1. Suppose you are the manager of a Golf Club with monopoly power. A typical consumerβs
inverse demand function for your firmβs product is π = 100 β 20π, and your cost function is C(Q) = 20Q.
(a) If you apply a two-part pricing strategy, how much would be the membership fee and the per unit price?
(b) How much additional profit do you earn using a two-part pricing strategy compared with single price strategy?
a) Applying two pricing strategies the per-unit price becomes the price at which price equals the marginal cost of production.
P=MC
100β20Q=20=4
P= 20
Membership fees= the area of the triangle above the MC curve, and the per-unit price becomes the price
b. If there was a single pricing strategy, then equilibrium will occur at MR = MC
MR=MC
100β40Q=20Q=2
P=60
The profit would have been
Ο =TRβTC
Ο =60Γ2β20Γ2
Ο =120β40
Ο =80
When there is two pricing strategy, profit is given as:
Ο =(20Γ4+160)β20Γ4
Ο=80+160β80
Ο=160
Additional profit will be:
ΞΟ=ΟβΟ =160β80=80
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