Assume a firm is able to use an optimal two-part tariff
a. Is the outcome economically efficient? Why or why not?
b. What happens to consumer surplus?
c. Does this represent perfect price discrimination? Why or why not?
What will be an ideal response?
a. If a firm uses an optimal two-part tariff, the outcome is economically efficient because price equals marginal cost at the level of output supplied.
b. With an optimal two-part tariff, all consumer surplus is transformed into profit.
c. With an optimal two-part tariff, the quantity supplied increases and there is no consumer surplus, so this represents perfect price discrimination.
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