The optimal two part tariff strategy is to charge:
A)an entry fee equal to consumer surplus and a zero price.
B)an entry fee equal to producer surplus and a zero price.
C)an entry fee equal to producer surplus and a price equal to marginal cost.
D)an entry fee equal to consumer surplus and a price equal to marginal cost.

Question

Quizplus · Accepted Answer

The optimal two part tariff strategy is to charge an entry fee equal to consumer surplus and a price equal to marginal cost. This is because the entry fee should capture the maximum amount of surplus possible, and setting the price equal to marginal cost ensures that the monopolist maximizes profits without discouraging demand. The other options either do not capture the maximum surplus or do not maximize profits for the monopolist.

The Optimal Two Part Tariff Strategy Is to Charge