If all customers had the same demand curve,the firm would set a price equal to marginal cost ad t consumer surplus When consumers have firm is faced with the following problem.If it sets the user fee equal to the larger consumer surplus.the firm will earn profits only from the consumers with the larger consumer surplus because the second group of consumers will not purchase any of the good.On the other hand,if the fee equal to the small consumer surplus,the firm will earn revenues from both types of consumers. 9.Why is the pricing of a Gillette safety razor a form of a two-part tariff?Must Gillette be a monopoly producer of its blades as well as its razors?Suppose you were advising Gillette on how to determine the two parts of the tariff.What procedure would you suggest? By selling the razor and the blades separately.the pricing of a Gillette safety razor can be thought of as a two-part tariff where the entry fee is the cost of the cazor and the age foo is the st of the blades Gillette does not ned tobe monopoly producer of its blades.In the simplest case where all consumers have identical demand curves,Gillette should set the blade price to marginal cost.and the razor cost to total consumer surplus for each consumer.Since blade price is set to marginal cost it does not matter if Gillette has a monopoly or not.The determination of the two parts of the tariff bec more complicated the reater the variety of consumers with different demands and there is no simple formula to calculate the optimal two part tariff.The key point to consider is that as the entry fee becomes smaller,the number ofentrants will rise,and the profit from the entry fee will fall.Arriving at the optimal two part tariff might involve some amountof iteration over different entry and usage fees 10.In the town of Woodland,California there are many dentists but only one eye doctor.Are senior citizens more likely to be offered discount prices for dental exams or for eye exams?Why. The dental market is competitive,whereas the eye doctor is a local monopolist. Only firms with market power can practice price discrimination,which implies eenior citizens are more likely to be offered discount prices from the eve doctor Each dentist is already charging a price equal to marginal cost so they are not able to ofer a discount 11.Why did MGM bundle Gone with the Wind and Getting Gertie's Garter?Wha characteristic of demands is needed for bundling to increase profits? Loews bundled its film Gone with the Wind and Getting Gertie's Garter to maximize revenues.Because Loews coul not price discriminate by charging a different price to each customer acoording to the customers price elasticity,it chose to bundle the two films and charge theaters for showing both films.The price would havebeen the combinedeservation prices of th last theater that ow wanted to attract. Of course,this tactic would only maximize revenues if demands for the two films were negatively correlated,as discussed in the chapter. If all customers had the same demand curve, the firm would set a price equal to marginal cost and a fee equal to consumer surplus. When consumers have different demand curves and, therefore, different levels of consumer surplus, the firm is faced with the following problem. If it sets the user fee equal to the larger consumer surplus, the firm will earn profits only from the consumers with the larger consumer surplus because the second group of consumers will not purchase any of the good. On the other hand, if the firm sets the fee equal to the smaller consumer surplus, the firm will earn revenues from both types of consumers. 9. Why is the pricing of a Gillette safety razor a form of a two-part tariff? Must Gillette be a monopoly producer of its blades as well as its razors? Suppose you were advising Gillette on how to determine the two parts of the tariff. What procedure would you suggest? By selling the razor and the blades separately, the pricing of a Gillette safety razor can be thought of as a two-part tariff, where the entry fee is the cost of the razor and the usage fee is the cost of the blades. Gillette does not need to be a monopoly producer of its blades. In the simplest case where all consumers have identical demand curves, Gillette should set the blade price to marginal cost, and the razor cost to total consumer surplus for each consumer. Since blade price is set to marginal cost it does not matter if Gillette has a monopoly or not. The determination of the two parts of the tariff becomes more complicated the greater the variety of consumers with different demands, and there is no simple formula to calculate the optimal two part tariff. The key point to consider is that as the entry fee becomes smaller, the number of entrants will rise, and the profit from the entry fee will fall. Arriving at the optimal two part tariff might involve some amount of iteration over different entry and usage fees. 10. In the town of Woodland, California there are many dentists but only one eye doctor. Are senior citizens more likely to be offered discount prices for dental exams or for eye exams? Why. The dental market is competitive, whereas the eye doctor is a local monopolist. Only firms with market power can practice price discrimination, which implies senior citizens are more likely to be offered discount prices from the eye doctor. Each dentist is already charging a price equal to marginal cost so they are not able to offer a discount. 11. Why did MGM bundle Gone with the Wind and Getting Gertie’s Garter? What characteristic of demands is needed for bundling to increase profits? Loews bundled its film Gone with the Wind and Getting Gertie’s Garter to maximize revenues. Because Loews could not price discriminate by charging a different price to each customer according to the customer’s price elasticity, it chose to bundle the two films and charge theaters for showing both films. The price would have been the combined reservation prices of the last theater that Loews wanted to attract. Of course, this tactic would only maximize revenues if demands for the two films were negatively correlated, as discussed in the chapter