Question

1. A recent graduate from the Clarkson University School of Engineering has an innovative idea for a new product.  You have been hired to help his recently-established firm set the price for their product.
   1. (5 Points) You have estimated that there are two groups of customers that would purchase the product - students, and more senior adults, with respective elasticities of demand: e_s=-6 for students and e_A=-2 for other adults. What per unit prices should the company charge to these groups to maximize their profits if each unit of the product costs the company $4?  If these prices are different, explain what needs to be true in order for the company to sustain these different prices in the marketplace.
2. 2. (5 Points) The product comes in three different varieties and the different groups (students and adults) value these varieties differently.  Using the data on willingness-to-pay (WTP) below, calculate the optimal price and bundling strategy to maximize profits for the company, keeping in mind the constant marginal cost of $4.  Compare this optimal bundling strategy to the best possible “a la carte” pricing strategy of a fixed price per unit (all varieties priced the same).   

WTP	Variety A	Variety B	Variety C
Students	15	12	5
Adults	18	7	12

1. c. (5 Points) Finally, suppose instead that you have estimated that demand for the product can be represented by P=10-0.5Q. Assuming the company has market power and complete flexibility in how they price their product, and perfect information about their consumers’ individual willingness-to-pay, how should the firm price their product to maximize profits, keeping in mind the constant marginal cost of $4? If they succeed at this, what would their profits be? What would consumer surplus be?

Answer 1

C)

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