Question

Suppose a monopoly is going to engage in a two-part-tariff pricing strategy. The monopoly wants to charge an entry fee (E) which will cover the fixed costs of production. Suppose also that the monopolist is going to set a price so that the market will be allocatively efficient. Suppose that the market has N = 50 consumers, fixed costs are FC = $600, and marginal costs are constant at MC = $4. What entry fee (E) and price (P) should this monopolist charge in its two-part-tariff pricing strategy?

A) E = $600, P = $4
B) E = $600, P = $150
C) E = $12, P = $12.5
D) E = $12, P = $4