Question

Assume that you manage a firm that sells calculators. You want to sell calculators to both commercial users and home users, and so you have developed 2 types of calculators - fancy and basic calculators. Each customer type has the following valuations for each type of calculator:

	Home User	Commercial User
Fancy Calculator	$100	$200
Basic Calculator	$30	$50

If you have an 100 home users and 100 commercial users that at most will buy 1 calculator each, you will maximize total revenue by setting what price for the fancy calculator? (Write answer without the dollar sign.)

Answer 1

A person will buy the fancy calculator as long as the price is less than or equal to the valuation that is given in the table.

If the price of Fancy calculator is $100, then both type of customers buy because the price is less than or equal to the valuation of both of them and therefore, a single consumer pays $100. Total customers = 100 + 100 = 200. Total revenue is this case = 200*$100 = $20,000.

If the price of Fancy calculator is $200, then both only commercial users buy because the price is equal to the valuation. Home users do not buy because the price is higher than their valuation. So, every 100 commercial users buy fancy calculator at $200. Total revenue is this case = $200*100 = $20,000.

Therefore, the price that can be charged is $100 or $200. In both the cases, total revenue remains the same.