Problem 2. Two-Part Pricing

You are an executive for Aztechnology, Inc. (AZ), which rents out super computers. AZ receives a fixed rental payment per time period in exchange for the right to unlimited computing at a rate of P pesos per second. AZ has two types of potential customers of equal number10 businesses and 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 of additional computing is 2 pesos per second, regardless of volume.

a) Suppose that 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?