Question

A company TFA has a monopoly on toilet paper production. It offers its product in three different sizes: a small (S) package which contains 4 rolls, a medium (M) package which contains 8 rolls, and a large (L) package which contains 12 rolls.

There are two types of consumers in the market: type A consumers and type B consumers. The willingness-to-pay (WTP) for each type of toilet paper package for each type of consumer is detailed in the table below (in dollar amounts):

Package Size	Type A Consumers	Type B Consumers
S	5	9
M	8	16
L	9	18

(c) Suppose that TFA now offers better prices for people buying larger packages of toilet paper. Specifically, while the price of the S package remains at $4, the M package will now be sold for $6.40 and the L package will now be sold for $9. How does this affect the consumption decisions of each type of consumer? How does it impact TFAs total revenues?

(d) TFA is considering discontinuing sales of the M packages, and selling only S or L packages (maintaining the same pricing strategy as in part c). If TFA's goal is to maximize their revenues, would this be a good strategy for them? Explain why or why not.

Answer 1

The table below summarizes the information.

Package size of Toilet rolls	Price in $	WTP for Type A consumers	Consumer surplus in terms of $ type A consumers	WTP for type B consumers	Consumer surplus for type B consumers
Small (4 rolls)	4 ($1/roll)	5	1	9	5
Medium (8 rolls)	6.40 ($0.8/roll)	8	1.60	16	9.60
Large (12 rolls)	9 ($1/roll)	9	0	18	9

Clearly from the table for both type of consumers, the price per roll is minimized at$0.8 and consumer surplus gets maximized for medium package. So consumption will move towards medium package.

Further Total Revenue will fall down as in order to sell more TPA had to cut down prices.

If sales of medium package is discontinued then type A consumers will buy small package because consumer surplus is higher.( even though large package per unit price is same)

Type b consumers will buy large roll as consumer surplus maximum.

Revenue will be maximized if TPA is able to sell large rolls ( i.e. more rolls ) for both type consumers.

With new strategy of discontinuation of medium package, type a consumers will prefer small package and type b large package.

This may not be a good stategy as revenue in type a consumer market declines due to lesser demand.

However exact effect of this stategy will be done after knowing cost function.