CD player Tape Player consumer 1 $200 $300 consumer 2 $200 $200 consumer 3 $500

Question

                             CD player               Tape Player

consumer 1           $200                          $300

consumer 2              $200                         $200

consumer 3               $500                          $0

The Firms cost are zero.

A.) How much will the firm make if it sells CD players for $200 and tape players for $200?

B.) How much will the firm make if it sells CD players for $400 and tape players for $300?

C.) How much will the firm make if it packages CD players and tape players together and sells the bundle for $500?

Explanation / Answer

(A) Sell CD players for $200 and tape players for $200

In this scenario, all three consumers will purchase CD players because the price of the good is lesser than (for consumer 3) or equal to (for consumers 1 and 2) the value the consumers place on the good. Therefore. the firm will sell a total of 3 CD players at $200 each and earn $600 from the sale of CD players.

For tape players, only consumers 1 and 2 will buy because $200 is lesser than or equal to the value of the good to the consumer. The firm will sell 2 tape players at $200 each, for earnings of $400 from the tape players.

Together then, the firm will earn $600 + $400 = $1000 from these set prices.

(B) Sell CD players for $400 and tape players for $300

We will use the same logic for the part as before. When the CD player price is set at $400, only consumer 3 will buy because the price exceeds the value of the good to the other two consumers. Earnings for the firm from CD players is then just 1 * $400 = $400. For the tape player, only consumer 1 will buy the good this time because $300 actually exceeds the value of the tape player to consumers 2 and 3. Therefore, the firm will earn only 1 * $300 = $300 from the tape players. Together, the two goods will bring in $400 + $300 = $700 for the firm.

(C) Sell CD player/tape player bundles for $500

For this part, we need to consider the value of teh two goods together to each consumer. For consumer 1, the sum of his value of a CD player and a tape player together is $200 + $300 = $500. The value for consumer 2 is $200 + $200 = $400, and the value for consumer 3 is $500 + $0 = $500. Out of the three consumers, consumers 1 and 3 will purchase the bundle because they both value the bundle at $500, which is exactly the price set by the firm. In that case, the firm sells two of these bundles at $500 apiece for total earnings of $1000.

Hope this helps!

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