Question

Bob and Ray have just purchased VCR's and they wish to rent movies for home use. The local video shop requires that customers must first join a movie club before they can rent movies. The two possible clubs are:

-The "Director's Club", which has an annual membership fee of $12, and entitles club members to rent movies for $4/night.

-The "Producer's Club", which has an annual membership fee of $25, and entitles club members to rent movies for $2/night.

The demand curves for nightly movie rentals in a given year are Qd=36-6P and Qd=9-P for Bob and Ray respectively. Which movie club will, if any, will Bob and Ray join? Explain your answer and show your work.

Answer 1

Join the club, which leads to rise in CS by a higher amount

That is the individual should select the club, that leads to greater consumer Surplus

For Bob, Q = 36-6P

1) if director club,

Then at P = 4, Q= 36-24 = 12

So net CS ( after paying the fixed fee)

= .5*12*(6-4) - 12

= 0

2) Producer club

P = 2, Q = 36-12 = 24

Net CS = .5*24*(6-2) - 25

= -1

So Bob should join Director's club

.

for Ray, Q = 9-P

1) director club,

P = 4, Q = 5,

Net CS =.5*(9-4)*5 -12

= .5

.

2) producer club

P= 2, Q = 7,

Net CS = .5*(9-2)*7 -25

=-.5

Ray should also join Director Club