Rajesh decides to open a bar. For any given night, Rajesh will have fixed cost of $1,000 plus a variable cost of $0.50 per drink. Drinks are the only thing Rajesh sells at the bar.

T C = 1000 + 0.5Q

MC = 0.5

(Q is number of drinks)

So Rajesh looks to the market and find a set of party animals (or USC students after midterms). There are 500 of these customers in a given night.

They each have the same demand curve for drinks: Q = 10 - 2P (P is the price of a drink)

1. Find the individual inverse demand curve.

2. How should Rajesh price the drinks?

3. How many drinks should each customer consume?

4. What will the total number of drinks sold be?

5. What will Rajesh's total profit be? Rajesh did very well with this strategy but there is some consumer surplus that is slipping through his hands. So Rajesh decides to add a cover charge at the door while setting a new price for each drink.

6. What is the profit-maximizing price for drinks?

7. What is the profit-maximizing cover charge?

8. What will Rajesh's total profit be?