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# Consumer surplus and optimal pricing strategy

The average consumer at a firm with market power has an inverse demand function of P = 10 - Q. The firm's cost function is C = 2Q. If the firm engages in optimal two-part pricing, it will earn profits of

\$2.
\$32.
\$64.
none of the statements associated with this question are correct.

Suppose three consumers of a new computer system have the following preferences for printers and ink, the prices in the columns represent the consumerÃ¢??s reservation price:

Consumer Printer Ink
1 \$400 \$175
2 \$350 \$100
3 \$300 \$200

The firmÃ¢??s costs are zero (for simplicity). If the manager knows the consumersÃ¢?? preferences, what is the optimal pricing strategy?

printer \$400, ink \$100
printer \$300, ink \$175
bundle the printer and the ink at \$500
bundle the printer and the ink at \$450

#### Solution Preview

Q1: The average consumer at a firm with market power has an inverse demand function of P = 10 - Q. The firm's cost function is C = 2Q. If the firm engages in optimal two-part pricing, it will earn profits of
MC=dTC/dQ = 2
Set the price at 2, we get
Q=10-P=10-2=8
Now the firm's profit would be the consumer surplus which is charged as lump-sum fees.
The consumer ...

#### Solution Summary

This post shows how to determine the consumer surplus and optimal pricing strategy.

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