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 cocktail price 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.
Under which scheme are the Lounge customers best off?

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 cocktail price 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.
Under which scheme are the Lounge customers best off?

Quizplus · Accepted Answer

The customers of the Lizard Lounge are best off under the single price scheme where the cocktail price equals the competitive price (option B). This is because under this scheme, the price charged for cocktails is more in line with the actual cost of production and there is no additional cover charge. Option A would charge a higher price than what is necessary for the monopoly power and result in a deadweight loss, while option C and D would impose additional cover charges on customers, making them worse off.

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