Question

Your firm produces two products, and has three consumer types, each of which represent 1/3 of...

Your firm produces two products, and has three consumer types, each of which represent 1/3 of the market. Each consumers’ willingness to pay for each good is given in the following table:

Consumer:

GOOD 1

GOOD 2

A

$600

$100

B

$1000

$50

C

$350

$150

A) Suppose both goods are produced at zero marginal cost. If the goods cannot be bundled, what is the optimal price to charge for each good?

B) If the goods can be bundled, what is the optimal price to charge for each bundle? What is the total profit? Should your firm bundle or not?

C) Suppose the production of each good entails a marginal cost of $90 (so the MC of the bundle is $180). How would this this change your answers to a. and b. above?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

(A) Here the marginal production cost is zero therefore, the producer will charge that price at which its total revenue (TR) is highest. Consider the case, of good 1, when the price is $600 then there is the only consumer; therefore, TR = $600, when the price is $1000, there is are two consumers; therefore, TR = $2000, and when the price is $350 then there are three consumers; therefore, TR = $1050. Hence, the optimal price for a good 1 is $1000.

Similarly for good 2, when the price is $100 then there is the only consumer; therefore, TR = $100, when the price is $50 there is are two consumers; therefore, TR = $100, and when the price is $150 then there are three consumers; therefore, TR = $450. Hence, the optimal price for good 2 is $150

(B) Now, if the goods are bundled the consumer A's willingness to pay is $700, consumer B's willingness to pay is $1050, and consumer C's willingness to pay is $500. Then again the above procedure is followed wherein when the price is $700, there is one consumer; therefore, TR = $700, when the price is $1050, there are two consumers; therefore, TR = $2100, and when the price is $500, there are three consumers; therefore, TR = $1500. Henceforth, the optimal price charge would be $1050. total profit = 4 units*1050 = $4200

(C)

Now, it is given that the marginal cost of a product is $90 rather than zero; therefore, considering part (a), there are 5 units of goods are produced. Thus, the total profit of the firm will become $2000 ($2450 - $90*5).

Similarly, for part (b), there are 6 units of goods are produced. Thus, the total profit of the firm will become $1980 ($2100 - $30 *4)

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. Your firm produces two products where marginal cost of production for each product is equal...
1. Your firm produces two products where marginal cost of production for each product is equal to $30. The following table shows the reservation prices (minimum price consumers willing to pay) of different types of consumers for each of your product. consumer type product 1 product 2 A 25 100 B 40 80 C 80 40 D 100 25 Consider three alternative pricing strategies (i) only selling the goods individually (ii) only bundling and (iii) providing both as a package...
You are a profit-maximizing firm. Suppose you face two types of customers: CHICH and CALM. There...
You are a profit-maximizing firm. Suppose you face two types of customers: CHICH and CALM. There are 3 people of CHIC type and 8 people of CALM type. These customers shop in your specialty clothing store. Consumers of CHICH type are willing to pay $200 for a coat and $50 for a pair of pants. Consumers of CALM type are willing to pay $100 for a coat and $75 for a pair of pants. Your firm faces no competition but...
Now suppose the firm faces three types of consumers: Type A, Type B, and Type C...
Now suppose the firm faces three types of consumers: Type A, Type B, and Type C with 100 consumers of each type. And the firm will produce high quality, medium quality, or low quality versions of the product. The marginal cost to produce the low quality version is $3 and the marginal cost to produce the medium quality version is $5 and the marginal cost to produce the high quality version is $15. Each consumer will buy at most one...
A consumer has a budget of M = $133 per month to spend on two goods,...
A consumer has a budget of M = $133 per month to spend on two goods, X and Y. The consumer’s utility derived from the purchase of these two goods is determined to be U (X, Y) = 3X2 + Y2 . If PX = 3, and PY = 2 a. What is the optimal bundle of goods that the consumer will purchase? b. How much does the consumer spend on each good? c. If the price of good Y...
3. Suppose that a consumer has a utility function given by U(X,Y) = X^.5Y^.5 . Consider...
3. Suppose that a consumer has a utility function given by U(X,Y) = X^.5Y^.5 . Consider the following bundles of goods: A = (9, 4), B = (16, 16), C = (1, 36). a. Calculate the consumer’s utility level for each bundle of goods. b. Specify the preference ordering for the bundles using the “strictly preferred to” symbol and the “indifferent to” symbol. c. Now, take the natural log of the utility function. Calculate the new utility level provided by...
6. There are two types of consumers or vacationers of a monopoly hotel in a resort...
6. There are two types of consumers or vacationers of a monopoly hotel in a resort town: type 1, of which there are 300 consumers willing to pay V¬¬1 = $600 per day; and type 2, of which there are 500 consumers, willing to pay V¬¬2 = $200 per day. The daily unit cost of serving a consumer is $50 per day, plus there is a fixed cost of $5,000 per day. a. (5 points) What price will the hotel...
Suppose there are two consumers, A and B, and two goods, X and Y. Consumer A...
Suppose there are two consumers, A and B, and two goods, X and Y. Consumer A is given an initial endowment of 4 units of good X and 4 units of good Y. Consumer B is given an initial endowment of 4 units of good X and 4 units of good Y. Consumer A’s utility function is given by: UA(X,Y) = X*Y4, and consumer B’s utility function is given by UB(X,Y) = X*Y. Therefore, consumer A’s marginal utilities for each...
Suppose there are two consumers of a public good, one with a marginal benefit of 10-Q;...
Suppose there are two consumers of a public good, one with a marginal benefit of 10-Q; the other a marginal benefit of 30-2Q, where Q is the quantity of that public good. The public good can be provided with MC = 20. a) how many quantities of the public good will be provided assuming that the low-demand consumer will free ride on the high-demand consumer? b) what is the sum of total consumer surplus to the two consumers under a...
Consider a monopolist facing two types of consumers. Normalise the total population to 1. Type one...
Consider a monopolist facing two types of consumers. Normalise the total population to 1. Type one consumers are in proportion 1/2, and type two are in proportion 1/2. The monopolist has marginal cost of production c = 1/2. The two types have demand curves q₁ =1-p q₂ =1-(p/2). If the monopolist can identify the two types and can charge different two-part tariffs to different types: {A1, p1} and {A2, p2}. [All type one consumers are identical and have the q1...
A consumer has an income of $24 to spend each day. The only two goods the...
A consumer has an income of $24 to spend each day. The only two goods the consumer is interested in purchasing are goods A and B. The marginal-utility schedules for these two goods are shown in the table below. The price of A varies between $4 and $8 and the price of B is $2. Good A Good B Quantity MU MU/$8 MU/$4 MU MU/$2 1 48 24 2 32 15 3 24 12 4 16 8 5 8 6...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT