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You are a profit-maximizing firm. Suppose you face two types of customers: CHICH and CALM. There...

  1. 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 bears the cost of making the clothes: $25 per coat and $20 per pair of pants (i.e. MC of making coat = $25 and MC of making pants = $20). You have the power to price discriminate. You offer the same prices to all your customers.

  1. Suppose you post a price for a coat and a price for pants. Knowing the customers’ reservation price (willingness to pay) for each product, what is the profit-maximizing price for coat and for pants that the firm should charge?
  2. Suppose instead that you only offer a bundle of one coat and one pair of pants (which we would call a suit.) What is the profit-maximizing price to charge for the suit? Compare the profit that the firm makes from bundling vs. non-bundling!
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