Question

If all consumers are identical and a monopolist implements two-tariff pricing

( = p1 + p2); which of the following is true?
a. Consumer surplus is higher than under uniform pricing
b. Consumers would be indifferent between this and first degree price
discrimination on the part of the monopolist
c. The market outcome is Pareto inefficient
d. p1 is lower than the competitive (i.e. efficient) price

Answer 1

Option d (p1 is lower than the competitive price) could be true in a scenario where a monopolist uses two-tariff pricing to attract consumers to pay a fixed fee, as the per-unit price p1 could be set lower to encourage more consumption.

Step-by-step explanation:

If all consumers are identical and a monopolist implements two-tariff pricing (a form of price discrimination where the price is a sum of a fixed fee plus a per-unit price, p1 + p2), we need to evaluate the given options based on this pricing strategy.

1. Consumer surplus is generally lower under two-tariff pricing compared to uniform pricing because the monopolist can extract more consumer surplus by charging a fee on top of the per-unit price.
2. Consumers would generally prefer first-degree price discrimination, or perfect price discrimination, where they pay exactly their willingness to pay for each unit, thus being indifferent on each purchase, but they do end up with no consumer surplus.
3. The market outcome could be Pareto inefficient if the fixed fee of the two-tariff pricing prevents some consumers who value the product more than the marginal cost from purchasing.
4. p1, the per-unit price in two-tariff pricing, is often set higher than the competitive price to allow the monopolist to gain more profit, although this is not always the case and it could be lower to attract more consumers to pay the fixed fee.

Therefore, option d seems to be the most appropriate, as p1 could potentially be lower than the competitive price depending on the monopolist's pricing strategy, which is not explicitly ruled out in the scenario provided.

Answer 2

The correct answer is a. Consumer surplus is higher than under uniform pricing.

How to explain

In a scenario of two-tariff pricing, a monopolist charges different prices for the same product or service. They set a higher price (p1) for consumers with higher demand and a lower price (p2) for those with lower demand. This strategy helps the monopolist increase overall revenue by charging more to consumers willing to pay higher prices while attracting those who are less willing to pay. It enables the monopolist to earn greater profits compared to when using a single, uniform price for all consumers.

Because all consumers are identical, there is no first-degree price discrimination to compare two-tariff pricing to.

Two-tariff pricing is not Pareto inefficient, as it is possible to make everyone better off with this pricing scheme compared to other alternatives.

The price p1 may be higher or lower than the competitive price, depending on the specific demand curve and the monopolist's cost structure.