The average consumer at a firm with market power has an inverse demand function of P = 10 - Q.The firm's cost function is C = 2Q.If the firm engages in two part pricing, what is the optimal fixed fee to charge each consumer?
A)$2.
B)$32.
C)$64.
D)none of the statements associated with this question are correct.

Question

Quizplus · Accepted Answer

The optimal fixed fee in two-part pricing is the consumer surplus. The consumer surplus is the area of the triangle under the demand curve above the price. The demand curve is P = 10 - Q, and the marginal cost is 2. Setting P = MC gives 10 - Q = 2, so Q = 8. The consumer surplus is (1/2) * (8) * (10 - 2) = 32.

The Average Consumer at a Firm with Market Power Has