Question

A price-searcher firm wants to try a two-part tariff. The firm's marginal cost is a constant $7 and it will charge that as the per unit price. To complicate things, the firm has two different groups of consumers. There are 30 consumers who have a demand function given by: q_D=15.25-0.25P. There are also 40 consumers who have a demand function given by: q_D=30.5-0.5P

If the firm charges a fee that is too high, then it may lose all of the customers of the low-willingness-to-pay group. That could be bad for their producer surplus, but it might also be worth it depending on the number of consumers lost and the size of the higher fee.

Determine thee fixed fee that the firm would charge in order to maximize producer surplus in total

Answer 1