two-part_tariff_example

two-part_tariff_example - Example 2 part-tariff with 2...

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Example: 2 part-tariff with 2 consumer groups. Suppose there are 1000 consumers (Type 1) with a demand curve given by: Q1 = 10 P Another 100 consumers (Type 2) have the demand curve given by: Q2 = 32 2P Marginal cost is constant at $1 Find the optimal two part-tariff for a monopolist to charge in this case. We need to maximize profits by choosing a price per unit (P*) and an entry fee (T*). First, note that the entry fee will be equal to the smaller of the consumer surpluses from the two groups. The entry fee can be expressed (see graph above) as T* = (1/2)*(10-P)Q[P1]. Where Q1[P] represents the quantity demanded by group 1 at a price of P. We can now write the profit function entirely in terms of P. First , write the profit function in terms of P & Q. Recall that profits will consist of the entry fee (charged to 2000 customers) plus units sold to 1000
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two-part_tariff_example - Example 2 part-tariff with 2...

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