Calculate the two-part tariff under each technology – Business Economics
1. Consider a monopolist who faces a market demand curve for her product given by QD = 200 − 5p. The firm can product its goods using one of two technologies. Technology A has a cost curve given by CA(Q) = 4Q. Technology B permits the firm to product its good at a zero marginal cost but requires incurring a fixed cost of FB . (a) Write out an equation for the profits of the firm for each potential technology. Write out the firm’s marginal revenue and marginal cost curves under each technology. (b) Using technology A, what will be the equilibrium in the market? (c) Given your answer in part 1b, is the market efficient? Explain your answer providing a brief discussion of the nature of the inefficiency (why does it arise and what it represents). (d) If the firm uses technology B, what will be equilibrium in the market? (e) Suppose the market is made up of 100 individuals each with the individual demands given by qD = 2 − 1 p. Suppose the firm uses a two-part tariff based on individuals’ demand curves. Calculate the two-part tariff under each technology. (f) Is the market operating efficiently at the equilibria you calculated in part 1e? Explain. Calculate the value of FB such that the firm will prefer using technology A when pricing based on the market demand and prefer technology B when it can use a two-part tariff based on individual demand curves.
