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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

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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 consumerâ??s reservation price:

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

The firmâ??s costs are zero (for simplicity). If the manager knows the consumersâ?? 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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