Micro 2-14

Micro 2-14 - o Admission Fee = $3 Variable Fee o Blank DVDs...

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Microeconomics 2-14 Strategic Pricing Consumer Surplus CS = MU – P Spose o MU = $3 (what you value it at/ are willing to pay. Marginal Utility) o P = $1 (what you pay) o CS = $2 (Consumer Surplus = gap between demand curve and price) o CS is area of triangle btwn demand curve and price when you buy Q* - all quantities which have an MU above P* (when you value it to be better than the price) o Revenue is the area of the rectangle PQ o If business can charge the MU for each purchase (max consumer is willing to pay), revenue becomes PQ + CS, and consumer has no CS. Businesses can almost never figure out exact MU for each individual. Can only follow averages and research demand o Businesses want your CS Calculate CS as (MU1-P) + (MU2 – P) until P is at Q Two-Part Pricing Fixed Fee (doesn’t vary with the quantity you buy) o Entry Fees, Membership Fees o DVD recorder = fixed fee (one time purchase)
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Unformatted text preview: o Admission Fee = $3 Variable Fee o Blank DVDs = variable fee (to keep recording, you keep buying) o Variable Fee = $2/ride Tradeoff between Entry Fee and Variable Fee If variable fee is high, CS is smaller, less CS to take as entry fee If variable fee is low, CS is bigger, able to get higher entry fee Consumer Heterogeneity Example: Demand for printer cartridges o Person A loves photography o Person B so-so Better to have o Low entry fee (get both people into the market) o High variable price (cartridges) Why is popcorn so damned expensive in theaters? Movie ticker (entry fee) Popcorn (variable cost) Consumer Heterogeneity o Some desire both o Some only want to see the movie Ideal strategy o Movie relatively cheap o Popcorn relatively expensive...
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This note was uploaded on 04/30/2008 for the course ECON 200 taught by Professor Park during the Spring '08 term at American.

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Micro 2-14 - o Admission Fee = $3 Variable Fee o Blank DVDs...

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