Two customers, Bob and Ed, with two types of services: premium (P) and simple (S). Bob’s...

Two customers, Bob and Ed, with two types of services: premium (P) and simple (S).

Bob’s willingness to pay for the premium service is given by uB(P) and for the simple service is uB(S). Similarly, for Ed, these values are uE (P) and uE (S), respectively.

Suppose these values are given as: uB(P) = 500, uB(S) = 200, uE(P) = 300, uE(S) = 100.

The seller of these services is looking to maximize the total payment. 1. If the seller could only set a single price say p, for premium and simple services, what price would be chosen? 2. If the seller could set different prices, say Ppr and Psm, what prices would she choose?

Solutions

Expert Solution

Answer.

1. If the seller wants to maximize the payment, he will set the lower proce for premium and simple, as both the buyers will be able to buy and this will give seller maximize profit. So, seller will set price for premium as 300 and, price of simple as 100.

2. If the seller can charge different price for each customer, he will charec price that both Bob and Ed will be willing to pay, so he will charge Bob 500 for premium and 200 for simple.

And, he will charge Ed 300 for premium and 100 for simple.

Rahul Sunny answered 1 year ago

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