Question

1. Consider the following table of willingness to pay for three groups of consumers and two goods.

Consumer	WTP for Good 1	WTP for Good 2
A	100	425
B	300	250
C	400	200

Calculate the profit-maximizing prices under three scenarios: a) No bundling (maximize profits from setting a price for each good, with no bundles) b) Pure Bundling c) Mixed Bundling. Assume costs are 0.

Answer 1

a) When there is no bundling, the profit maximizing price for good 1 should be 300 so that consumer B and C make a purchase. Similarly, the profit maximizing price for good 2 should be 200 so that consumer A, B and C make a purchase. Total revenue = Total profit = 300 x 2 + 200 x 3 = $1200

b) Bundled prices are 525, 550 and 600. Out of them, the optimum bundled price is 525 at which consumer A, B and C make a purchase. Total revenue = Total profit = 525 x 3 = $1575

c) Bundle price is 550 and separately good 1 is priced at 100 and good 2 is priced at 425. This allows consumer B and C to buy the bundle and consumer A to buy them separately. Total revenue = Total profit = 550 x 2 + 425 + 100 = $1625.