QUESTION 6 Food For Life makes health foods for active, outdoor people. Their th
ID: 1225087 • Letter: Q
Question
QUESTION 6 Food For Life makes health foods for active, outdoor people. Their three basic products are whey powder, a high protein strength bar, and a meal additive that has the taste and consistency of sawdust. Research shows that consumers fall into two types (A and B), and these are described in the table below by their reservation prices for the products. Each consumer will demand no more than one unit of any product at their reservation price. The consumers will value a bundle of the products at the sum of the constituent reservation prices. Each product costs 3 to produce. A bundle of all three products costs 9 to produce. Food for Life does not price discriminate. Reservation Prices Consumer Whey Strength Sawdust Bundle A 10 16 2 B 3 10 13 There is an equal number of each consumer type (for simplicity, one of each type). Only bundles of all three products need to be considered. Best Separate Price Strategy Customer Price per Unit Cost per unit Profit per unit Number of units Profit A B A B A B Best Pure Bundling Strategy Customer Price per Bundle Cost per Bundle Profit per Bundle Number of units Profit A B Best Mixed Bundling Strategy Customer Price per Bundle Cost per Bundle Profit per Bundle Number of units Profit Customer Price per Unit Cost per unit Profit per unit Number of units Profit What pricing (profit- maximizing) strategy ( and mixed bundling) would you recommend to Food For Life? Why?
Explanation / Answer
Best separate price strategy:
Whey:
Customer
Price per unit
Cost per unit
Profit per unit
No. of unit
profit
A
10
3
7
3
21
B
3
3
0
3
0
Strength:
Customer
Price per unit
Cost per unit
Profit per unit
No. of unit
profit
A
16
3
13
3
39
B
10
3
7
3
21
Sawdust:
Customer
Price per unit
Cost per unit
Profit per unit
No. of unit
profit
A
2
3
-1
3
-3
B
13
3
10
3
30
Pure bundling strategy:
Whey:
Customer
Price per unit
Cost per bundle
Profit per unit
No. of unit
profit
A
10
9
1
1
1
B
3
9
-6
1
-6
Strength:
Customer
Price per unit
Cost per bundle
Profit per unit
No. of unit
profit
A
16
9
7
1
7
B
10
9
1
1
1
Sawdust:
Customer
Price per unit
Cost per bundle
Profit per unit
No. of unit
profit
A
2
9
-7
1
-7
B
13
9
4
1
4
10w+15s+2s= total revenue
MR (marginal revenue) =change in total revenue
Average revenue=Total revenue/output
AR wrt whey=10w+15S+2s/w=3
10w+15s+2s=3w 7w+15S+2s=0………………… (i)
AR wrt strength=10w+15S+2s/s=3
10w+15s+2s=3s 10w+12s+2s=0………………..(ii)
Solve equation (i) and (ii)
7w+15S+2s=0…………….. (i)
10w+12S+2s=0……………..(ii)
-3w+3S=0
3w=3S
W=S
Then 10w+15S+2s/w=3
10S+15S+2s/s=3
27s/s=3
Total cost=9
Ma=change in Tc
=9Q
Average cost=9/Q=3 Q=3
BEST PRICING STRATEGY IS SEPARATE PRICING STRATEGY AS THE FIRM WILL EARN THE MAXIMUM PROFIT FROM THERE.
Customer
Price per unit
Cost per unit
Profit per unit
No. of unit
profit
A
10
3
7
3
21
B
3
3
0
3
0
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.