Question

A = -7.25, B = $200, C = $80, D =$140, E= $120, F= $40 and G = $20.​

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 __B__ for a coat and __C__ for pants. Consumers of type S will pay __D__ for a coat and __E__ for pants. Your firm faces no competition and but it does pay for the clothing, __F__ per coat and __G__ per pair of pants, i.e. MCcoat = __F__ and MCpants= __G__. You can't price discriminate. You offer the same prices to all your customers.

(Show your work) (A) (2 pts.) 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 = $_______ ; Answer: Price for pants =$_________

(B) (2 pts.) 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 = $_______

( C) (2 pts.) 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: ________________

(Did you always show your work?)

Answer 1

We have two type of customers:

one Customer of R & one Customer of S

R can pay max (200, 80) for coat and pant. whereas S can pay max ( 140,120) for coat and pant.

Coming to coat , if we charge 200 for coat then the revenue will be just 200 as only R will purchase but if we have price as 140 then both will purchase so the revenue will be 2*140= 260

So the price of coatshould be 140.

Coming to pant, the max R will spend is 80 and S can spend 120. If company charges 80 then both the buyers will buy hence 160 will be revenue.

Part A) Price of coat will be $140 and price of pant $ 80.

Part B) Since we have to do bundling the bundle will cost 280 for R and 260 for S. since it has to be sold as a bundle the company should charge $ 260 so that both R and S will be able to afford the suit.

hence answer is $260.

Part C) Profit in bundling will be 260- (40+20)= 200

Profit in part A will be = 140+80 -(40+20)= 160.

hence we see that in bundling the profit is higher. hence, True!