Answer to Question 1
This is so because (1) we assume that the monopolist must sell all its product at a single price (no price discrimination) and (2) to raise output and sell it, the firm must lower the price it charges. Selling the additional output will raise revenue, but this increase is offset somewhat by the lower price charged for all units sold. Therefore, the increase in revenue from increasing output by 1 (the marginal revenue) is less than the price.
Answer to Question 2
Bill will enjoy a consumer surplus of 2.00 . He'll rent the first movie and enjoy a surplus of 1.50 (5.00 - 3.50) and he'll rent the second movie and enjoy a surplus of .50 (4.00 - 3.50). He will not rent the third movie since this will result in negative consumer surplus. If the video rental franchise offers a package deal for 9.00 Bill will take it. The reason is that his consumer surplus will be 3.00 (5 + 4 + 3 - 9). The maximum price that could be charged for the package deal would be one in which the consumer surplus is the same for Bill as it would be if he had to pay for each of the movies separately. Since the 9 price leaves him with a consumer surplus of 3 it must be that 10 would be the maximum that he would be willing to pay since that deal still provides him with a 2 surplus.
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