A public water utility is comparing two separate pricing schemes: (i) a two-tiered pricing scheme where the first 5,000 gallons cost $20 and all subsequent gallons cost $10 or (ii) a single price of $15 per gallon. There are two types of demand for water from the utility Type 1: p = 30 − 3q Type 2: p = 25 − 5 4 q where q is thousands of gallons. The marginal cost of providing a gallon of water is $10.
(a) Under scheme (i), how much water is purchased by each demand group? What is the total surplus?
(b) Under scheme (ii), how much water is purchased by each demand group? What is the total surplus?
(c) Which pricing scheme maximizes total welfare?