You are the manager of a firm that produces products X and Y at zero cost. You k

Question

You are the manager of a firm that produces products X and Y at zero cost. You know that different types of consumers value your two products differently, but you are unable to identify these consumers individually at the time of the sale. In particular, you know there are three types of consumers (1,000 of each type) with the following valuations for the two products: a. What are your firm's profits if you charge $40 for product X and $60 for product Y? $ b. What are your profits if you charge $90 for product X and $160 for product Y? $ c. What are your profits if you charge $150 for a bundle containing one unit of product X and one unit of product Y? $ d. What are your firm's profits if you charge $210 for a bundle containing one unit of X and one unit of Y, but also sell the products individually at a price of $90 for product X and $160 for product Y? $

Explanation / Answer

Given the costs are zero, implies whatever the manager sells turns into his revenue which is price*output.

a. $40 for X + $60 for Y.

Profits = for $40 of X, all the 3 types of consumers would be willing to buy, TR = 3000*40 = 120,000. (1000 each consumer for each type, 1000*3=3000). + again for product Y all the three types would be willing to buy, TR = 60*3000 = 180000.

Profits = 120000 + 180000 = $300000.

b. If $90 is chargged for X, only type 1 consumer would buy, TR = 90*1000 = 90000.

If $ 160 is charged only type 3 would be willing to buy, TR = 1000*160 = 160000.

Profits = 90000 + 160000 = $250000.

c. For one unit of X and Y, all the combination yield equal to or higher cost of the bundle (greater than 150), like 90 + 60 or 70 + 140 or 40 + 160. So all the three types of consumers would be willing to buy, total quantity would be 1000+ 1000 + 1000 = 3000.

Profits = 150*3000 = $450000.

d. only type 2 consumer would be willing to buy this bundle and rest other would not buy as they value less the entire bundle.

profits = 2000*210 = $420000.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.