3 The reservation price for Alex Billy Chad and Dylan for Gu

3. The reservation price for Alex, Billy, Chad, and Dylan for Gutars and Amps are given below] Guitar $50 $250 $300 Am $450 Alex Billy Chad lan $220 S50 The marginal cost of a guitar is $100, and the marginal cost of an amp is $150 a. What are the prices and profit of a monopolist under a single price scheme? b. What are the prices and profit of a monopolist under a pure bundling scheme? c. What are the prices and profit of a monopolist under a mixed bundling scheme?

Solution

a) When a single price is to be charged, guitar is priced at 250 to sell to Billy Chad and Dylan. The price of Amp is set at 275 to sell to Alex and Billy. This implies a revenue of 250*3 + 275*2 = 1300 and the cost is 100*3 + 150*2 = 600. Hence profit is 1300 - 600 = 700.

b) A pure bundle of 500 (by adding reservation prices) is profit maximizing as all will buy. Profit = 500*4 - 100*4 - 150*4 = 1000

c) A mix bundle of 520 and separately each product at 450 will give a revenue of 520*2 + 450*2 = 1940. The cost is 100*3 + 150*3 = 750. The profit is now 1940 - 750 = 1190.