Consider two groups of consumers. In the first group, each consumer has the inverse demand function P = 50 – Q. In the second group, each consumer has the inverse demand function P = 30 – Q. There are 10 consumers in each group, or 20 consumers in all. Marginal cost is always zero. The monopolist wants to maximize profits by designing a two-part tariff that will apply to both groups. (1) After paying the tariff, how much consumer surplus remains to a member of Group I? Of Group II? (2) Suppose that Q is a normal good. Compare the consumer surplus remaining for a member of Group I to the surplus remaining for a member of Group II. How might two-part tariffs affect the equality of the income distribution?
Consider two groups of consumers. In the first group, each consumer has the inverse demand function P = 50 – Q. In the second group, each consumer has the inverse demand function P = 30 – Q. There are 10 consumers in each group, or 20 consumers in all. Marginal cost is always zero. The monopolist wants to maximize profits by designing a two-part tariff that will apply to both groups.
(1) After paying the tariff, how much
(2) Suppose that Q is a normal good. Compare the consumer surplus remaining for a member of Group I to the surplus remaining for a member of Group II. How might two-part tariffs affect the equality of the income distribution?
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