When a two-part tariff is employed on consumers with identical demand curves,the maximum entry fee the firm can charge:
A)is represented by the total area below the demand curve.
B)is equal to the total consumer surplus.
C)is equal to the total cost.
D)is equal to the average total cost.

Question

Quizplus · Accepted Answer

With a two-part tariff, the firm charges an entry fee (fixed fee) and a per-unit fee. The maximum entry fee the firm can charge is equal to the total consumer surplus since the firm captures all of the surplus through the entry fee. However, the per-unit fee must be set at marginal cost to maximize profits. Therefore, the maximum entry fee is equal to the total consumer surplus.

When a Two-Part Tariff Is Employed on Consumers with Identical