Question

You are a manager of a company that sells cable television channels. You are thinking of bundling a nature channel and a travel channel. Suppose that the marginal cost of each channel is zero. You have equal numbers of two types of customers. The table lists the maximum monthly price each type is willing to pay for each product.

Customer	Maximum price willing to pay for a nature channel	Maximum price willing to pay for a travel channel
A	$0.75	$2.00
B	$2.00	$3.00

Suppose you sell the channels separately.

The price you should charge for the travel channel must be $____ and the price you should charge for the nature channel is $____.

The monthly economic profit for your firm is $____.

Suppose you bundle the channels.

The highest bundled price customer A would be willing to pay is $_____ and the highest bundled price customer B would be willing to pay is $_____.

Choosing the optimal bundle price, the monthly economic profit for your firm is now $______.

(Round your answer to two decimal places. )

To maximize your profit, should you bundle the channels?

A. Yes, you should bundle the two channels as your profit is lower when you sell them separately ($5.50 versus $6.00 ).

B. No, you should not bundle the two channels as your profit is higher when you sell them separately ($6.00 versus $5.50 ).

C. No, you should not bundle the two channels as your profit is higher when you sell them separately ($6.00 versus $4.00 ).

D. Yes, you should bundle the two channels as your profit is lower when you sell separately ($4.00 versus $6.00 ).

Now suppose that your customers' preferences change. The revised maximum prices are shown in the second table.

Customer	Maximum price willing to pay for a nature channel	Maximum price willing to pay for a travel channel
A	$0.75	$3.00
B	$2.00	$2.00

After the change in customers' preferences, if you sell the channels separately, the price you should charge for travel channel must be $______ and the price for nature channel must be $_____.

The monthly economic profit for your firm is $______.

Suppose you bundle the channels.

The highest bundled price customer A would be willing to pay is $______ and the highest bundled price customer B would be willing to pay is $______.

Choosing the optimal bundle price, the monthly economic profit for your firm is now $_______.

(Round your answer to two decimal places. )

To maximize your profit, should you bundle the channels?

A. Yes, you should bundle the two channels as your profit is lower when you sell them separately ($4.00 versus $7.50 ).

B. No, you should bundle the two channels as your profit is higher when you sell them separately ($7.50 versus $4.00 ).

C. No, you should bundle the two channels as your profit is higher when you sell them separately ($7.50 versus $6.00 ).

D. Yes, you should bundle the two channels as your profit is lower when you sell them separately ($6.00 versus $7.50 ).

Answer 1

• The price you should charge for the travel channel must be $2 and the price you should charge for the nature channel is $2.

Explanation

Suppose we charge $0.75 for nature, we will get 2* 0.75 =$1.5

On the other hand, if we charge $2 for nature channel, we will get $2

2 > 1.5 => We will charge $2 for nature channel

Suppose we charge $2 for travel channel, we will get 2* 2 =$4

On the other hand, if we charge $3 for travel channel, we will get $3

4 > 3 => We will charge $2 for travel channel

• The monthly economic profit for your firm is $6

Explanation

B will buy nature at $2. Both A and B will buy Travel channel at $2. Therefore, the total will be $6.

• The highest bundled price customer A would be willing to pay is $2.75 and the highest bundled price customer B would be willing to pay is $5.

Explanation

The maximum bundle price one is willing to pay is the sum of reservation prices for each item. Therefore, for A, the maximum bundle price = 0.75 + 2 = $2.75

For B, maximum bundle price = $2 + $3 = $5

• Choosing the optimal bundle price, the monthly economic profit for your firm is now $5.5.

Explanation

We can either charge the bundle price of 2.75 or 5. If we charge 2.75, both customers will buy it resulting in profit of $5.5. If we charge $5, only B will buy it resulting in profit of $5.

For increased profit, we charge $2.75 per bundle. And the profit = $2.75 *2 =$5.5

• To maximize your profit, should you bundle the channels?

Answer: B. No, you should not bundle the two channels as your profit is higher when you sell them separately ($6.00 versus $5.50 ).

Explanation

Compare the profit from bundling and non-bundling as given in previous answers. Bundling profits (5.5) is lesser than non-bundling (6). Therefore, we should not bundle.

Now suppose that your customers' preferences change​​​​​​​

• After the change in customers' preferences, if you sell the channels separately, the price you should charge for travel channel must be $2 and the price for nature channel must be $2.

Explanation

Selling Nature channel at $2 to one customer will give more total profit than selling it to 2 customers at $0.75. Similarly, selling Travel Channel at $2 to 2 customers will give more profit than selling it at $3 to one customer.

• The monthly economic profit for your firm is $6.

Explanation

B will buy nature at $2. Both A and B will buy Travel channel at $2. Therefore, the total will be $6.

• The highest bundled price customer A would be willing to pay is $3.75 and the highest bundled price customer B would be willing to pay is $4.

Explanation

A's reservation price for bundle = $0.75 + $3 = $3.75

A's reservation price for bundle = $2 + $2 = $4

• Choosing the optimal bundle price, the monthly economic profit for your firm is now $7.5

​​​​​​​Explanation

When we charge price of $3.75 for bundle, both customers purchase and profit = 3.75*2 = 7.5

When we charge price of $4, only B will purchase and profit will be $4.

Hence we charge $3.75 and get the higher profit of $7.5

• To maximize your profit, should you bundle the channels?

Answer: D. Yes, you should bundle the two channels as your profit is lower when you sell them separately ($6.00 versus $7.50)

Explanation

When we bundle, the profit is $7.5 and when we sell separately, the profit is only $6. Hence we should bundle to earn more profit.