Suppose Andy is willing to pay $5 for a tennis ball and $10 for a tennis racquet

Question

Suppose Andy is willing to pay $5 for a tennis ball and $10 for a tennis racquet, while Holly is willing to pay $12 for a tennis ball but only $8 for a tennis racquet. In addition, the retailer knows exactly what Andy and Holly are willing to pay. Which strategy should the retailer use to maximise revenues?

Select one:

a. Charge a price of $5 for a tennis ball and $8 for a tennis racket.

b. Charge a price of $12 for a tennis ball and $10 for a tennis racket.

c. Charge a price of $15 for a bundle consisting of a tennis ball and a tennis racket.

d. Charge a price of $20 for a bundle consisting of a tennis ball and a tennis racket.

Explanation / Answer

This is the case of perfect price discrimination, if the seller knows the willingness to pay for the commodity of the consumer he will charge a price equal to the willingness to pay.

The answer is c.)Charge a price of $15 for a bundle consisting of a tennis ball and a tennis racket.

The seller does not charge a price of $20 for a bundle, because it will lose one customer of him.

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