Suppose all individuals are identical, and their monthly demand for Internet access from a certain

leading provider can be represented as p = 5 - (1/2) q where p is price in $ per hour and q is hours per

month. The firm faces a constant marginal cost of $1. If the firm will charge a monthly access fee plus a per

hour rate, according to two-part tariff pricing, the total monthly access fee that the firm will collect from all

the buyers taken together equals?

Question

Meadow Hanna

Business

3 October, 19:33

Suppose all individuals are identical, and their monthly demand for Internet access from a certain

leading provider can be represented as p = 5 - (1/2) q where p is price in $ per hour and q is hours per

month. The firm faces a constant marginal cost of $1. If the firm will charge a monthly access fee plus a per

hour rate, according to two-part tariff pricing, the total monthly access fee that the firm will collect from all

the buyers taken together equals?

+5

Answers (1)

Know the Answer?

Guadalupe Villarreal · Answer 1

Solution:

P = 5 - (q/2)

P = 5 - 0.5q

MC = 1

In two-part pricing, the monopolist equates the hourly rate (p) with MC:

5 - 0.5q = 1

0.5q = 4

q = 8

p = MC = $1

Total monthly access fee equals entire consumer surplus (CS).

From demand function, when q = 0, p = $5 (Reservation price)

Monthly Access fee = CS = Area between demand curve and market price = (1/2) x $ (5 - 1) x 8 = 4 $4 = $16