Question

Marge’s Beauty Salon sells shampoo and conditioner to two types of consumers. The following table shows the number of consumers of each type and their reservation prices for the two
products:
Reservation Price
Customer Type Number Shampoo Conditioner
Type I 30 9 6
Type II 20 5 7
Marge has received a large stock of shampoo and conditioner for free as part of a special
promotion from her supplier (thus Marge’s marginal cost of both products is zero). She is
considering whether to sell shampoo and conditioner separately or as a bundle. Fill in the
blanks below to help her decide.
If Marge sells the products separately, she can maximize profits by charging $9 for
shampoo and $6 for conditioner. Her profits from the two products would be $570.
Consider selling the products in bundles, where each bundle contains one bottle of shampoo
and one bottle of conditioner.
• If Marge sets the price of a bundle at $____, she will sell 50 bundles. Profits would be $_____.
• If Marge charges $15 for a bundle, then she will sell _____ bundles. Profits would be $_____.
• So, if the products are bundled, Marge should charge PB * = $_____ for the bundle.
• The maximum profits from bundling are $_____ higher than the maximum profits when the
products are sold separately.

Answer 1

Consumer type	number	shampoo	conditioner	combined WTP
Type I	30	9	6	15
Type II	20	5	7	12

So when two are bundled, then if price charged $ 12, then both type will participate in the market, hence total 50 bundles will be sold, with profits equal to 12*50= 600 $

if price charged $15, then only type I will participate & total 30 bundles are sold,

Profits = 15*30= 450 $

If bundling, then charge price =$ 12,

maximum profits from bundling is $600, which are higher than when sold separately, higher by $30

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