Assuming a market for PUB services which consists of equal numbers of two types of consumers. The monthly inverse demand of Consumer A is given by P = 100 – q₁ and Consumer B is given by H = 100 – q₂. H is the per hour price of PUB services and q₁ and q₂ are the hours of internet services purchased monthly by A and B. All consumers are provided by a monopolist with a monthly fixed cost of 500 per consumer and a marginal cost of zero.

(i) Assuming monopolist could differentiate the two types apart and offered a different monthly subscription fee to A and B at zero per unit price, calculate the monthly subscription fee offered to A and B.

(ii) Assuming that the firm cannot tell the two types apart so manager decides to charge all consumers the same monthly subscription fee and then offer PUB services at zero per unit price. Calculate monthly subscription fee that maximizes the monopolist’s profit in this case? Explain if the firm sell to both A and B consumers or to only one of them?

(iii) Assuming a new manager decides to implement a new pricing scheme under which the monopolist sets a single two-part tariff, with in addition to the monthly fee. Calculate the two-part tariff that maximizes the monopolist’s profit? Explain if you think that the firm with sell to both consumer A and B consumers or to only one of them?

(iv) What is the total welfare in this market assuming that the monopolist sets a monthly subscription fee as in part (ii) and again when it sets a single two-part tariff as in part (iii). Which and when will be the welfare higher? Explain your answer with a general result.

3. A new manager decides to implement a new pricing scheme under which the monopolist sets a single two-part tariff, so in addition to the monthly fee there is a per unit price which can be different from zero. What is the two-part tariff that maximizes the monopolist’s profit? Will the firm sell to both consumer types or to only one consumer type? Explain.

4. Calculate the total welfare in this market when the monopolist sets a monthly subscription fee as in part (b) and again when it sets a single two-part tariff as in part (c). When is welfare higher? Do you think that this is a general result? Explain your answer.

Answer rating: 100% (QA)

i The monthly inverse demand function of consumer A for PUB services is given as P100q1 or q1100P where P and q1 represent the price and monthly quantity of services for consumer A The inverse demand ... View the full answer