Suppose all individuals are identical,and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month.The firm faces a constant marginal cost of $1.If the firm will charge a monthly access fee plus a per hour rate,the monthly access fee will equal
A) $1.
B) $5.
C) $8.
D) $16.

Question

Quizplus · Accepted Answer

To find the optimal pricing strategy, we need to use the formula:
MC = MR
where MC is the marginal cost and MR is the marginal revenue.

Let's first find the demand function by setting the price equal to the demand:
p = 5 - (1/2)q
q = 10 - 2p

Now, the total revenue function is:
TR = pq = p(10 - 2p) = 10p - 2p^2

The marginal revenue function is:
MR = dTR/dq = 10 - 4p

Setting MR equal to MC, we get:
10 - 4p = 1
4p = 9
p = 9/4 = 2.25

Thus, the optimal per hour rate is $2.25.

To find the monthly access fee, we can use the demand function:
q = 10 - 2p
q = 10 - 2(2.25)
q = 5.5

Since the provider faces a constant marginal cost of $1, the total cost function is:
TC = 1q = 5.5

Thus, the optimal monthly access fee plus per hour rate is:
$5.5 + ($2.25 per hour)

We can see that only option D matches this optimal solution with a monthly access fee of $16.

Suppose All Individuals Are Identical,and Their Monthly Demand for Internet