Merriwell Corporation Has a Virtual Monopoly in the Ultra-High Speed

question 1

Essay

Merriwell Corporation has a virtual monopoly in the ultra-high speed computer market. Merriwell has recently introduced a new computer that will be used by satellite installations around the world. The installations have identical demands for the computers. Merriwell's managers have decided to lease rather than sell the computer, but they have been unable to decide whether to use a single hourly rental charge or a two-part tariff. Under the two-part tariff, users would be levied an "access charge" plus an hourly rental rate. Merriwell's marketing staff estimates the demand and marginal revenue curves below for each potential user:
P = 45 - 0.025Q
MR = 45 - 0.05Q,
where P = price per hour of computer time, and Q = the number of hours of computer time leased per month. Merriwell offers their users extensive maintenance assistance and technical support. The firm's engineers estimate that marginal cost is $30 per computer hour.
a. Assuming that Merriwell chooses to set a single price, what are the firm's profit maximizing price and output?
b. Assuming that Merriwell uses a two-part tariff, what "access charge" and hourly rental fee should the firm set? Compare the firm's revenues under the options in (a) and (b).
c. Briefly describe how differing demand curves among the various buyers would alter the two-part tariff.

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Definitions:

Scrap Value

The estimated resale value of an asset after its useful life is over and it can no longer be used for productive purposes.

Monthly Rates

Interest or other rates measured or applied over a one-month period, commonly used in loans, leases, or savings accounts.

Monthly Rates

Rates recalculated on a monthly basis, often used to express the cost of financing or earning on investments on a monthly timeline.

Annual Rates

Refers to the interest or growth rate over a period of one year.