C)should go with single-price monopoly pricing to maximize profits.
D)Both A and B.

Question

Quizplus · Accepted Answer

In two-part pricing, a firm charges a lump-sum fee (fixed fee) along with a per unit price. The fixed fee is usually set equal to the consumer surplus, which is the difference between the maximum willingness to pay and the price paid. By setting the fixed fee equal to the consumer surplus, the firm can capture the entire surplus as profit, while also charging a per unit price that is equal to the marginal cost. This results in the firm maximizing its profits and also ensures that consumers are willing to pay the per unit price since it is equal to their willingness to pay. Setting the unit price below marginal cost would result in the firm incurring losses, while single-price monopoly pricing would result in the firm not capturing the entire consumer surplus and leaving potential profit on the table. Therefore, the best choice in this scenario is to set the fixed fee equal to the consumer surplus.

In Two-Part Pricing with Identical Consumers, a Firm