A firm using a two-part tariff faces a tradeoff because
A)the only way to increase the fixed-fee portion of the price is to lower the per-unit portion of the price.
B)the only way to increase total revenue is to lower per-unit profit.
C)any increase in consumer surplus must be offset by a decrease in producer surplus.
D)the smaller the variation between the parts of the price, the greater the deadweight loss generated by the pricing scheme.

Question

Quizplus · Accepted Answer

A two-part tariff consists of a fixed fee and a per-unit price. If the firm wants to increase the fixed-fee portion of the price, it must lower the per-unit portion of the price. This tradeoff is necessary to ensure that the total revenue generated from the pricing scheme is optimized. If the firm were to increase the total revenue, it would have to lower the per-unit profit, which is not a desirable outcome. Therefore, the best choice is to focus on adjusting the two parts of the tariff to achieve the optimal balance between total revenue and per-unit profit.

A Firm Using a Two-Part Tariff Faces a Tradeoff Because