Question

Assume P= 300 – 5Q and Total Cost = 15Q.

25. (LONG TIME) Calculate the profit this firm earns when it employs a 2-part pricing strategy.

Answer 1

In case of two part pricing strategy, the first part is the per unit charge which is equal to marginal cost. Since marginal cost as well as average total cost is $15 in this case, per unit charge is $15. There is no profit from selling goods at per unit charge because it is equal to average total cost.

the second part is the tariff which is equal to the consumer surplus at per unit charge. Quantity sold at this charge is 300 - 5Q = 15 or Q = 57 units. This indicates that consumer surplus is 0.5*(300-15)*57 = 8122.50. this is the profit from tariff

Total profit from this strategy is 8122.50