Question

A bar owner must decide how to best raise revenues. A cover charge will allow him to offer cheaper drink prices. if the owner does decide to require a cover charge and offer cheaper drinks, how much should it be to avoid losing customers? Explain.

Answer 1

Perfect price discrimination as a technique can be used by the owner to raise revenue and at the same time to maintain the sales. What the owner should do is to reduce the price of the drink equal to the operating cost for the marginal cost of drink and then determine the optimum number of drinks to be offered. The cover charge should be equal to the consumer surplus that is generated at this out come when the price is equal to the marginal cost.

This will be a way of choosing a two part tariff where the one part is the fixed cover charge and the other part is the price for drink which will virtually result in no economic profit because price is equal to the operating cost. All the economic profit will now come from the cover charge.