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# Many retail video stores offer two alternative plans for renting films A two-part tariff Pay an annual membership fee e.g \$40 and then pay a small fee for the daily rental of each film

Many retail video stores offer two alternative plans for renting films:

• A two-part tariff: Pay an annual membership fee (e.g., \$40) and then pay a small fee for the daily rental of each film (e.g., \$2 per film per day).

• A straight rental fee: Pay no membership fee, but pay a higher daily rental fee (e.g.,\$4per film per day). What is the logic behind the two-part tariff in this case? Why offer the customer a choice of two plans rather than simply a two-part tariff?

8. Sal"s satellite company broadcasts TV to subscribers in Los Angeles and New York. The demand functions for each of these two groups are

QNY = 60 - 0.25PNY

QLA = 100- 0.50PLA

where Q is in thousands of subscriptions per year and P is the subscription price per year. The cost of providing Q units of service is given by

C = 1000+ 40Q

where Q = QNY + QLA"

a. What are the profit-maximizing prices and quantities for the New York and Los Angeles markets?

b. As a consequence of a new satellite that the Pentagon recently deployed, people in Los Angeles receive Sal"s New York broadcasts and people in New York receive Sal"s Los Angeles broadcasts. As a result, anyone in New York or Los Angeles can receive Sal"s broadcasts by subscribing in either city. Thus Sal can charge only a single price. What price should he charge, and what quantities will he sell in New York and Los Angeles?

c. In which of the above situations, (a) or (b), is Sal better off? In terms of consumer surplus, which situation do people in New York prefer and which do people in Los Angeles prefer? Why?

Jun 24 2020 View more View Less