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Question
Laughlin and Sons is a company that provides estate planning services to 100 wealthy clients. Although the clients have different wealth levels, their demands for the hourly estate planning services are identical. The aggregate annual demand for estate planning services facing Laughlin and Sons is Q = 20000 - 200P where Q is the total hours of estate planning services and P is the hourly rate charged for the services, and the firm's total cost of providing the estate planning services is TC = 80Q. The firm wants to establish a two-part tariff scheme for charging the clients, and the fees include an annual fixed retainer (entry fee) plus an hourly rate (usage fee).a. What is the firm's marginal cost of providing estate planning services? What is the demand curve for a representative client?
b. What are the profit maximizing levels for the retainer and hourly rate? What is the firm's aggregate annual profit under the two-part tariff scheme?
c. Suppose Laughlin and Sons has a local monopoly on estate planning services. What are the profit maximizing hourly rate (price) and quantity under a single-price monopoly? How does the profit earned under the single-price monopoly compare to the profit earned under the two-part tariff scheme?
Answer
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