A local video store estimates their average customer's demand per year is Q = 20 - 4P, and knows the marginal cost of each rental is $1.00.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)$20.
B)$32.
C)$40.
D)$64.

Question

Quizplus · Accepted Answer

To extract the entire consumer surplus, the store should set the price per rental equal to the marginal cost ($1) and charge an annual membership fee equal to the total consumer surplus. The demand equation is Q = 20 - 4P. Setting P = $1, Q = 20 - 4(1) = 16. The consumer surplus is the area of the triangle with base 16 and height (5 - 1) = 4, which is (1/2) * 16 * 4 = $32.

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