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, $50 per coat and $30 per pair of pants, i.e. MCcoat = $50 and MCpants= $30. 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 = $_______ ; Answer: Price for pants =$_________

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 = $_______

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: ________________

Answer 1

Answer.

Part A

	coat	pant
type R	80	60
type S	60	75

Cost of coat = $50

Cost of pant = $30

Profit on coat at price of $80 = $80 - $50

                                                     = $30

Profit on 2 coats at price of $60 = $120 - $100

                                                     = $20

Profit on two pants at price of $60 = $120 - $60

                                                     = $60

Profit on pant at price of $75 = $75 - $30

                                                     = $45

As by selling one coat for $80 we will get more profit that is $30 then by selling two coats at $60 which is $20. In the case of pants, we will sell two pants each for $60 and make the profit of $60 because by selling only one pant at $75 we are getting the profit of only $45.

Price of Coat = $80

Price of Pant = $45

Part B

At the cost of $135 all the will buy the suit, there will be a profit of $55 on each set. Because if we sell the suit at the price of $140 only half of the customers will buy it and we will have a profit of only $5 more that is $60.

Part c

Suppose if there are 100 customers.

Profit on coats = 100($30) = $3000

Profit on pants = 100($30) = $3000

Total profit = $6000

Profit on Suits = 100($55)

                          = $5500

The statement is true.