1. (10 marks). Solve the menu of block prices example done in class for the parameter values and level of qL indicated below. Your solution should (i) derive values for qH, FL, FH and profits and (ii) show how buyers select from the menu. Menu of Block Prices Example p1 = a1 - q1, p2 = a2 - q2, MC = c, N buyers of each type Parameter and qL values: a1 = 40, a2 = 50, c = 0. qL = 10

2. (10 marks). Use the diagram below to explain the profit earned from each buyer from the contracts in part c). Explain what happens to FL, qH and FH and the profits earned from each buyer if qL is slightly increased. Indicate whether overall profit will rise or fall. Note : Diagram does not accurately reflect the distance between the demand curves or the positioning of qL between the origin and the demand curves. Note also that there are no user fees and so the p1 and p2 indicated on the diagram are not user fees but are intended to assist in making the argument about how profits will change.qL A B MC = 0 D2D1 D C p2 p1