Question

In: Economics

Consumer Type PowerPoint Excel Word Accountants $60 $175 $75 Marketing/Sales $125 $80 $135 Administrative Assistants $75...

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.

Solutions

Expert Solution

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.


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