A local video store estimates its average customer's demand per year is Q = 20 − 4P,and it 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 via an optimal two-part pricing strategy, the store should set the price equal to the marginal cost, which is $1.00. This makes P = 1, and substituting P = 1 into the demand equation Q = 20 - 4P gives Q = 20 - 4(1) = 16. The total revenue from rentals is then 16 rentals * $1.00 = $16. To find the consumer surplus, we need to calculate the area of the triangle formed by the demand curve above the price line, which is (base * height) / 2 = (16 * (5 - 1)) / 2 = 32. Therefore, the store should charge $32 for an annual membership to extract the entire consumer surplus.

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