(solution) 1. Suppose Sarah's individual demand curve for the number of

(solution) 1. Suppose Sarah's individual demand curve for the number of

1. Suppose Sarah?s individual demand curve for the number of hours she would like to play tennis per week is given by: Q = 10 ? (0.1)*P, where Q is measured in hours and P is the measured in $ per hour. Suppose further that for the local tennis club the marginal cost of providing a tennis court is a constant $50 per hour. What is the optimal two-part tariff solution to this problem? What are the profits that the tennis club can earn by charging Sarah this two part tariff? If the tennis club could only charge an hourly rate how much would it charge Sarah? How much profit would it now earn?

2. Jill wants to rent a DVD but she has to decide whether to shop at the ?Big Store? or at the ?Small Store.? Jill doesn?t like to shop at the ?Big Store? but they always have the DVD she wants. On the other hand, she doesn?t mind going to the ?Small Store?but there is a 20% chance that they don?t have the DVD she wants. Jill gets 50 Utils of happiness if she gets to watch the DVD she wants, and looses 15 Utils if she shops at the ?Big Store.? Note that Jill doesn?t have time to go to both shops. Where should Jill go to get her DVD? How valuable is it to Jill (in terms of Utils) to find out whether the ?Small Store? has the DVD she wants?

3. Two consumers are buying software and their reservation prices for the Spreadsheet software and the Word processing software are given as follows:

Amir’s WTP (Willingness to Pay or Reservation Price ->

for Spreadsheet: 150 ; Word Processing: 100

Glen’s WTP (Willingness to Pay or Reservation Price->

for Spreadsheet: 100 ; Word Processing :150

Suppose that the marginal costs are constant at $10 for each package. Should we seta different price for Spreadsheet software and Word Processing software? Or shouldwe bundle them? What exact prices should we set?