Question

2. Suppose a video game company sells the following two products separately: console and headset. Through a consumer survey group, it has estimated that the following individuals value the two products at the following prices:

           

Consumer	Console Valuation	Headset Valuation
Louis	$350	$40
Lois	$200	$60

a) If the company prices the console at $350 each and the headset at $40 each, how much revenue will the firm receive?

b) If the company prices the console at $200 each and the headset at $60 each, how much revenue will the firm receive?

c) Suppose the company bundles the console and the headset together for a package price of $260 each. What would be the total revenue in this case?

d) Is there a bundle price at which both consumers will purchase the package that yields the highest revenue of any possibility on this page? If so, what will it be? If not, why not?   

Answer 1

Answer:

Given that:

Suppose a video game company sells the two products separately :console and headset.

(a)

Louis value console at $350 and headset at $40.

Lois value console at $200 and headset at $60.

A consumer is willing to purchase a good if the price is less than or equal to his or her maximum willingness to pay.

If company sells console at $350 each and headset at $40 each then only Louis will purchase both as his maximum willingness to pay is equal to the given price.

Total revenue = $350 + $40 = $390

Thus,

The firm will receive revenue of $390.

(b)

Louis value console at $350 and headset at $40.

Lois value console at $200 and headset at $60.

A consumer is willing to purchase a good if the price is less than or equal to his or her maximum willingness to pay.

If company sells console at $350 each and headset at $60 each then Louis will purchase both as his maximum willingness to pay is equal to or greater than the given price of both while Lois will purchase only headset as her maximum willingness to pay is equal to the price of headset.

Total revenue = $350 + $60 + $60 = $470

Thus,

The firm will receive revenue of $470.

(c)

Louis value console at $350 and headset at $40.

Lois value console at $200 and headset at $60.

A consumer is willing to purchase a good if the price is less than or equal to his or her maximum willingness to pay.

If the company sells the console and headset as bundle for $260 then this price is equal to combined maximum willingness to pay of Louis and thus he would purchase the bundle.

Total revenue = $260

Thus,

The firm will receive revenue of $260.

(d)

Louis value console at $350 and headset at $40.

Lois value console at $200 and headset at $60.

A consumer is willing to purchase a good if the price is less than or equal to his or her maximum willingness to pay.

If company sells the console and headset as bundle and charges $260 then this price is less than the combined maximum willingness to pay of Louis and is equal to the combined maximum willingness to pay of Lois.

So, both will make the purchase if bundle is priced at $260.

In such case,

Total revenue = $260 + $260 = $520

Thus, there is bundle price at which both consumers will purchase the package and that yields the highest revenue other than seen in a), b), or c).

The bundle price would be $260 and revenue will be $520.