Consider a monopolist who own an exclusive source of spring water, which produces water at 0 cost. The demand curve of the springwater is

q = 1pif p > p*

q=1pif 0 p p*

The monopolist decided to use the membership feeCin addition to the per unit pricepof the water to generate the profit. (If you are a member of Amazon Prime, you have to pay annual membership feeC, and when you buy a good, you payp.)

1. Assume thatp*= 0.4. Suppose that the monopolist chargepmfor a small >0but also chargeC=. If the consumer is willing to purchaseq= 1(pm), paying subscription feeC=, what is the profit of the monopolist?
2. What is the optimal values of membership feeCand unit pricep, ifp*= 0.4? What is the monopolist's maximum profit? Compare the value to the profit you calculated in the first part of the questions.
3. Calculate the maximized profit of the monopolist from the two part tariff as a function ofp*.
4. Ifp*= 0, the solution is often called "Mickey Mouse Monopoly". Explain the pricing practice of Disney World as the profit maximization behavior of the firm.