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 = 200 consumers, fixed costs are FC = $4,000, and marginal costs are constant at MC = $8. What entry fee (E) and price (P) should this monopolist charge in its two-part-tariff pricing strategy? Hint: Look in your notes to find out what price needs to be set such that the market will be allo