Problem 2:

Menu Pricing. Assume that there are two types of fans of Chicago Cubs games: Lukewarm (L) and Passionate (P). Each Lukewarm fan has a representative demand curve given by PL = 120 3QL Each Passionate fan has a representative demand curve given by PP = 150 3QP . The marginal cost of ticket production is constant at MC = 30 for all consumers.

1. Suppose the Cubs can perfectly distinguish between the two types of fans and set different two-part tariffs for each type.

a) What fixed fee and per unit price will they set for Lukewarm fans?

b) What fixed fee and per unit price will they set for Passionate fans?

c) What is the consumer surplus for each type of consumer?

d) What are the profits for the Cubs from each type of fan?

2. Suppose instead that the Cubs can't distinguish between the two types of fans. Instead of setting a single constant price per game, the Cubs engage in menu pricing.

a) How many tickets do the Cubs sell to each Lukewarm fan? What is the price of this package?

b) What is Passionate fan surplus when they buy the Lukewarm fan package?

c) How many tickets do the Cubs sell to each Passionate fan? What is the price of this package?

d) What is the consumer surplus of each type of consumer?

e) What are the profits for the Cubs from each type of fan?

f) Compute the average price per ticket (package price divided by quantity) for each type of fan.

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