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Two part pricing strategy

You are the manager of a monopoly. A typical consumer's inverse demand function for your firm's product is P=100-2Q and your cost function is C(Q)=20Q.

a. Determine the optimal two part pricing strategy.
b. How much additional profit do you earn using a two part pricing strategy compared with charging the consumer a per unit price?

Solution Preview

a. Determine the optimal two part pricing strategy.

According to two part pricing strategy, a monopolist will maximize profits by charging usage price equal to
Marginal Cost and setting initial price at consumer surplus.

Marginal Cost=dC(Q)/dQ=20

Let us see what is value of Price at which ...

Solution Summary

Solution describes the steps to calculate a product's price by using two part pricing strategy. It also calculates additional profit earned by using this strategy.