Question

Suppose a firm faces an identical inverse demand curve of pequals 140minusq for each consumer in the market. ​ Currently, the​ firm's average cost equals marginal cost equals ​$40 . Determine the​ profit-maximizing price and identical​ lump-sum fee to charge with a two-part tariff LOADING... . The​ profit-maximizing price to charge is ​$40 . ​(Enter a numeric response using a real number rounded to two decimal​ places.) The​ profit-maximizing lump-sup fee to charge is ​$70 . ​(Enter a numeric response rounded to the n.

Answer 1

Complete Question:

Suppose a firm faces an identical inverse demand curve of P= 140-Q for each consumer in the market. ​ Currently, the​ firm's average cost = marginal cost = $40.

Determine the​ profit-maximizing price and identical​ lump-sum fee to charge with a two-part tariff

The​ profit-maximizing price to charge is $ ____? ​

Identical lump- sum fee ___?

Answer:

Price is $40

Identical lump- sum fee  is 5000.

Explanation:

Here

P = 140 - Q

This means

Maximum price the customer is willing to pay is $140

Average Cost = Marginal Cost = $40

This will be the price the firm will charge in two part tariff. Hence,

Price per Unit = $40 per Unit

By putting the above values, we have:

40 = 140 - Q

Q = 140 - 40

Q = 100 Units

Now, the consumer surplus can be calculated using the following formula:

Consumer Surplus = 1/2 * (Max. Price that the customer is willing to pay - Market Price) * Quantity

Consumer Surplus = 1/2 * ($140 - $40) * 100 Units = 5000