8 . Individual Problems 14-6At a student café, there are equal numbers of two types of customers with the following values. The café owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (i.e., she cannot price-discriminate). Students with Early ClassesStudents without Early ClassesCoffee7060Banana51101 The marginal cost of coffee is 10 and the marginal cost of a banana is 40.The café owner is considering three pricing strategies:1.Mixed bundling: Price bundle of coffee and a banana for 161, or just a coffee for 70.2.Price separately: Offer coffee at 60, price a banana at 101.3.Bundle only: Coffee and a banana for 121. Do not offer goods separately. Assume that if the price of an item or bundle is no more than exactly equal to a student's willingness to pay, then the student will purchase the item or bundle.For simplicity, assume there is just one student with an early class, and one student without an early class.Price StrategyRevenue from Pricing StrategyCost from Pricing StrategyProfit from Pricing Strategy1. Mixed Bundling 2. Price Separately 3. Bundle Only Pricing strategy yields the highest profit for the café owner.

Indirect price discrimination requires identifying some potential product feature that is correlated with value. Here we have the price of each bundle and good and the maximum willingness to pay of each student. The total revenue is the sum of all goods sold at the given price. And the cost is the total cost associated with the goods produced. And the profit is total revenue minus total cost. coffee banana total student with early class 70 51 121 without early class 60 101 161The table below gives a value of total revenue, cost and profit associated with each pricing strategy of each. Mixed bundling: Price bundle of coffee and a banana for 161, or just a coffee for 70 Student without early class buys a bundle, and student with early class can get a coffee. Price separately: Offer coffee at 60, price a banana at 101. Student with or without early class gets a coffee and only student without early class can get a banana. Bundle only: Coffee and a banana for 121. Do not offer goods separately. Therefore, student with early class and without early class gets a bundle of coffee and banana. The marginal cost of coffee is 10 and the marginal cost of a banana is 40. PRICING STRATEGY REVENUE COST PROFIT MIXED BUNDLING 161+70=231 10×2+40=60 231-60=171 PRICE SEPERATELY 60×2+101=221 10×2+40=60 221-60 = 161 BUNDLE ONLY 121×2=242 10×2+40×2=100 242-100=142 Therefore, Pricing strategy of mixed bundling yields the highest profit for the café owner. That is $171 profit..

Answered: Assume that if the price of an item or…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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8 . Individual Problems 14-6

At a student café, there are equal numbers of two types of customers with the following values. The café owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (i.e., she cannot price-discriminate).

	Students with Early Classes	Students without Early Classes
Coffee	70	60
Banana	51	101

The marginal cost of coffee is 10 and the marginal cost of a banana is 40.

The café owner is considering three pricing strategies:

1.	Mixed bundling: Price bundle of coffee and a banana for 161, or just a coffee for 70.
2.	Price separately: Offer coffee at 60, price a banana at 101.
3.	Bundle only: Coffee and a banana for 121. Do not offer goods separately.

Assume that if the price of an item or bundle is no more than exactly equal to a student's willingness to pay, then the student will purchase the item or bundle.

For simplicity, assume there is just one student with an early class, and one student without an early class.

Price Strategy	Revenue from Pricing Strategy	Cost from Pricing Strategy	Profit from Pricing Strategy
1. Mixed Bundling
2. Price Separately
3. Bundle Only

Pricing strategy yields the highest profit for the café owner.

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