Consider the following scenario:
A firm encounters two demand functions:
• Strong demander: PS = 20 – QS.
• Weak demander: PW = 10 – QW.
The firm's marginal cost is $2, and there are no total fixed costs.
To boost its total profit, the firm is considering a two-part pricing strategy.
In this simplified setting, there is only one strong demander and one weak
demander present in the market.
a) If the firm assumes that there is only strong demander in the market,
what will be the entry fee (A), price of the product (P), and total profit (Ï€)?
b) If the firm assumes that there are both strong and weak demanders in
the market and sets P = MC, what will be the entry fee (A), price of the
product (P), and total profit (Ï€)?
c) If the firm assumes that there are both strong and weak demanders in
the market and sets P > MC, what will be the entry fee (A), price of the
product (P), and total profit (Ï€)?
d) What would be the best option for the firm to select?