5. 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 ClassesCoffee6656Banana4797 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 153, or just a coffee for 66.2.Price separately: Offer coffee at 56, price a banana at 97.3.Bundle only: Coffee and a banana for 113. 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 (1, 2, or 3? ) yields the highest profit for the café owner.

Price strategy refers to the deliberate and planned approach that businesses adopt to determine the…

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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5. 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	66	56
Banana	47	97

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 153, or just a coffee for 66.
2.	Price separately: Offer coffee at 56, price a banana at 97.
3.	Bundle only: Coffee and a banana for 113. 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 (1, 2, or 3? ) yields the highest profit for the café owner.

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