A firm using a two-part tariff can produce the economically efficient outcome by
A)making the fixed-fee portion of the price as low as possible.
B)setting the per-unit portion of the price equal to the marginal cost of production.
C)setting the per-unit portion of the price equal to the average cost of production.
D)setting the fixed-fee portion of the price at some proportion to the fixed cost of production.

Question

Quizplus · Accepted Answer

In a two-part tariff, the firm charges a fixed fee and a per-unit fee. The economically efficient outcome is achieved when the firm sets the per-unit portion of the price equal to the marginal cost of production. This is because, at the efficient outcome, marginal cost equals marginal benefit, and consumers are willing to pay up to their marginal benefit for each unit consumed. The fixed-fee portion of the price does not affect the efficient outcome but can be set at some proportion to the fixed cost of production to ensure the firm covers its costs. Thus, choice B is the correct answer.

A Firm Using a Two-Part Tariff Can Produce the Economically