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    Two-part tariffs and underage drinkers

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    The Rusty Anchor Bar has 2 types of patrons: legal and underage drinkers. Even though it is illegal to allow entry to underage drinkers, there is no perfect way to identify underage drinkers since they often use fake identification cards. The penalty for serving underage drinkers is severe - the bar could lose its license. Assume the bar's MC = $3 per drink and the nightly drink demand curve is given by P(legal)=5-Q(legal) and P(underage)=3.5-Q(underage).
    1) Design a two-part tariff (pricing) structure that would get the max nightly profit from each LEGAL drinker. The two-part pricing would include a cover charge plus a charge for each drink.
    2) Under the two-part tariff, will Underage drinkers attempt to come the bar? Why or why not?

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    Solution Preview

    The profit-maximizing two-part tariff can be found by setting the per drink price equal to the marginal cost and the entry fee equal to consumer ...

    Solution Summary

    Attempts to prevent underage drinking by price discrimination are examined. The expert designs a two-part tariff for underage drinkers.