Question

You own a fast food restaurant and must decide on a pricing strategy for burgers and fries. Marginal production costs are constant at $1 for burgers and $0.50 for fries. The market you serve contains equal numbers of 3 types of consumers called “Average”, “Burger Buffs”, and “Fries Fiends”. Each consumer will purchase at most 1 of each food type. Their valuations of the two goods are listed in the following table.

Consumer Types	Burger	Fries	B+F bundle deal
Average	5.33	8	13.33
Burger Buff	12	3	15
Fries Friends	3	11	14

The best bundle price is $13.33

Which pricing strategy yields the highest profit, and why?

a. allow consumer to buy the bundled meal

b. allow buy a burger or fries separately

c. having a mixed bundle and purchase separately

Please advise what additional info is needed

Answer 1

Lets first how much maximum profit each strategy will give us. But even before that, note that the table given to us the maximum value the customer have for the product. But since it costs us some to actually make the product, we need to reduce that from their value to find out how much profit we would earn if we sold it at that price to them. This has been done in the table below-

1 has been deducted from Burger column, .5 from fries and 1.5 from bundle (as these are our costs for each of them).

Maximum profit in case of bundles- If we price the bundle at 13.33, all 3 would buy and our profit would be 11.83*3= 35.49, which is the maximum possible in this case.

Maximum profit in case of selling everything separately-

Lets first look at Burgers. If we keep price at 5.33, only average and Burger Bros would buy it and our profit from Burgers would be=4.33*2=8.66. If we keep price at 12, only bros would buy at a profit of 11 to us. At price 3 all would buy but the profit would only be 3*2=6. So, we would keep the price at 12, for a profit of 11.

Now lets look at fries. Using the same method as above, we can conclude that the best price would be 8, for a price of 7.5*2=15.

Total profit in this strategy=15+11=26.

Finally, lets look at mixed bundling strategy.

In mixed bundling strategy, we offer both bundles and separate products, but at such prices that maximize our profits. In our case, we will offer the bundle at 15. In that case only Bros would buy at a profit of 13.5. Then we would offer Burgers at 5.33, at a profit of 4.33. Finally, we would offer fries at 8, for a profit of 7.5*2=15. The total profit is 32.83 This is the maximum possible in mixed bundling.

So, we can see that we get highest profit in pure bundling, where we earn a profit of 35.49.