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 cocktail price and a cover charge that will generate total revenue equal to the area X.
D.A two-part tariff: a competitive cocktail price and whatever cover charge that will generate a total revenue equivalent to the area X + Y + Z.
Which pricing scheme(s)achieve the economically efficient outcome?
A)schemes a and c
B)scheme b
C)schemes b and d
D)scheme d only

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 cocktail price and a cover charge that will generate total revenue equal to the area X.
D.A two-part tariff: a competitive cocktail price and whatever cover charge that will generate a total revenue equivalent to the area X + Y + Z.
Which pricing scheme(s)achieve the economically efficient outcome?
A)schemes a and c 
B)scheme b 
C)schemes b and d 
D)scheme d only

Quizplus · Accepted Answer

Scheme b is not efficient as it leads to lower total revenue and deadweight loss. Schemes a and c achieve economic efficiency by charging a higher monopoly price (as opposed to the competitive price in scheme b) and capturing some consumer surplus through a cover charge. Scheme d also achieves efficiency by setting a competitive price and using the cover charge to capture additional consumer surplus. However, scheme d is not the best choice as it may result in a higher incidence of deadweight loss than schemes a and c.

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