Question

You are a profit-maximizing firm. Suppose there are two types of customers (50% of 1 type, 50% of the other) who shop in your specialty clothing store. Consumers of type R will pay $80 for a coat and $60 for pants. Consumers of type S will pay $60 for a coat and $75 for pants. Your firm faces no competition and but it does pay for the clothing, $30 per coat and $50 per pair of pants, i.e. MC_coat = $30 and MC_pants= $50. You can’t price discriminate. You offer the same prices to all your customers.

(Show your work)

(A) Suppose you post a price for a coat and a price for pants. What are the profit-maximizing prices to charge?

            Answer: Price for coat = $_______ ;             Answer: Price for pants =$_________

(Show your work)

(B) Suppose instead that you only offer a bundle of one coat and one pair of pants (which we would call a suit.) What is the profit-maximizing price to charge for the suit?

                        Answer: Price for suit = $_______

(Show your work)

( C) Answer True or False and then show or explain how you reached your conclusion.: Profits in Part (B) with bundling are higher than in Part (A) of this problem.

            Answer: ________________

(Show your work)

Answer 1

Willingness to pay for	type R	type S
Coat	80	60
Pant	60	75

Coat MC: 30

Pant MC:50

A) individual pricing

For coat, if charge p = 60, both type will buy, so total revenue = 120

total cost= 30+30= 60

total profit = 60

if charge $ 80, type S will exit the market, only type R will buy, so total profit = 80-30= 50

thus charge price =$ 60

For pant: if p= 60, TR =120, TC =100, profit = 20

If P=75, Profit = 75-50 = 25$

( As only type S will buy)

So Price for coat = $60

Answer: Price for pants =$75

Answer b) pure bundling

combined WTP for two good, by type R = 80+60=140

by type S= 60+75 = 135$

SO cost of bundle °= 30+50=80

so if charge P= 135, both type will buy the bundle, profit = TR - TC

So profit = 135*2 - 2*80 = 270-160 = 110$

If p =140, only type R will buy , profit = 140-80 = $60

Thus price of suit = $135

answer c)

so profit in bundling is =$110

In separate selling, total profit = profit from pant + from coat

= 25+60 = $85

Thus Answer is TRUE.

bundling yields more profit