Assume that individuals have identical preferences and that each has a demand curve for internet services of the following form: P = 71 - 2Q where P is the price per hour and Q is hours per month. Assume the firm has a constant marginal cost of $10. How much profit does the firm earn from charging a profit-maximising two-part tariff to each consumer? [Round your answer to 2 decimal points when necessary]
Question
Assume that individuals have identical preferences and that each has a demand curve for internet services of the following form: P = 71 - 2Q where P is the price per hour and Q is hours per month. Assume the firm has a constant marginal cost of $10. How much profit does the firm earn from charging a profit-maximising two-part tariff to each consumer?
[Round your answer to 2 decimal points when necessary]
Solution
To solve this problem, we need to follow these steps:
Step 1: Find the quantity where the consumer's demand equals the firm's marginal cost. This is where the firm maximizes its profit.
The demand curve is P = 71 - 2Q and the firm's marginal cost is $10. Setting these equal to each other gives:
71 - 2Q = 10 2Q = 71 - 10 2Q = 61 Q = 61 / 2 Q = 30.5 hours per month
Step 2: Find the consumer's willingness to pay for this quantity. This is the maximum price the consumer is willing to pay for the service.
Substitute Q = 30.5 into the demand equation to find P:
P = 71 - 2(30.5) P = 71 - 61 P = $10
Step 3: Calculate the firm's profit.
The firm's profit is the difference between the price it charges and its marginal cost, multiplied by the quantity sold.
Profit = (P - MC) * Q Profit = (10 - 10) * 30.5 Profit = $0
Step 4: Calculate the two-part tariff.
The two-part tariff consists of a fixed fee plus a per-unit fee. The per-unit fee is the firm's marginal cost, and the fixed fee is the consumer's surplus, which is the difference between the consumer's willingness to pay and the price.
Fixed fee = Consumer's surplus = Willingness to pay - Price Fixed fee = 10 - 10 Fixed fee = $0
Per-unit fee = MC = $10
So, the two-part tariff is 10 = $10.
Step 5: Calculate the firm's profit from the two-part tariff.
The firm's profit from the two-part tariff is the fixed fee plus the per-unit fee times the quantity sold.
Profit = Fixed fee + (Per-unit fee * Q) Profit = 0 + (10 * 30.5) Profit = $305
So, the firm earns a profit of $305 from charging a profit-maximising two-part tariff to each consumer.
Similar Questions
A profit-maximising firm in a monopolistic competition setup will seek to produce the quantity Q where (X), and charge the price indicated by the firm’s (Y) curve at quantity Q. Identify X and Y.X = marginal cost equals marginal revenue; Y = marginal cost X = average cost is more than average revenue; Y = average total cost X = marginal cost equals marginal revenue; Y = demand X = average cost is more than average revenue; Y = demand
A monopolist faces a demand curve given by P = 30-Q and has constant marginal (and average cost) of $19. What is the economic profit made by this profit-maximising monopolist when practicing perfect price discrimination? [Round your answer to 2 decimal places where necessary]
The total cost function of our monopolist HPW is TC = 300 + 10Q + Q2/2 (as in question 6, tutorial 9) where Q is the number of visitors to HPW. The demand curve for visits to HPW is given by P = 259 - 2Qd where P is the market price.What is the profit-maximising price charged by our (single-price) monopolist HPW? [Round your answer to one decimal place]
Consider a single-price monopoly that produces electrical cars. Suppose you are told that the monopoly has the following cost curves where TC is total cost measured in dollars, Q is the quantity of electrical cars, and P is the price per electrical car in dollars:Total Cost: 18+5Q+0.5Q2Market demand curve is also given by following equationMarket Demand: P=95-QIf the monopoly aims to maximize its profit, what price it will charge for each electrical car? (Round your answer to two decimal places.)
Suzanne is the monopoly seller of an illegal product in a particular city. Her marginal cost is $11 per unit and she has no other costs. She faces a demand curve of P = 121–q, and she charges a linear (or single) price to her clients. What is the profit-maximising price Suzanne charges?
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.