Question

CompuTrip Inc. offers two softwares, Street Finder and Trip Planner, which are produced at a cost of $2 and $1 per unit respectively (and zero fixed costs). The market research department has estimated that there are four groups of 100,000 customers each that buy the two products: professionals, travelers, geeks and ordinary consumers. Professionals have a reservation price of $12 for Street Finder and $6 for Trip Planner. Travelers have a reservation price of $10 for Street Finder and $5 for Trip Planner. Geeks have a reservation price of $8 for Street Finder and $4 for Trip Planner. Finally, ordinary consumers have a reservation price of $6 for Street Finder and $3 for Trip Planner. Based on this information, which of the following alternatives maximizes profit for the firm?

a) Sell Street Finder for $6 and Trip Planner for $3.

b) Sell Street finder for $6 and Trip planner for $4

c) Sell both (in a bundle) for a combined price of $12

d) Sell Street Finder for $12, sell Trip Planner for $4 or both (in a bundle) for a combined price of $15.

Answer 1

In case of alternative (a) when street finder will be sold for $6 and trip planner will be sold for $3, then total 4 street finder and 4 trip planner will be sold out because selling price is less or equal to reservation price of all type of customers. So profit from alternative a is 4*(6-2) + 4*(3-1) = $16 + $8 = $24.

From alternative (b) the street finder will be sold out 4 units and trip planner will be sold out 3 units because the ordinary customer will not buy trip planner because it's reservation price is 3 but it's selling price is 4. So profit from alternative b is 4*(6-2) + 3*(4-1) = 16 +9 = $25

From alternative (c) we can say when it will be sold at a bundle i.e both in a single price of $12 then three types of consumer will be able to buy that and the ordinary consumer will not buy because it's reservation price with bundle is $9 and it is less than $12. So all other 3 type of consumer will buy it in bundle because their reservation price with bundle is less or equal to 12. Now the profit under this price will be 3*(12 - 3) = $27. 3 we have got adding the per unit cost of both i.e 2+1=3. Here the profit is $27.

From alternative (d) If the combined price be 15, then two type of consumer will be able to buy that , in this case the profit will be 2*(15 - 3) = $24. If it is sold in $12 for street finder and $4 for trip planner then the profit will be 1*(12-2) + 3*(4-1) =$19.

By analysing all the alternatives we get that the profit from (c) alternative is highest for firm i.e $27. So answer is C.