(a). You are an executive for Video Palace (VP), Inc., which rents out movies. VP has two types of potential customers of unequal number - 1400 adults and 1000 seniors. Adults have demand functions Q = 10 - P, where Q is the number of movies rented per month; seniors have demands Q = 8 - P. The marginal cost to VP of additional rentals is $2 per movie, no matter what the volume of rentals. Suppose you are restricted in setting a common membership and rental fee for all your customers. What membership and rental fees will you set to maximize profits?

(b). What if Video Palace, Inc. has only adult customers (1400 of them), and it wants to set two prices for rentals, a regular price, P₁ , and a volume discount price, P₂. What are the optimal values of P₁ and P₂?

(c). Now suppose Video Palace, Inc. requires the adult customers to pay a membership fee to be entitled to rent movies at the store at block prices. What two-part tariff with a block-pricing twist would maximize Video Palace's profits? What will be the optimal level of Q₂? What will be the level of profits per customer?