Question

Use the following table to answer questions below. Assume the cost of producing the goods is zero and that each consumer will purchase each good as long as the price is less than or equal to value. Consumer values are entries in the table:

Consumer values for two goods

	Consumer A	Consumer B
Good 1	$2,300	$2,800
Good 2	$1,700	$1,200

(a) Suppose the monopolist only sold the goods separately. What price will the monopolist charge for Good 1 to maximize revenues for good 1?

(b) What is the total profit to the monopolist from selling the goods separately?

(c) What is a better pricing strategy for the monopolist? What is the resulting profit?

Answer 1

a)The monopolist can either sell the goods separately or bundle them together.

If the monopolist is selling goods separately, then in order to maximise the profit, he would sell good 1 at $2300. This is because at this price both the buyers would purchase the good , and if he sells at $2800, consumer A would not purchase it.

b) If the monopolist sells the goods separately, then he would sell them at the price where both the consumers would buy them.

For good A, the price would be $2300 and for good B , the price would be at $1200. These prices would be the ones when both the consumers would buy the goods and hence the revenues and profits would maximise.

The revenue would be $2300*2+1200*2= $7000

So the revenue from selling the goods separately would be $7000.

c) If the seller decides to bundle the goods, he would be able to sell at $4000 each because given the willingness of each consumer for different good separately, this would be the sum of the willingness.

If the seller sells at this price, the revenue and the profit, given there are no costs would be $8000.

This strategy of bundling would given higher profit than selling goods separately.