A warehouse club has customers with identical demand curves: Q=100-5P, where Q measures the annual number of merchandise units and P is the price per merchandise unit

Economics Dec 12, 2020

A warehouse club has customers with identical demand curves: Q=100-5P, where Q measures the annual number of merchandise units and P is the price per merchandise unit. The marginal cost of a merchandise unit is $10. If the warehouse club uses a two part tariff strategy, it will earn producer surplus of _ per customer.

a. $1,060

b. $75

c. $450

d. $250

Expert Solution

According to the scenario given above, Price is equal to marginal cost

Now,

Q = 100 - 5P

5P = 100 - Q

P = (100 - Q) / 5

When P = MC

(100 - Q) / 5 = 10

100 - Q = 50

Q = 50

Thus further equating price, then, P = (100 - Q) / 5

P = (100 / 5) - (Q / 5)

P = 20-Q / 5

Therefore, it woul earn a producer surplus of (20 - 10) * 50 * (1/2) = $250

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