You are a produce grocer who sells two products: apples and bananas (you sell them in bushels, but weâll just consider a bushel to be one unit of fruit). Each costs you $1 per bushel wholesale, which is your only cost. You can prevent resale among your customers, of which there are three, each with unit inelastic demand. Consumer 1 has a willingness to pay of $2 per apple (bushel) and $8 per banana (bushel). For Consumer 2, the willingness to pay is $4 for apples and $6 for bananas. Consumer 3 would pay up to $9 for apples but only $1 for bananas.
A. Suppose you price apples and bananas separately. What is the profit-maximizing price for each?
B. What is the profit-maximizing price if you sell the two fruit as a pure bundle?
C. What leads to higher profits â selling separately or offering a pure bundle? Explain how this answer relates to the correlation in consumersâ willingness to pay across apples and bananas.
D. Can you do better by mixed bundling? Explain why or why not?
E. Does your answer to part (d) change if your production cost is $3 per unit instead?
You are a produce grocer who sells two products: apples and bananas (you sell them in bushels, but weâll just consider a bushel to be one unit of fruit). Each costs you $1 per bushel wholesale, which is your only cost. You can prevent resale among your customers, of which there are three, each with unit inelastic demand. Consumer 1 has a willingness to pay of $2 per apple (bushel) and $8 per banana (bushel). For Consumer 2, the willingness to pay is $4 for apples and $6 for bananas. Consumer 3 would pay up to $9 for apples but only $1 for bananas.
A. Suppose you price apples and bananas separately. What is the profit-maximizing price for each?
B. What is the profit-maximizing price if you sell the two fruit as a pure bundle?
C. What leads to higher profits â selling separately or offering a pure bundle? Explain how this answer relates to the correlation in consumersâ willingness to pay across apples and bananas.
D. Can you do better by mixed bundling? Explain why or why not?
E. Does your answer to part (d) change if your production cost is $3 per unit instead?
Related textbook solutions
Related questions
Scenario Bundling.1 :
Konon Company produces both digital cameras and photo printers. The marginal cost for a digital camera is 120 and the marginal cost for a photo printer is 80. There are four types of customers for Konon's digital camera and photo printers and their reservation prices are given in the table below.
|
Reservation |
Camera |
Printer |
|
A |
200 |
100 |
|
B |
150 |
150 |
|
C |
210 |
20 |
|
D |
50 |
180 |
The possible pricing strategies are listed in the table below.
|
Prices |
Camera |
Printer |
Bundle |
|
Separated Prices |
150 |
150 |
-- |
|
Pure Bundling |
-- |
-- |
280 |
|
Mixed Bundling |
200 |
150 |
300 |
You can assume each consumer only needs to buy 1 camera and 1 printer and they will purchase a product as long as the consumer surplus from purchasing the product is non-negative.
Refer to Scenario Bundling.1. Assuming there is only one customer of each type, what is the total producer surplus from pricing separately for Konon? We assume that if a consumer's willingness to pay equals the price, the consumer will purchase the product.
A. 150$
b. 350$
c. 120$
d. 230$
