In: Economics
Consumer Type |
PowerPoint |
Excel |
Word |
Accountants |
$60 |
$175 |
$75 |
Marketing/Sales |
$125 |
$80 |
$135 |
Administrative Assistants |
$75 |
$100 |
$140 |
The above table contains the maximum prices different types of consumers are willing to pay for three software titles: PowerPoint, Excel and Word. Suppose there are 100 consumers of each type.
a. (6 pts) Which of the following three strategies has the chance of generating the highest revenue for Microsoft?
Support your answers with revenue estimates for each
strategy.
Strategy A. Charge a single price of $315 for the bundle of
PowerPoint, Excel and Word
Strategy B. Charge $60 for PowerPoint, $80 for Excel and $75 for
Word
Strategy C. Charge $125 for PowerPoint, $175 for Excel and $140 for
Word
The best strategy among A, B, and C is…
b. (4 pts) Can you suggest a strategy that would produce higher revenue that any of the above three strategies? Support your answer with numbers.
Type | Power point | Excel | Word | Bundle |
Accountants | 60 | 175 | 75 | 310 |
Marketing | 125 | 80 | 135 | 340 |
Assistants | 74 | 100 | 140 | 315 |
Strategy A. Price of Bundle = $ 315.
The Accountants maximum WTP is less than the price charger by Microsoft. Thus, only Marketing and Assistants will purchase the bundle.
Total revenue = 315 × 200 = $ 63,000
Strategy B. When price of power point = $ 60
Revenue from Power Point = 60 × 300 = $ 18,000
Price of $ 80 is charged for Excel. Demand = 300
Revenue = 80 × 300 = $ 24,000
Price of $ 75 for word. Demand = 300
Revenue = 75 × 300 = $22,500
Total revenue = 18,000 + 24,000 + 22,500 = $ 64,500
C. When different prices are charged.
PowerPoint = $ 125, Demand = 100
Excel = $ 175, Demand = 100
Word = $ 140, Demand = 100
Total revenue = (125+175+140)×100 = $ 44,000
The best strategy is Strategy B.
b. When microsoft will charge a bundle price of $ 310 the quantity demanded would be 300 units.
Revenue = 300 × 310 = $ 93,000
Thus, the firm can maximize revenue by charging a bundle price of $ 310.