Question

Problem IX A,B,C: Consider the following valuations table for five consumers willing to purchase two differently colored T-shirts:

CONSUMER	VALUATION FOR BLUE T-SHIRTS	VALUATION FOR PINK T-SHIRTS
John	50	15
Bob	40	30
Tim	35	35
Jennifer	25	45
Maria	10	50

a) Assuming no production costs, what is the most profitable way to price these two goods independently? What are the prices and resulting profit?

b) Assuming no production costs, what is the most profitable way to price these two goods using bundling? Analyze both pure and mixed bundling, state the prices and resulting profits and choose the best option.

c) Assuming costs of production of $27 per t-shirt (regardless of color), what is the most profitable bundling pricing strategy? Specify whether it’s better to use mixed or pure bundling, then record the optimal prices and resulting profit.

Please answer this question in complete detail as I don't understand this subject too well. Thank you

Answer 1

a) From the above table, it is clear that the least valuation for blue T-shirts and pink T-shirts are 10 and 15 respectively. Therefore, the most profitable price of Blue T-Shirts = $10 and pink T-shirts = $15

b) We can show the valuation table as follows:

Consumer	Valuation for Blue T-shirts	Valuation for Pink T-shirt	Bundling valuation of both shirts
John	50	15	65
Bob	40	30	70
Tim	35	35	70
Jennifer	25	45	70
Maria	10	50	60

From the above table, the least bundling valuation for both T-shirts is 60. therefore, the pure bundling price should be $60. Again, the most profitable prices for both blue and pink T-shirts are $10 and $15 respectively. Therefore, the mixed bundling price for two T-shirts should be $10+$15 =$25

In this case, pure bundling is best option.

c) Again if the costs of production per T-shirt (Blue or pink) = $27. Then bundled cost of both T-shirts = $54 which means that it is better to use pure bundling for maximum profits.

Pure bundling price = $60 and profit per bundle = $60-$54= $6.