Consider a firm with market power that sells suits. The firm has two types of cu

Question

Consider a firm with market power that sells suits. The firm has two types of customers, A and B. There are an equal number of customers of each type. Type-A customers are willing to pay up to $100 for a coat and up to $50 for pants. Type-B customers are willing to pay up to $75 for a coat and up to $65 for pants. Suppose for simplicity that the marginal cost of production is zero. If the firm practices bundling, then the optimal price for a suit (which is a bundle of the two products) is:

A. $140.
B. $150.
C. $175.
D. $115.

Explanation / Answer

Type A is willing to pay $150 for a bundle of 1 coat and 1 pants. Type B is willing to pay $140 for this bundle. Since there are an equal number of each type, we should choose a price of $140 and sell to both types rather than selling only to type A and charging $150. A*140 + B*140 > A*150 The correct answer is A.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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