Question

A local video store estimates their average customer's demand per year is Q = 11 - 2P, and knows the marginal cost of each rental is $0.5. How much should the store charge for an annual membership in order to extract the entire consumer surplus via an optimal two-part pricing strategy?

a. $25

b. $52.50

c. $20

d. None of these answers.

Answer 1

The answer is Option A $25

Fixed fee is equal to consumer surplus and variable fee is equal to marginal cost in an optimal two part pricing strategy.

P=MC(demand at price)

MC=0.5

Therefore P=0.5

Q=11-2P

=11-2*0.5

=11-1

Q=10

When Q(demand) is zero

Q=11-2P

=>0=11-2P

=> -11=2P

=>-11/-2=P

P=5.5

Now consumer surplus =

CS=1/2*(5.5-0.5)*10=

So the store should charge $25 for an annual membership in order to extract the entire consumer surplus via an optimal two-part pricing strategy

Thank You.