Question

2. Suppose a video game company sells the following two products separately: console and headset. Through a consumer survey group, it has estimated that the following individuals value the two products at the following prices: Consumer Console Valuation Headset Valuation Louis $400 $45 Lois $300 $40 a) If the company prices the console at $400 each and the headset at $45 each, how much revenue will the firm receive? (2 points) b) If the company prices the console at $400 each and the headset at $40 each, how much revenue will the firm receive? (3 points) c) Suppose the company bundles the console and the headset together for a package price of $445 each. What would be the total revenue in this case? (2 points) d) Is there a bundle price at which both consumers will purchase the package that yields the highest revenue other than seen in a), b), or c)? If so, what will it be (bundle price and revenue)? If not, why not? (4 points)

Answer 1

Question 2

(a)

Louis value console at $400 and headset at $45.

Lois value console at $300 and headset at $40.

A consumer is willing to purchase a good if the price is less than or equal to his or her maximum willingness to pay.

If company sells console at $400 each and headset at $45 each then only Louis will purchase both as his maximum willingness to pay is equal to the given price.

Total revenue = $400 + $45 = $445

Thus,

The firm will receive revenue of $445.

(b)

Louis value console at $400 and headset at $45.

Lois value console at $300 and headset at $40.

A consumer is willing to purchase a good if the price is less than or equal to his or her maximum willingness to pay.

If company sells console at $400 each and headset at $40 each then Louis will purchase both as his maximum willingness to pay is equal to or greater than the given price of both while Lois will purchase only headset as her maximum willingness to pay is equal to the price of headset.

Total revenue = $400 + $40 + $40 = $480

Thus,

The firm will receive revenue of $480.

(c)

Louis value console at $400 and headset at $45.

Lois value console at $300 and headset at $40.

A consumer is willing to purchase a good if the price is less than or equal to his or her maximum willingness to pay.

If the company sells the console and headset as bundle for $445 then this price is equal to combined maximum willingness to pay of Louis and thus he would purchase the bundle.

Total revenue = $445

Thus,

The firm will receive revenue of $445.

(d)

Louis value console at $400 and headset at $45.

Lois value console at $300 and headset at $40.

A consumer is willing to purchase a good if the price is less than or equal to his or her maximum willingness to pay.

If company sells the console and headset as bundle and charges $340 then this price is less than the combined maximum willingness to pay of Louis and is equal to the combined maximum willingness to pay of Lois.

So, both will make the purchase if bundle is priced at $340.

In such case,

Total revenue = $340 + $340 = $680

Thus, there is bundle price at which both consumers will purchase the package and that yields the highest revenue other than seen in a), b), or c).

The bundle price would be $340 and revenue will be $680.