Compared to monopoly pricing, an optimal two-part tariff
A)reduces economic efficiency.
B)eliminates the deadweight loss.
C)equates marginal revenue and average revenue.
D)increases consumer surplus.

Question

Quizplus · Accepted Answer

An optimal two-part tariff eliminates the deadweight loss, which is not the case in monopoly pricing. The two-part tariff charges consumers a fixed fee and a per-unit price to access the product/service. This pricing strategy allows the monopolist to capture some of the surplus that consumers would have otherwise received, leading to greater profits for the firm. However, the pricing strategy also allows consumers to self-select based on their willingness to pay, which results in a more efficient allocation of resources. The optimal two-part tariff equates marginal cost and the total fee paid by consumers.

Compared to Monopoly Pricing, an Optimal Two-Part Tariff