Question

Your company sells two products, product A and product B. You have two potential customers, Customer 1 and Customer 2. They will both either buy 0 or 1 units of each product. Their willingnesses to pay for each product are given by the table below:

	Customer 1	Customer 2
Product A	$10	$7
Product B	$12	X

a. Suppose that X is $14. Does it make sense for you to sell your products as a bundle or to sell them separately?

b. For what range of possible X’s is your answer to part (a) still true?

c. Suppose that X is $14, but it costs $9 to produce each unit of Product A and $10 to produce each unit of Product B. What pricing strategy should you use?

Please show your work to parts a. b. and c.

Answer 1

a. I'll make a bundle which has a price $21 so that both the customers can buy and my total revenue, in this case, would be 21*2 = $42.

b. x >= 12, at x = $12 seller is indifferent between selling as a bundle or individually product.

c. If I sell them as a bundle then my profit will be:

=> TR - TC = (21*2) - (9*2 + 10*2) = $4.

But if Pa = $ 10 then profit from product A = $1.

and, price of product B = $12 then profit = 12*2 - 8*2 = 24 - 16 = $8.

Total Profit = 1+8 = $9.

Hence it profitable to sell them according to the latter scenario.