Question

Pindyck & Rubinfeld, 8e. Ch. 11, #9. You are an executive for Super Computer, Inc. (SC), which rents out super computers. SC receives a fixed rental payment per time period in exchange for the right to unlimited computing at a rate of P cents per second. SC has two types of potential customers of equal number—10 businesses and 1 10 academic institutions. Each business customer has the demand function Q = 10−P, where Q is in millions of seconds per month; each academic institution has the demand Q = 8 − P. The marginal cost to SC of additional computing is 2 cents per second, regardless of volume.

(a) Suppose you could separate business and academic customers. What rental fee and usage fee would you charge each group? What would be your profits?

(b) Suppose you were unable to keep the two types of customers separate and charged a zero rental fee. What usage fee would maximize your profits? What would be your profits?

(c) Suppose you set up one two-part tariff—that is, you set one rental and one usage fee that both business and academic customers pay. What usage and rental fees would you set? What would be your profits?