Question

DBM is a small bank with two types of customers: urban account and rural account holders. The management of DM knows that of their 40,000 customers, 25,000 are urban and 15,000 are rural. Urban customers are relatively more price sensitive as they have more banking alternatives as compared to the rural customers. The total monthly demand for each group is given by: Urban: qu=90000-60000P Rural qr=100,000-40,000P Where q is the number of bank transactions per month and P is the price paid by each customer. DBM’s total monthly fixed cost is $45000 and the cost for each banking transaction is $0.1.

a) Suppose that DBM could separate urban and rural customers. What rental fee and usage fee would you charge each group? What are the profits from each group?

b) Suppose now DBM set up one two-part tariff- that is, it sets one rental and one usage fee that both urban and rural customers. What usage and rental fees would it set? What would be the profits? Explain why price would not be equal to marginal cost.

Answer 1

Ans (a) We would charge a fee that cover at least MC

and the profit for each group are

Group of urban customers

25000=90000-60000P

60000P=90000-25000=65000

P =65000/60000

=1.083

So Revenue =1.083×25000

=27075

and total cost is F.C.+ V.c.=28125$ +(25000×0.1)

=28125$+2500 $=29625$

So Profit =27075 -29625 =-2550

Means loss of 2550 $

For rural group

15000=100000-40000P

40000P=100000-15000

=85000

P=85000/40000

=2.125

So revenue =15000×2.125=31875

and Total cost =16875 +(15000×0.1)

=18375

So profit from rural group =31875-18375

13500