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

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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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