A restaurant has three types of customers. A third of its customers, Type A, are

Question

A restaurant has three types of customers. A third of its customers, Type A, are willing to spend $5 on an appetizer but only $2 on a desert. Another third, Type B, are willing to spend $4 on an appetizer and $3 on a dessert. The remaining third, Type C, are willing to spend only $2 on an appetizer but $6 on a dessert. It costs the restaurant a constant $2 to prepare an appetizer or a dessert.

a) What will be the profit-maximizing flexible bundling strategy when the restaurant offers appetizers and desserts separately and in a bundle? How much profit would the restaurant earn from this flexible bundling strategy? How big is social welfare in this case?

Explanation / Answer

Type A

Appetizer : $5

Dessert : $2

Type B

Appetizer : $4

Dessert : $3

Type C

Appetizer : $2

Dessert : $6

Cost to Restaurant :

Appetizer: $2

Dessert : $2

profit-maximizing flexible bundling strategy would be the one where the difference between the cost of the item and willingness of the customer to pay for it, would be the maximum

Bundle

Type C can pay $8 for the combination of appetizer and dessert. This would be the profit maximizing bundlie

Profit : $ 4

Separate

Type A can pay $5 for the appetizer and Type C can pay $6 for the dessert. This would be the profit maximizing strategy separately.

Profit : $ 7

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