Question

Suppose all individuals are​ identical, and their monthly demand for Internet access from a certain leading provider can be represented as p​ = 5 minusone half q where p is price in​ $ per hour and q is hours per month. The firm faces a constant marginal cost of​ $1. If the firm will charge a monthly access fee plus a per hour​ rate, the monthly access fee will equal A. ​$5. B. ​$16. C. ​$1. D. ​$8.

Answer 1

Answer: B) $16

Explanation:

First lets take down the data given to us;

access from a certain leading provider can be represented as p​ = 5 minusone half q i.e 5 - 0.5q

Using the concept of two-part terrific which is a monopolistic market system, it is type of price discrimination where the price of goods and services are of two section namely; a lump-sum fee (expensive) as well as a per-unit charge .

Entry fees are set to be equal to the consumer surplus in the competitive equilibrium.

So we calculate our price and quantity in the competitive equilibrium first,  marginal cost is equal to price

5 - 0.5q = 1

4 / 0.5 = q

q = 8

Now the intercept of the demand curve at the vertical axis is 5,

so the consumer surplus in the competitive equilibrium is:

M = (5 - 1) * 8 / 2

M = 4 * 4

M = 16

the monthly access fee will be equal to $16.