Question

You manage a cable company that offers 2 channels - NBC and Fox. You face 2 types of customers (type A and type B) and there are 100 customers of each type. Their respective values for each channel are: Type A Type B NBC $10 $15 Fox $3 $7 If you bundle the two channels together, what price should you charge for the bundle? (Write answer without the dollar sign.)

Answer 1

A customer will buy the channel if his/her willingness to pay is greater than or equal to the price that it is being charged for it.

The following table gives the willingness to pay. Willingness to pay for the bundle can be calculated by adding the Willingness to pay for NBC and Willingness to pay for Fox for each customer respectively.

If $22 is charged for the bundle, then only Type B customers will buy (because the price is equal to the willingness to pay of Type B. So, revenue = number of type B customer * price = 100*$22 = $2200

If $13 is charged then both type A and B customers will buy bundle because they both have the willingness to pay more than or equal to the price being charged. In this case, revenue = total customers that buy the bundle * price of the bundle = 200 (both type A and B) *$13 = $2600

Since there is higher revenue when $13 is charged, therefore, price of $13 should be charged for the bundle.