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 optimal two-part pricing, it will earn profits of
A)$2.
B)$32.
C)$64.
D)none of the statements associated with this question are correct.

Question

Quizplus · Accepted Answer

In optimal two-part pricing, the firm sets the price per unit equal to marginal cost (MC = 2) and charges a fixed fee equal to the consumer surplus. The consumer surplus is the area of the triangle under the demand curve above the price line, which is (1/2) * (10 - 2) * 8 = 32. Thus, the firm's profit is $32.

The Average Consumer at a Firm with Market Power Has