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Maximum price which video rental franchise could charge

Assume that Bill is a big movie buff & enjoys renting movies from the local video rental outlet. Suppose that he is eager to pay $5 for the first movie he rents for the weekend but would pay only $4 for a second and yet only $3 for a third movie. If the video rental franchise charges is $3.50 per movie what will Bill's consumer surplus be and why? Suppose now that the video rental franchise now has new package deal wherein it offers to rent three movies to customers at price of $9.00 would Bill be interested? How much consumer surplus would he benefit from now? What is the maximum price which the video rental franchise could charge and yet make Bill interested in the package deal?

Bill will enjoy consumer surplus of $2.00. He'll rent the first movie & enjoy a surplus of $1.50 ($5.00 - $3.50) and he'll rent the second movie and benefit from a surplus of $.50 ($4.00 - $3.50). He will not rent the third movie as this will result in negative consumer surplus. If the video rental franchise provides a package deal for $9.00 Bill will take it. The cause is that his consumer surplus will be $3.00 ($5 + $4 + $3 - $9). The maximum price which could be charged for the package deal would be one in which the consumer surplus is the similar for Bill as it would be if he had to pay for each of the movies separately. As the $9 price leaves him along with a consumer surplus of $3 it have to be that $10 would be the maximum that he would be eager to pay as that deal still provides him along with a $2 surplus.

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