Which of the following statements about setting optimal two-part tariffs for man

Question

Which of the following statements about setting optimal two-part tariffs for many consumers is NOT true? Explain your answer.

a) The number of buyers (entrants) declines as the entrance fee (tariff) increases.

b) The profit from the entrance fee (tariff) is a concave function of the tariff because it first increases and then decreases as the tariff increases.

c) The profit from the entrance fee (tariff) is a convex function of the tariff because if first declines and then increases as the tariff increases.

d) The total profits is composed of the profit from the entrance fee (tariff) and from the profit from sales to buyers.

Explanation / Answer

C) The profit from the entrance fee (tariff) is a convex function of the tariff because if first declines and then increases as the tariff increases.

           This statement is wrong because initially you set your price above than your margin to get some profit. Now increase the margin leads to increase in profit but at the same time no of consumers decline but not as much as increase in profit. Therefore in aggregate we are in profit and this margin increases when you increase the tarrif.

                  But after a break even point the increase in tarrif leads to more decrease in customers hence the profit starts falling. Ideally at tarrif being very large no of customers tends to zero hence the profit also tends to zero.

         Therefore 3rd statement is wrong.

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