Question

Andy Anderson is the only supplier of email updates on avalanche conditions in the mountains above the two towns of Vanee and Keno. The marginal cost of producing these updates is zero (with zero fixed costs) and the inverse demand for these updates in Vanee is p = 42-q and p = 9-q in Keno. Suppose that in each of the two towns, all of the demand comes from one customer. Andy cannot identify which customer is which. To get around this, he creates two kinds of packages, one containing 42 updates and one containing 9. He allows his customers to simply buy one and only one of the kind of package that they prefer. What is the maximum price Andy could charge for the large package if he wants the Vanee customer to buy the package of 42 and the Keno customer to buy the package of 9?

Answer 1

Answer:

Explanation:

He will charge for smaller package Equal to consumer surplus of keno customer with q = 9  

Price of small package = 1 / 2 * 9 * 9

                                       =40.5

If veno willingness to pay for 9 updates is

= 1 / 2 * 9 * 9 + 9 * (42 - 9)

= 40.5 + 9 * 33

= 40.5 + 297 = 337.5

So he will get surplus of (337.5 - 40.5 = 297 by buying smaller package.

Veno willingness to pay for larger package = 1/2 * 42 * 42 = 882

To make veno buy larger package ,andy need to make sure that veno also get same CONSUMERs surplus by buying larger package.

So price for larger package = 882 - 297 = 585