After Graduation, You Start an Internet-Based Firm That Allows People

question 32

Essay

After graduation, you start an internet-based firm that allows people to buy and sell books online. Based on your market research, you believe there are two basic types of customers. The first type is the casual reader who has relatively low willingness-to-pay for your services, and their annual demand is Q1 = 30 - 40P where Q1 is the number of books traded per year and P is the price you charge per book traded. The second type of customer is the avid reader who has relatively high willingness-to-pay for your services, and their demand is Q2 = 100 - 50P. The marginal cost of your online service is $0.40 per book traded.
a. If you set your usage fee equal to the marginal cost, how many books will each type of customer trade on your system? What is the consumer surplus enjoyed by each type of customer?
b. What is the optimal entry fee that you should charge under a two-part tariff pricing scheme for access to your online market? How much consumer surplus is left for the two types of customers after they pay the entry fee and usage fee?

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Definitions:

Memorization

The process of committing something to memory or learning it by heart.

Hindsight Bias

The inclination to think, following an event, that one could have foreseen or anticipated the result, commonly called the "I-knew-it-all-along" effect.

Spontaneous Recovery

The reappearance of a conditioned response after a period of apparent extinction or reduction.

Repressed Memories

Remembrances that have been involuntarily repressed, connected to severe stress or distressing experiences.