Question

Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - 0.5q, where p is the price in dollars per hour and q is hours per month. The firm faces a constant marginal cost of $1.If the firm will charge a monthly access fee plus a per hour rate, according to two-part tariff pricing, the total monthly access fee that the firm will collect from all the buyers taken together equals:a. $1.b. $5.c. $8.d. $16.

Answer 1

d. $16.

Step-by-step explanation:

The computation of the total monthly access fee is shown below:

Given that

p = 5 - 0.5q

Constant Marginal cost = 1

Based on the above information,

As we know that

In case of the two-part pricing, the monopolist is equal to the hourly rate

i.e (p) = MC

5 - 0.5q = 1

0.5q = 4

So, q = 8

And,

p = MC = $1

Moreover,

Total monthly access fees equal the whole consumer surplus

As per the demand function,

when q = 0 and p = $5

So,

Monthly Access fee is

= (0.5) × ($5 - 1) x 8

= 4 × $4

= $16