3. Suppose a company produces 2 products, X and Y, and has 3 potential buyers, A

Question

3. Suppose a company produces 2 products, X and Y, and has 3 potential buyers, A, B, and C. The following table summarizes each potential buyer's willingness to pay for each good A B C X 430 Y034 For simplicity, assume there is no production cost 3.1. (2 points) If the company ties the two products together, what price should charge for the bundle ar 3.2. (2 points) Can the company increase its profit by doing mixed tying? (Mixed tying means the company sells its products both separately and as a bundle. In this problem, the company can set Px.Py, and Pon)

Explanation / Answer

3.1

If the company ties the two products together, it shall charge a price of 4. It can be observed that with this, a total of 3 products are sold. This, is because all the buyers are willing to pay 'at least 4' for a total of both the products. While if the prices are decreased, the sale will be of 3 products. But as a result of this, the profits will also decline. Also, the sale of products greater than a price of 4 will fall along with the profits.

Profit = 3*4 = 12

This is because all buyers will buy the product because all are at their respective willingness to pay.

3.2

If the company undertakes mixed tying of goods and Px = 4 and the Py = 4 and the price of the bundle Pxy = 6, then buyer A would spend only on good X (because he is willing to spend a total of 4 on only good X), buyer C will spend only on good Y (since he is willing to spend 4 only on good Y) while the buyer B will not spend individually on any of the goods because he is not willing to spend on any 'one' of them, and would prefer buying a bundle at a price of 3 each.

Thus, the profit can be calculated as shown below :

Profit = 4 + 6 + 4 = 14

Thus, it can be ascertained that the profit has increased under mixed tying.

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