Figure 16-7 The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-Refer to Figure 16-7. The owners of the Lizard Lounge are considering the following four pricing options:
a. A single price scheme where the price of cocktails equals the monopoly price.
b. A single price scheme where the cocktail price equals the competitive price.
c. A two-part tariff: a monopoly price for cocktails and a cover charge that will generate total revenue equal to the area X.
d. A two-part tariff: a competitive price for cocktails and a cover charge that will generate total revenue equal to the area X + Y + Z.
Which scheme will earn the largest profit?

Question

Figure 16-7  The Lizard Lounge is well known for its exotic cocktails. Figure 16-7 shows its estimated demand curve for cocktails.
-Refer to Figure 16-7. The owners of the Lizard Lounge are considering the following four pricing options: 
a. A single price scheme where the price of cocktails equals the monopoly price.
b. A single price scheme where the cocktail price equals the competitive price.
c. A two-part tariff: a monopoly price for cocktails and a cover charge that will generate total revenue equal to the area X.
d. A two-part tariff: a competitive price for cocktails and a cover charge that will generate total revenue equal to the area X + Y + Z.
Which scheme will earn the largest profit?

Quizplus · Accepted Answer

A two-part tariff with a competitive price for cocktails and a cover charge that captures the entire consumer surplus (area X + Y + Z) will maximize profits by extracting the maximum willingness to pay from consumers.

Figure 16-7 the Lizard Lounge Is Well Known for Its