Movie House is an online seller of DVD's. To buy a DVD from Movie House, a customer must pay a monthly membership fee, plus a price for every DVD bought (this being a two-part tariff pricing scheme).
After some market research, Movie House discovers that the DVD market is separated into two segments: fanatics and amateurs. Fanatics have a demand curve Qc = 12 - P and amateurs have a demand curve Qa = 10 - 2P. P is the price of a DVD, Qc is the number of DVD's demanded by fanatics and Qa is the number of DVD's demanded by amateurs. There are 100 fanatics and 100 amateurs. Because all transactions are done on the interent, Movie House can not tell the difference between fanatics and amateurs and must charge both groups the same price.
The marginal cost of a DVD is $0, but Movie House has a fixed cost of $2,000.
A. Graph fanatics demand curve (Qc = 12 - P) and graph amateurs demand curve (Qa = 10 - 2P).
B. Suppose that Movie House wants to sell to only fanatics. To maximize profits, Movie House should charge a membership fee of ($0, $25, $30, $47, $60, $72) per member and a price of ($0, $1, $2, $3, $6, $10) per DVD.
C. If Movie House sells only to fanatics, its total profits will be ($0, $3,100, $5,100, $5,200, $7,200, $12,400).
Movie House has heard that selling to both market segments may increase its profits. To include both consumer groups in the market, it sets a price of $1 per DVD and a membership fee of $16.
D. On the graph from Part A. place a horizontal line at the price per DVD that Movie House will charge when it sells to both fanatics and amateurs.
E. On the graph shade the area that represents Movie House's membership fee when it sells to both fanatics and amateurs.
F. If movie house sells to both fanatics and amateurs, its total profits will be ($3,000, $3,075, $3,100, $5,000, $5,075, $5,100).
G. Is selling to both market segments profit maximizing? (Yes or No).