Assume that a local bank sells two services-- checking accounts and ATM card services. Mr. Done that is willing to pay $8 a month for the bank to service his checking account, and $10 a month for unlimited use of his ATM card. Ms. Beenthere wants to pay only $5 for a checking account, but will pay $15 for unlimited use of her ATM card. To keep this example simple, assume that the bank can provide each of these services at zero marginal cost.
A) If the bank is unable to use tying, what is the profit-maximizing price to charge for a checking account?
B) If the bank is unable to use tying, what is the profit-maximizing price to charge for unlimited use of an ATM card?
C) If the bank is able to use trying to price checking account and ATM services, what is the profit-maximizing price to charge for the "tried good?
D) How much additional profit does the bank make when it switches to use of a trying strategy to price checking accounts and ATM services?
E) How much total surplus is generated from using trying to price the checking account and ATM services? How does that compare to the nontied pricing strategy? Which strategy has the largest deadweight loss?