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:

ANOVA

A statistical method used to compare the means of three or more samples to find out if at least one sample mean is significantly different from the others, considering variation within and between groups.

Independent Variable

A variable that is manipulated or changed in an experiment to observe its effect on a dependent variable.

Outcome Variable

Another term for the dependent variable, specifically referring to the result or effect measured in a study.

Factorial Analysis

A statistical method used to describe variability among observed variables in terms of a potentially lower number of unobserved variables called factors.