Figure 16-7

The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-Refer to Figure 16-7.The owners of the Lizard Lounge are considering the following four pricing options:
A.A single price scheme where the price of cocktails equals the monopoly price.
B.A single price scheme where the cocktail price equals the competitive price.
C.A two-part tariff: a monopoly price for cocktails and a cover charge that will generate total revenue equal to the area X.
D.A two-part tariff: a competitive price for cocktails and a cover charge that will generate total revenue equal to the area X + Y + Z.
Which scheme will earn the largest profit?
A)scheme a
B)scheme b
C)scheme c
D)scheme d

Question

Figure 16-7
  
The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-Refer to Figure 16-7.The owners of the Lizard Lounge are considering the following four pricing options:
A.A single price scheme where the price of cocktails equals the monopoly price.
B.A single price scheme where the cocktail price equals the competitive price.
C.A two-part tariff: a monopoly price for cocktails and a cover charge that will generate total revenue equal to the area X.
D.A two-part tariff: a competitive price for cocktails and a cover charge that will generate total revenue equal to the area X + Y + Z.
Which scheme will earn the largest profit?
A)scheme a 
B)scheme b 
C)scheme c 
D)scheme d

Quizplus · Accepted Answer

A two-part tariff with a competitive price for cocktails and a cover charge that captures the entire consumer surplus (areas X + Y + Z) will maximize profits by extracting the maximum willingness to pay from consumers.

Figure 16-7 The Lizard Lounge Is Well Known for Its Exotic Cocktails