Question

Suppose a video game company sells the following two products separately: console and headset (each can be used separately on their own or together). 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	$20
Lois	$300	$50

a) If the company prices the console at $400 each and the headset at $50 each, how much revenue will the firm receive?

  b) If the company prices the console at $300 each and the headset at $20 each, how much revenue will the firm receive?

c) Suppose the company bundles the console and the headset together for a package price of $420 each. What would be the total revenue in this case?

d) Is there a bundle price at which both consumers will purchase the package that yields the highest revenue of any possibility on this page? If so, what will it be? If not, why not?

Answer 1

A consumer purchases good when the price of the commodity is lower than his valuation (willingness to pay) otherwise not.

(a) So here Lious will purchase Console and Lios will not. Similarly, Loius will not purchase Headset and Lois will purchase it. Hence total revenue to the firm is $400 + $50 = $450.

(b) Since Console and Headset are priced lower than valuation of each consumer, both of them will buy both the goods. Hence total Revenue is $300 * 2 + $20 * 2 = $640

(c) Now the bundle costs $420, only one consumer's valuation for the bundle is $420 and that would be the total revenue also.

(d) For bundle Price = $350 both consumers will purchase it as this the lowest valuation among the consumers in the survey and ensures both of them participating. This bundle would yield highest revenue of $700 on this page.