A local video store estimates their average customer's demand per year is Q = 7 - 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)$9.
B)$10.
C)$11.
D)$12.

Question

Quizplus · Accepted Answer

The optimal two-part pricing strategy is to set the membership fee equal to the consumer surplus, which is the difference between the consumer's willingness to pay and the price they actually pay. In this case, the consumer's willingness to pay is given by the demand curve, Q = 7 - 2P, and the price they actually pay is the marginal cost, which is $0.5. So the consumer surplus is:CS = (7 - 2P) - 0.5 = 6.5 - 2PTo extract the entire consumer surplus, the store should set the membership fee equal to the consumer surplus, which is $6.5.

A Local Video Store Estimates Their Average Customer's Demand Per