After graduation, you start an internet-based firm that allows people to buy and
ID: 1123781 • Letter: A
Question
After graduation, you start an internet-based firm that allows people to buy and sell books online. Based on your market research, you believe there are two basic types of customers. The first type is the casual reader who has relatively low willingness-to-pay for your services, and their annual demand is Q1 = 30 - 40P where Q1 is the number of books traded per year and P is the price you charge per book traded. The second type of customer is the avid reader who has relatively high willingness-to-pay for your services, and their demand is Q2 = 100 - 50P. The marginal cost of your online service is $0.40 per book traded.
a, If you set your usage fee equal to the marginal cost, how many books will each type of customer trade on your system? What is the consumer surplus enjoyed by each type of customer?
b, What is the optimal entry fee that you should charge under a two-part tariff pricing scheme for access to your online market? How much consumer surplus is left for the two types of customers after they pay the entry fee and usage fee?
Explanation / Answer
Answer a:- For the first group that is for casual reader
The quantity of book trading services demanded =30-40(0.40) = 14 books/year
Price is given as P=0.75-0.025Q1
Consumer surplus depending on the marginal cost pricing CS1= 14(0.75-0.4)/2 = $2.45/year
For the second group of customers that is for avid readers:
The quantity of book trading services demanded =100-50(0.40) = 80 books/year
Price is given as P=2-0.02 Q2
Consumer surplus depending on the marginal cost pricing CS1= 80(2-0.4)/2 = $64/year
Answer B:- the optimal entry fee will be equal to the consumer surplus for the casual readers that is given as $2.45 as derived from part a.
Once the entry fee is implemented, there will be zero consumer surplus for casual readers and the consumer surplus for avid readers is $64-$2.45= $61.55
I REQUEST YOU TO KINDLY RATE THE ANSWER AS THUMBS UP. THANKS A AOT.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.